If you have a secondary property, it’s a real estate investment opportunity that can be put to work for you.
Properties hold inherent value in themselves, but by utilizing your property in different ways, you can maximize the return on the investment property.
Two popular ways to maximize the ROI on a property are flipping it or renting it. Both choices have upsides and downsides.
Ultimately, the avenue you decide to take depends on how quickly you want to see a profit, whether you desire passive long-term income or short-term active income, and so much more.
Flipping or renting a property is a much smarter financial move than letting a property sit untouched.
By finding ways to make your investment strategy work for you, you can generate extra income with your assets.
Keep reading to learn the details of flipping and renting to decide which path is right for you.
Pros and cons of flipping
Like anything else, there are pros and cons to flipping houses.
Though many people are attracted to the idea of flipping a home, it takes the right person (and property) to successfully turn a profit on a flip.
Flipping provides quick and active income when real estate investing. When considering flipping vs. renting, it’s important to know the facts.
Pro #1 - Quicker profit
When comparing flipping a home to renting a home, it’s no doubt that flipping will make a larger profit in a short amount of time in real estate investors' monthly income.
By following a comprehensive remodeling plan, and adhering to it, many people can pull off a flip in as little as a year.
To avoid heightened capital gain taxes, it’s best to flip the property in under a year. More complicated flips, or construction delays, may cause a project to go beyond a year.
However, flipping is always a faster way to get cash in your pocket than renting.
Pro #2 - No property management responsibilities
One of the inherent downsides of renting a property for long-term profit is that you become the landlord, and in effect, need to adhere to laws and regulations regarding the landlord-tenant relationship in your state.
Renting out a property can be complicated for this reason, particularly if you’re new to property management, or if you live far away from the property itself.
With a flip, no property management is necessary.
Con #1 - Expenses can snowball out of control
The entire objective of a home flip is to buy a house that's inexpensive, and fix it up in an economically conservative fashion, to make a large profit margin on the home sale. This means flipping requires extremely careful budgeting and spending.
Though the home itself might have been inexpensive, the repairs may not be. Generally, the more inexpensive a home is, the more work it’s likely to need.
Certain remodeling tasks, like structural work, plumbing, or electrical changes are expensive to complete.
Contractors are highly specialized individuals and their hourly rates reflect that. If a part of your project is more complicated than expected or takes longer than expected, it can cause your remodeling costs to skyrocket.
It’s important for those considering flipping to investigate the property they are considering buying thoroughly.
It’s also important for flippers to make a realistic and attainable budget for their remodeling, and adhere to it.
However, certain aspects of the remodeling process cannot be predicted or budgeted for. This is a huge con of flipping.
Con #2 - One-time income
Flipping a house ends in one result: a sale of the property.
It’s important to remember that by the time the property is remodeled, other economic factors such as the state of the housing market, could impact your sale.
Flipping results in one-time income, and flippers need to ensure they are getting the highest profit possible for the time and money spent.
Sometimes this might mean flippers need to wait longer than expected to sell the house if the economy is in a downturn.
The profit on the property needs to be enough to not only cover the original price of the home and the cost of all the repairs but to make the flipper a reasonable profit, too.
This can be a hard balance to strike and some flippers may end up with one-time income that is lower than originally expected. When considering whether to flip or rent, this is a significant factor.
Con #3 - Taxes
Like with any income, taxes apply when making money from the sale of a flip. These taxes can be significant and eat into the overall ROI.
When selling a property, you should be prepared to pay your regular income tax bracket percentage, plus 15%.
However, if you own the property for less than a year, you will typically only pay your regular income tax percentage.
Still, this is a large chunk of cash. Most people’s income tax ranges from 18% all the way to 43% for the self-employed.
Before you consider a flip, do the math on the expected taxes you’ll pay with the sale. It might not be worth it for high-earning individuals or the self-employed.
Pros and cons of renting out a property
If you’re looking for a long-term way to make a consistent income, renting out your property might be the best avenue.
