When it comes to investing in real estate, two popular strategies are flipping houses and buying rental properties. Each has its pros and cons, and the best option for you depends on your personal goals, finances and how much risk you’re willing to take.
In this article, we’ll compare flipping and rental investing to help you decide which one might be right for you.
What is Flipping?
Flipping houses means buying a property for a low price, fixing it up and then selling it for a profit in a short time. The goal is to find a cheap property, make improvements and sell it quickly for more money. Here’s how it works.
- Buy a cheap property: These homes usually need a lot of work like fixer-uppers or foreclosed homes.
- Renovate the property: This can mean simple changes like painting and new flooring or bigger upgrades like adding rooms or updating the kitchen.
- Sell the property for a profit: After the improvements, the goal is to sell it quickly for more than what you paid for it, including renovation costs.
Why Choose Flipping?
- Fast Profits: If you find the right property and do the renovations well, flipping can bring quick profits. You could make a good amount of money in just a few months.
- Potential for Big Gains: If you’re good at finding cheap properties and handling renovations, you could make a lot of money, even tens of thousands of dollars, from one flip.
- Creative Control: Flipping lets you put your personal touch on a property. You get to choose what changes to make and what improvements can be made to the house.
However, flipping does come with challenges.
Cons of Flipping
- Market Risk: The real estate market can change quickly, and a price drop could make it hard to sell the property for a profit. For example, if home prices fall after you buy and start fixing the property, you might not sell it for as much as you expected.
- High Upfront Costs: Flipping requires a big initial investment, not just to buy the property but also to cover repairs and renovations. These costs can add up fast, and unexpected expenses might gorge into your profits.
- Time and Expertise: Flipping isn’t a hands-off investment. You need to understand the market, know what buyers want and oversee the renovations. This takes time, effort and experience to do well.
What is Rental Investment?
In rental investing, the strategy is to buy a property, rent it out and earn regular income over time. Instead of focusing on flipping for a quick profit, rental investors look for properties that will bring in steady cash flow and increase in value over the long term. Here’s how it works.
- Buy a rental property: Look for a home in a good location with strong demand for rentals.
- Rent it out: Once the property is ready, you rent it to tenants who pay rent each month.
- Maintain the property: While rental properties usually need less work than flipping, you still need to handle repairs, management, and tenant concerns.
- Sell or hold long-term: Over time, the property’s value may rise, giving you the option to sell for a profit, or you can keep renting it out for steady cash flow.
Why Choose Rental Investment?
- Steady Income: The main benefit of rental properties is the regular cash flow from rent payments. This can provide a steady income to cover your mortgage and earn profits each month.
- Appreciation: Over time, properties usually rise in value. This means your property could be worth much more in a few years, giving you the option to sell for a profit or refinance for better terms.
- Tax Benefits: As a rental property owner, you can deduct certain expenses from your taxable income such as mortgage interest, property taxes and maintenance costs. This can help lower your tax bill.
- Less Risk: While economic downturns can hit rental markets, they are generally less unstable than the flipping market. If the market drops, you can still rent the property and wait for the value to revert.
Cons of Rental Investment
- Ongoing Management: Being a landlord means managing tenants, collecting rent, handling maintenance issues, and addressing problems as they arise. This can take a lot of time if you own multiple properties.
- Vacancies: If your property is empty for any period, you won’t earn rent, but you’ll still need to pay for the mortgage, utilities and maintenance.
- Initial Capital: Like flipping, buying rental properties requires a large upfront investment. You need enough money for the down payment, closing costs and any immediate repairs or updates.
- Long-Term Commitment: Rental investments are more of a long-term strategy. They require patience and the willingness to wait for the property’s value to rise and rent prices to surge.
Flipping vs. Rental Investment: The Key Differences
Let’s compare flipping and rental investing on a few important factors.
| Factor | Flipping | Rental Investment |
| Time Horizon | Short-term (few months to a year) | Long-term (many years or decades) |
| Initial Investment | High (for buying and fixing up the property) | High (down payment and property costs) |
| Risk Level | High (market changes, unexpected costs) | Moderate (vacancies, repairs, economic issues) |
| Income | One-time profit from selling | Regular monthly rental income |
| Maintenance | Renovations and repairs | Ongoing upkeep and managing tenants |
| Potential for Growth | Quick profit from selling | Long-term increase in property value |
| Tax Benefits | Only for renovations and selling gains | Regular tax deductions for expenses and mortgage |
| Liquidity | High (can sell quickly if the market is good) | Low (harder to sell without a buyer) |
In 2022, the average profit from flipping houses was about $70,250, according to the National Association of Realtors. However, flipping has become more difficult as property prices increase and renovation costs rise. Many flippers have found it harder to make the same profits as before.
On the other hand, studies show that rental properties usually give an average return of around 10% per year. Even when the market goes down, rental properties tend to provide steady returns, making them a safer long-term investment than flipping.
Conclusion: Which is the Smarter Choice?
In the end, the best choice between flipping and rental investing depends on your investment goals.
Flipping is a good option if you want quick profits and enjoy renovating homes. It’s more hands-on and high-risk, requiring knowledge of the market and renovation skills.
Rental investing, on the other hand, is a better choice if you prefer a steady income over time and are willing to take a long-term approach. It’s generally less risky and more passive, though it does require ongoing management and patience.
The important thing is that both strategies can be successful if done right. Your decision should depend on your financial situation, risk tolerance and long-term goals. Whether you enjoy the thrill of flipping or the stability of rental income, real estate investing can be a great way to build wealth over time.
