Flipping vs. Renting: A Quick Guide on Real Estate Investing

Is it Better to Flip or Rent? Discover the Pros & Cons of Both and Find Out Which Strategy Is Right For You  

In this guide, we will explore the difference between the two and discover if flipping house is profitable. We will include pros and cons, so you can easily establish whether either of them meets your needs and preferences. You will also learn how a professional property management company can help you run a successful rental business. Let’s dive into the specifics of both strategies so you can decide which one will help you accomplish your investment targets.

What Does It Mean to Flip a House?

House flipping entitles purchasing real estate with the intention of remodeling in order to quickly resell it again for a higher price. This investment strategy does not take too long. In fact, in some cases it can be completed in less than a year, which is a fantastic timeline, considering the extent and size of real estate renovation projects.

To make profits, individuals are purchasing houses below market value that are in need of major renovation. This includes purchasing fixer-uppers or distressed real estate. Experienced house flippers need an average 6 months to flip a property, while beginners typically need more time, usually over a year.

To flip a house means to renovate it so that it’s value is increased in a short period of time, and then sell it to earn profits. This is an active income strategy. When you gain profits, you must start the process with another house again. Proceeds from this type of project are on the rise which is why this strategy is becoming trendy. In fact, according to Attom Data, almost 9% of all homes sales in the first quarter of 2024 were flipped properties. That’s more than 67,000 residences.

Pros Of Flipping A Property

Now that we know what flipping houses involves, let’s see advantages and disadvantages of this method of investing.

Quick profit

If you do your due diligence and make a good investment choice, you have the potential to earn significant revenues in a short amount of time. As mentioned above, the more experience and knowledge you have, the faster the process will be and the sooner you will get your profit. After you sell the flipped property you can either purchase another fixer-upper or invest in something completely different. The choice is yours.  

Project control

When you decide to flip a residence, you get complete control over what is to be upgraded and how it will finally look. Even if you hire designers and other contractors, you will still have your say in what will go into the house, including materials, layout, and decor.

Less property management responsibility

Unlike rental unit landlords, you don’t have to deal with tenant screening, landlord-tenant laws and regulations, renters’ issues, and so on. Your only focus is on the house you are working on and the progress of the contractor. You will, however, have to take care of insurance and utility bills while the property is in your name.

Flipping is repeatable

After you flip and sell your first house, you can repeat the whole process. Use the profit acquired to invest in a new fixer-upper. Your next flip should be easier as you will already have some knowledge and experience, as well as an established network of reliable contractors.

Cons Of Flipping A House

Even though house flipping can be a fast way to earn significant active profit, there are several risks to consider. By understanding all the negative aspects of this process, you will be able to determine whether this is the right real estate investment for you.

High-risk investment

How well you’ll do mostly depend on how you perform on the market and how much the value of the property increased. For most people, this is a high-risk venture due to market volatility and the need for a keen understanding of how to remodel and advertise a property successfully.

For instance, when the market is badly influenced by outside factors, your property may not appreciate as fast, which means that you will not earn revenue as planned.

Other risks come from remodeling that lasts longer than expected, due to contractors being late or not delivering quality. This also means going over budget and financial losses.

Unforeseen expenses

To be able to appeal to buyers, you must ensure the house is in great condition, which means thoroughly inspecting and improving every inch of the house. Often times, you will run into issues previously not predicted (structural problems, plumbing issues, etc.) which will incur unexpected extra expenses and prolong your estimated project timeline.

High taxes

The money acquired by selling a property that was purchased at lower price is considered capital gain in the U.S., and the exact amount of money you must contribute towards taxes depend on how long you have owned the house. It is usually higher than the capital gains tax for rental properties.

Large upfront capital

Another downside is that you have to invest significant capital upfront to purchase the real estate and also to cover the cost of remodeling.

One-time payout

This is another vital aspect. Make sure you are getting the highest possible revenue, enough to cover purchase price and repair costs, and bring reasonable profit.

Owning A Rental Property

If you are looking for consistent, passive income, renting is the best investment strategy. Renting a property can be long-term or short-term (vacation). These properties generate monthly cash flow that accrues wealth over a long period of time.  