When deciding whether to flip or rent, it’s important to consider your profit goals.
While flipping provides a fast one-time profit, renting provides a slow and consistent profit over the course of years.
Pro #1 - Consistent and reliable income
Owning rental property is desirable because it allows consistent and reliable cash flow at all times.
Renting is extremely popular and there will always be people who need to rent a home.
A property owner can enjoy years upon years of consistent income by renting instead of flipping. This can be a great way to make money for a property owner who is retired or unable to work.
If someone owns enough rental units, this can also become a way to quit your day job altogether.
Pro #2 - Rental property value grows with time
Though all property has the potential to increase in value over time, rental property is the only way to ensure your residual income will increase year over year.
Rental property benefits from inflation and wage increases, which tend to happen every year.
For example, imagine you bought a rental property ten years ago. The national median rent in 2012 was approximately $810.
Today, the national median rent is over 1,100$. The average annual rent rate increase can vary from 1% all the way to 9%, depending on the greater economic climate.
In any case, rental rates rarely stay stagnant. Renting a property out means you will have access to consistent income that keeps above inflation, allowing more cash in your pocket.
Pro #3 - Tax breaks and incentives on rental property
When you flip a home, you are subject to all applicable income taxes.
These can be very high, and therefore taxes are very important to consider when weighing the choice to rent or flip. A pro of renting out a property is the tax benefits.
Profits from renting are taxed as investment income, which is considerably lower than regular income tax rates.
In addition, those who rent out a property can write off several aspects of being a landlord on their taxes, including maintenance, repairs, transportation to and from the property, staff salary costs, and more.
Even more importantly, rental owners can write off depreciation on their assets. All properties depreciate but rental properties are the only assets that allow someone to write off depreciation losses, saving thousands per year.
Con #1 - Rental properties are not entirely passive income
It would be remiss to say owning a rental property doesn’t take hard work and planning.
Once someone has nailed down a good system to manage their rented assets, income will feel more passive.
However, the act of qualifying applicants, keeping rental properties up to regulations, and dealing with tenant relations is anything but passive.
Rental property owners can utilize tools like property management software to automate and streamline processes.
Owners can also choose to hire a third-party property team to manage the heavy lifting for them if they see the costs associated as worthwhile.
In the case someone manages their rental properties with no outside help or technology, there is a lot of work associated with earning consistent rental income.
Con #2 - Vacancy
Sometimes, rental property owners will have a hard time finding qualified tenants for their property.
This might be due to location, economic downturns, and more. Owning a rental property always carries an inherent risk of prolonged vacancy.
Though there are steps property managers can take to mitigate vacancy, such as advertising available units or giving away concessions, the risk of profit loss comes with every rental.
After a current tenant moves out, it may take anywhere from a few weeks to a few months to find a new tenant.
Is flipping or renting better in 2023?
When it comes to flipping vs. renting, there is no inherently better choice. The best choice depends on the property owner's profit goals.
In review, when flipping a property, you can expect:
- Quick, active income.
- A repeatable process.
- Unpredictable repair schedules and costs.
- A high tax rate on your flip’s profit.
Versus when renting out a property, you can expect:
- Long-term consistent income that stays competitive with inflation.
- Tax incentives such as write-offs on depreciation and property management costs.
- The risk of potential vacancy.
- The responsibility to manage the tenant-landlord relationship.
Folks who need active, one-time income and don’t mind paying higher taxes may opt for a flip. Folks who desire long-term stable income with lower taxes and more tax incentives may choose to rent out the property.
Flipping is not inherently more profitable than renting. Depending on the amount of time that the rental property is held, rental income can be significantly more over time than a flip makes in one transaction.
Whether you flip houses or rent them out, you’re making a smart financial move.
The best way to maximize your property investments is to make them work for you by finding ways to generate profit above and beyond the value of the property.
Whether you flip or rent is up to your goals. Both result in significant profits, just with different timelines and tax stipulations. Hopefully, this article has shed new light on the pros and cons of each.