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Flipping vs Renting: Find the Best Investment Strategy For You
If you're thinking about getting into real estate investing or are already a real estate investor, you've probably come across these two real estate investment strategies; flipping and renting.
In case you're wondering what investment option would be best for you, it entirely depends on the outcome that you're seeking as both strategies can help you boost your income.
In this article we highlight the pros and cons of each strategy to help you determine which strategy is best for you.
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Key Takeaways
- Real estate investing can be a way to make significant profits and get returns on your investment
- Flipping as a real estate investing strategy refers to the process of an investor buying a house or property, repairing and upgrading it and then selling it for a profit. Renting on the other hand is where investors can lease a property to tenants and earn rental income from regular rental payments
- Depending on the outcome that you're looking for, either strategy if executed well can help boost your income
Disclaimer
The contents of this article are for educational purposes only. They are not intended to be a source of professional financial advice. You will find experts on financial planning, financial management, and real estate here. More on disclaimers here.
House Flipping as a Real Estate Investment Strategy
House flipping is when a real estate investor buys a house or property, repairs and upgrades it and then sells it for a profit. Flipping can be done in a short amount of time of up to 4-6 months.
The primary goal of flipping houses is to buy low, make improvements and then sell the investment property at a profit within a relatively short period. The faster you can sell the property, the higher your chances of making money.
Flipping enables the investor to earn active income as they are able to generate money from the sale of renovated properties.
How House Flipping Works
Real estate flipping can be summed up in these 6 steps:
Step 1: Identify a potential property
First, an investor starts by searching for properties that have the potential to be improved and resold for a profit. They can look for distressed properties, foreclosures or homes in need of repairs or updates.
Step 2: Do a financial analysis
Next is to evaluate the value of the property by considering factors like the purchase price, estimated renovation costs, holding costs (such as mortgage payments, property taxes and utilities during the renovation period) and potential selling price. The aim is to ensure that the purchase and renovation expenses can be recouped, along with a profit margin.
Step 3: Secure financing
After that, the flipper needs to secure financing through various means, such as personal savings, lines of credit partnerships or a loan. The availability of financing depends on the individual's financial situation and the property's condition.
Step 4: Purchase and renovate
Once financing has been secured, the investor begins the renovation process. This involves making necessary repairs, upgrading features, enhancing curb appeal and improving the overall aesthetic appeal of the house. The extent of renovations can vary widely, from general changes to extensive structural work.
Step 5: Market and sell the property
Once the renovations are complete, the flipper lists the property for sale. They may work with a real estate agent or use various marketing channels to attract potential buyers. The selling price is typically set to generate a profit while remaining competitive in the local real estate market.
Step 6: Close the sale
When a buyer is interested, negotiations take place, and if an agreement is reached, the sale proceeds to closing. The flipper transfers ownership of the property to the buyer, and the profits from the sale are realized.
Renting as a Real Estate Investment Strategy
Renting is another way in which investors can tap into the real estate market. Using this strategy, investors can lease a property to tenants and earn rental income from regular rental payments.
Real estate investors can be able to earn money from both residential and commercial real estate and build long-term wealth.
How Renting Works
Real estate renting spelt out in 7 steps:
Step 1: Acquire a Property
The investor identifies and purchases a property with the intention of renting it out. This can include residential properties like houses and apartments or commercial properties such as office spaces and industrial buildings.
Step 2: Preparation of a Property
Before renting out the property, the investor may need to make necessary repairs and renovations to ensure it meets local housing or commercial standards. This includes addressing any safety concerns, maintaining essential amenities and enhancing the property's appeal.
Step 3: Setting rental terms
The investor then determines the rental terms, including the monthly rent amount, lease duration, security deposit requirements and any other conditions or restrictions. The rental terms should be competitive within the local rental market and consider factors such as property location, size, condition and demand.
Step 4: Tenant search and screening
After setting the rental terms, the investor goes ahead to advertise the property to attract potential tenants. This can be done through various channels such as online listings, real estate agents or local advertising. Interested individuals submit rental applications, and the investor conducts a screening process to evaluate their suitability as tenants. Screening may involve background checks, credit checks, income verification and reference checks.
Step 5: Lease agreement and move-in
Once a suitable tenant is identified, the investor and tenant sign a lease agreement that outlines the rights, responsibilities and terms of the tenancy. This includes rent payment details, maintenance obligations, rules regarding property use and any specific conditions agreed upon. Upon signing the lease and collecting the required move-in funds (such as the security deposit and first month's rent), the tenant can then move into the property.
Step 6: Rent collection and property management
The investor manages the ongoing process of collecting rent from tenants. This may involve setting up a system for rent payment collection, addressing tenant inquiries or concerns and ensuring the property is well-maintained. Depending on the investor's preference and capacity, property management tasks can be handled directly by the investor or outsourced to a professional property manager or management company.
Step 7: Lease renewals and turnover
At the end of the lease term, the investor may choose to renew the lease with the existing tenant or search for new tenants if the property becomes vacant. Lease renewals involve negotiating new terms and potentially adjusting the rent. When tenants move out, the investor prepares the property for new occupancy by taking care of any necessary repairs and doing maintenance on the property.
Pros & Cons of House Flipping
Let's begin with its advantages.
Pros
Advantages include:
Potential to earn profits. House flipping offers the potential for substantial profits. If done correctly, a well-executed flip can result in a significant return on investment, especially in areas with a strong real estate market and high demand for renovated properties.