When making a decision whether to rent or not, take into account all the advantages and disadvantages that come with it.

Advantages Of Renting Out Your Property

Here are several major advantages to owning a long-term (or short-term) rental property:

Continuous income flow

Rental business generates passive income, which means that you can still collect your monthly rent payments even if you are injured or unable to work. This type of business allows you to be independent and build wealth slowly over time.

Low-risk investment

Since the success of this type of business does not depend on how fast it is sold, the associated risks are relatively low.

Property value increase

The longer you own the property, the more equity you can build, and with increased appreciation comes wealth accumulation. With the value of the property rising, so can your rents.

If you decide to sell the unit one day, you can get a substantial sum of money in return, particularly if you have purchased the property during buyer’s market and sold it during seller’s market. The best time to sell is during seller’s market, when there is high housing demand and low supply. Typically, sellers get more than their asking price if they decide to sell during this time.  

Tax benefits

Investment income for rental properties is significantly lower than taxes for the flippers. Plus, there are a lot of tax deductions for landlords that can be written off, and they include depreciation, repairs, travel to/from property, property management services expenses, mortgage interests, and many more.

Personal use of property

An additional bonus is that you can use the place for personal use.

Cons Of Owning A Rental Property

Even with slow and steady income, there are several disadvantages related to owning a rental property.

Vacancies

Vacancies are certainly the biggest risk of renting. It’s normal to be vacant for a few days or weeks, but it can become a problem if it is not occupied for a longer period of time since it can cause you to lose money. Vacancies typically occur during low demand (low season), or when the price is too high. To avoid potential financial losses, be realistic about the rental price you set up so that it reflects the current market value.

Slow ROI

Compared to flipped homes, rental properties have a slower return rate. Be prepared to wait for years before you can recoup your initial investment.

Tenant relations

Dealing with residents can be difficult and time-consuming. You have to handle issues such as late rent payments, property damage, eviction, and other potential problems. Every day can be a challenge.

Seasonal demand

If you own a short-term (vacation) rental, your property’s occupancy levels may depend on seasonality.  The demand can be determined by local events, weather, or season. However, even though your unit is not occupied, you still have to pay for utilities, mortgage, taxes, maintenance, etc. To avoid low occupancy, offer amenities to enhance guest experience, market yourself to business travelers and past guests, or form the correct price, reflective of current market trends.

More responsibilities

As a landlord, you have a long list of daily responsibilities you have to take care of, including advertising, tenant screening, dynamic pricing, regular maintenance checks, cleaning, etc.

Which Method Is Right for You?

If you still can’t decide which one is better for you, ask yourself:  

Do I have enough funds for flipping?

To be able to properly flip a house, you have to invest a lot of money upfront, which means that you need a lender.

What is the worst possible outcome?

For rental landlords, there is a risk of no one wanting to rent the property or that it gets destroyed by the occupants. The solution is to craft a rock-solid lease agreement that will protect you against issues like these and to obtain adequate landlord insurance. As far as vacancies are concerned, try to improve your advertising, reassess rental price, and evaluate current market conditions. If you are not experienced enough, it is best to hire professional property managers who will help you with marketing, price forming, and tenant screening. They will ensure your rental unit is occupied and brings you money.

For those who flip homes, the worst-case scenario would be substantial financial troubles as a result of poor investment decision. The stakes are high, so you must be confident and educated about what you plan to do.

How well do you work under stress and how do you handle finances?

If the answer to these questions is yes, then you most likely can do either of these two strategies.  

Hire Professionals To Help You With Your Rental Investment

Before diving into fixing and flipping or renting, you should assess your personal situation, as well as market circumstances. Don’t forget that house flipping carries a lot of risk and can be a costly learning experience. In contrast, renting offers a more secure, slow, and steady income gain, but requires ongoing dedication of time and efforts.

For more information and assistance in house sales and property management in California, contact Swell Property agents today. We offer full suite of rental management services, including tenant screening, maintenance, tenant relations, advertising, and property inspections. This way, you do not have to worry about daily responsibilities and can enjoy a worry-free ownership experience.

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