Flipping vs. renting a home is often the million dollar question for real estate investors. Each has their pros and cons, but in order to make an informed decision, investors need to have a deep understanding of the properties they’re looking to add to their portfolio. Not every property is best used as a rental, and not every property is ideal for a flip, so let’s see which makes the most sense for your strategy.
The biggest difference between flipping a house and using it as a rental is that with flipping your income is dependent on the number of flips you do each year as you only make money when you find, fund, fix and sell a house.
What you need to know when considering flipping a property:
- Make large amounts of money at once – On average, investors spend 3-6 months working on a property flip. With that timeline, you can take on several flips a year, and earn a significant income off of each. As these are short-term investments, your money is returned to you faster, giving you a higher rate of return and allowing you to complete more deals than with rental properties.
- At the mercy of the market – The value that you’ll be able to sell your property for are very much dependent on the ebbs and flows of the local real estate environment. In a growing market, you can usually expect to make a strong profit when you sell your property. However, during a crash, your final returns could dramatically decrease, leaving you with less profit than expected.
- Unexpected costs – When considering the overall cost of flipping a property, investors also need to add a cushion for unexpected expenses that come up during the renovation process. Whether an issue is found within the walls of the property, or issues arise with the contractor, not accounting for these potential expenses can heavily influence the returns on your project.
However, when you turn a property into a rental, you only have to do the work once and you’ll receive monthly cash flow in the form of rent checks each month. Rental income is ongoing and doesn’t stop until the property becomes vacant or you sell it.
Here are some things to keep in mind when considering a rental property:
- Steady income stream – Arguably the biggest benefit of a rental property is the regular cash flow from rent checks. Investors like that this gives them a steady passive income, and helps them reach their financial goals as they add more and more rental properties to their portfolio.
- Property appreciation over time – Most properties appreciate in value over time. A rental strategy allows investors to hold on to a property, collect a steady cash flow, and then cash in on an increase in the property’s value at a later time.
- Long-term management – Not every investor has the desire (or skillset) to be a landlord. Maintaining a successful rental property requires a lot of attention and upkeep. From finding high-quality tenants to keeping the property in top condition, acting as a landlord can take a lot of time out of your days, pulling you away from other investment opportunities. Spend some time thinking about if you’re willing to dedicate the time and effort needed to manage a property.
There’s no straightforward answer to which is the better investment strategy, and it’s really based on your investment goals. If your goal is to earn income quickly, flipping houses may be a better option for you. If your goal is to build your cash flow to earn passive income, buying rentals may be a better option. You also need to consider the capital you can invest, as well as your own personality and preferences.
We’ve made it easier to determine if a specific property is better used as a fix and flip or a rehab and rent. Using Backflip’s Returns Analyzer, see which strategy gives you the best returns, so you’ll know instantly if it’s a good investment and how to incorporate it into your portfolio.