Quicker return on investment. Flipping houses can provide a relatively quick turnaround compared to long-term real estate investments. With efficient planning and execution, investors can buy, renovate and sell a property within months, allowing them to realize profits more quickly.
Active investment. House flipping allows investors to actively participate in the renovation process and have control over the property's outcome. This can be appealing to those who enjoy hands-on projects and have a knack for design and renovation.
It is a repeatable process. Once investors get the hang of it, they can easily buy houses below market value, make renovations and then sell at a profit. This process can be duplicated across numerous properties.
Now, for its disadvantages:
Cons
They include:
Financial risks. House flipping involves financial risks, including the potential for unexpected costs, market fluctuations and extended renovation timelines. Factors such as inaccurate cost estimates, unforeseen repairs or a slow housing market can affect the profits or even lead to financial losses.
Tax implications. Flipping houses can have tax implications, including capital gains tax on the profit earned from the sale of the property. It's essential for flippers to understand tax laws, deductions and potential tax liabilities associated with short-term property transactions.
Renovation complexities. The renovation process can be more complicated and costly than anticipated. Dealing with unforeseen structural issues, obtaining permits, managing contractors and ensuring quality workmanship can be challenging, especially for inexperienced flippers.
Time consuming. Flipping houses can be a time-consuming and demanding process. It requires significant effort and hands-on involvement in property selection, renovation planning, overseeing contractors and managing the overall project. This can be challenging for individuals with limited time or those who prefer more passive investment strategies.
Pros & Cons of Renting
Let's begin with its benefits.
Pros
Benefits include:
Steady income stream. Renting out properties provides a consistent and predictable income stream. Monthly rental payments from tenants can help cover property expenses, such as mortgage payments, property taxes, insurance and maintenance costs. It can contribute to a stable cash flow and potentially generate passive income.
Long-term wealth building. Renting properties allows investors to build long-term wealth through equity appreciation and property value growth. Over time, the property's value may increase, and the investor can benefit from potential capital gains when selling in the future.
Diversification. Real estate investments, including rental properties, can diversify an investor's portfolio. Real estate often behaves differently from other investment assets, such as stocks or bonds, providing a hedge against market volatility.
Property appreciation. In addition to rental income, rental properties can appreciate in value over time, especially in areas with favorable market conditions. This can result in equity growth, allowing the investor to build wealth through property appreciation.
Tax benefits. Rental property owners can take advantage of various tax benefits. These may include deductions for mortgage interest, property taxes, insurance premiums, repairs, maintenance costs and depreciation expenses. Consultation with a financial advisor is recommended to fully understand and maximize these potential tax advantages.
Let's balance the picture with some drawbacks.
Cons
They include:
Property management responsibilities. Owning rental property comes with the responsibility of property management. This includes finding and screening tenants, addressing maintenance and repair issues, responding to tenant inquiries or complaints and ensuring compliance with local rental laws and regulations. Property management can be time-consuming and may require dealing with difficult tenants or unexpected challenges.
Vacancy and turnover costs. Property vacancies can result in a loss of rental income and additional costs for advertising, tenant screening and preparing the property for new occupancy. Turnover between tenants can also entail repairs or renovations to make the property marketable again.
Potential rental risks. Renting properties involves certain risks, such as non-payment of rent, property damage caused by tenants or legal disputes. Screening tenants thoroughly and having appropriate rental agreements and insurance can help mitigate some of these risks, but there is still a possibility of encountering challenging situations.
Market fluctuations. Rental property values and rental rates are influenced by local real estate market conditions. Changes in the housing market or shifts in demographics can affect the demand for rental properties and rental rates. Fluctuations in market conditions may impact the profitability and attractiveness of rental investments.
Limited liquidity. Real estate investments, including rental properties, are relatively illiquid compared to other investment options. It may take time to sell a property if needed, and the investor's funds can be tied up in the property until a suitable buyer is found.
Conclusion
As a real estate investor, determining the best real estate investment strategy, whether flipping or renting, depends on your individual circumstances, goals and preferences. It is important that you consider what your investment goals are and also the outcomes that you seek.
Some investors may choose to go with one strategy while others may choose to incorporate both strategies to diversify their portfolio. Ultimately, the best real estate investment strategy varies for each individual, and it's essential to conduct thorough research and analysis before you dive in. If you would like to consult a real estate professional before you get started on your real estate investing journey, get in touch with Ila here .
Bay Street Capital Holdings
Bay Street Capital Holdings is an independent Black-owned investment advisory and wealth management firm that is based in Palo Alto, CA. The firm was founded by William Huston founded after 13 years of supporting the United States' largest retirement plan ($650B) Thrift Savings Plan.
In 2021, he was recognized as Investopedia’s Top 100 Financial Advisors. Bay Street was also selected as a finalist out of over 900 firms across the US in the category of Asset Manager for Corporate Social Responsibility (CSR). In California, only two black-owned firms out of nineteen firms received this recognition.
Bay Street manages portfolios with the goal of maintaining and increasing total assets and income with a high priority on managing total risk and volatility. The firm was founded to advocate for diverse and emerging fund managers and entrepreneurs.
Sources
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https://www.lodgify.com/blog/flipping-vs-renting/
https://www.rocketmortgage.com/learn/flipping-vs-renting
https://www.igms.com/flipping-vs-renting/
https://www.investopedia.com/articles/mortgages-real-estate/08/flipping-flip-properties.asp
