Renters Warehouse Blog
Flipping Vs. Long-Term Investing: Which is the Best Route for You?
Real estate. It’s a time-tested path to wealth creation and something that investors have been turning to for years. But while real estate has long been the avenue that most investors have used to amass their wealth, the truth is that real estate investing styles vary considerably.
Today, there are two common methods that investors turn to: house flipping, and buy-and-hold investing with rental properties.
Before you decide to invest in real estate, be it flipping houses or rentals, it’s important that you weigh up both the pros and cons of both sides to ensure that you make the best choice, keeping in mind that often, what works for one person might not work for the next.
Your investment shouldn’t be a gamble, and it doesn’t have to be. With the right approach, a careful strategy, and by making an informed decision you can ensure that you choose the best investment option, before you dive in.
With this in mind, let’s uncover both the benefits and risks of flipping houses and buying rental properties.
We’ve all seen the reality TV shows –like Flip This House and Flip This House. Someone buys a house (oftentimes sight-unseen), and just in an hour or less, manages to transform the property into something magnificent.
They also almost always turn a tidy profit and hardly ever lose out. So what could possibly go wrong? While there are certainly some benefits that can come from flipping houses, things aren’t quite so straight-forward. Before you decide if this is the option for you, here’s a look at a few things you’ll want to consider.
What Does Flipping Houses Mean?
In short, flipping houses means buying a fixer-upper, performing the upgrades or repairs and ‘flipping it’ for a profit. It’s helpful if you have knowledge or experience to perform routine (or extensive) repairs and upgrades. Profits made from the flip are often rolled over into another property and the cycle continues as you work your way up the market.
Pros of Flipping Houses
Here’s a look at a few things you might gain when you invest in a fix and flip property.
- Potentially Quick Profit – If done right, your fix and flip project does mean the potential to bring you some quick profit. So if you’ve timed the market right and have purchased a true gem of a property, ideally below market value, then your chances of securing a decent return are higher.
- Increased Knowledge – When you start fixing and flipping houses, your knowledge of the ins and outs of real estate investing will increase –drastically. Your real-life experience with purchasing real estate, securing funding, finding decent properties, running projected income and expenses, surveying the market, construction, contractors, bidding, budgeting, and more will increase, and fast.
- Establish Connections – Once you start purchasing investment properties, you’ll also establish valuable connections as you go along. This will give you access to a wealth of knowledge and help to make the process easier the next time around. Establishing contacts –such as investor-friendly real estate agents, property inspectors, property managers, contractors, attorneys, and more will prove to be invaluable.
- Personal Satisfaction – Finally, there isn’t anything more satisfying than seeing a project through to the end. Once it’s all said and done, you will have the personal satisfaction of finding, buying, fixing, and flipping a house –from start to finish. Now how many people can say that?
Cons of Flipping Houses
Of course, this doesn’t mean that flipping is risk-free. Here’s a look at a few things that can go wrong when flipping houses.
- The Risk of Losing Money – Like any investment, with house flipping, you run the risk of losing money. You purchased a lemon house, the inspector didn’t prepare you for all the problems, the market crashed, or things just came in above budget. With real estate, expenses are higher, and one unexpected repair, like a new roof or foundation repairs, can quickly take a significant bite out of your profits.
- Tax Increases – While there are few things more satisfying than completing your very own fix and flip, your neighbors won’t be the only ones noticing! Your friendly city will also take notice and raise the property taxes as well. While this isn’t a major issue should you successfully sell, you should also consider the fact that you might be subject to capital gains taxes on your profits.
- A Drop in the Market – Finally, another considerable risk when flipping houses is a drop in the market. Since a project’s success is contingent on the right market conditions and appreciating property values, an unexpected drop could be devastating.
On the other side of the coin, we have long-term investing –or, purchasing rental properties. This approach certainly isn’t a get rich quick scheme, but rather an option that produces long-term rewards. It’s an investment strategy that isn’t for everyone, but is something that makes sense for a lot of people –including first-time buyers and seasoned investors alike.
With income properties, there are a number of long-term advantages, including appreciation, equity growth, and tax breaks –not to mention leverage –which are largely what makes this investment option so attractive to so many.
Let’s take a look at a few benefits, as well as some of the challenges of long-term investing now.
Pros of Long-Term Investing
First up, some of the advantages of long-term investing.
- Monthly Income – One of the great things about rental property is the chance to experience cash flow –in the form of rental income every month. Every time the rent comes in, you’ll be reminded of why you decided to purchase rental property. This monthly income that can help you to pay down the mortgage. Once it’s paid off, things get even better! After that, a large percentage of that income will be yours –in pocket.
- Appreciation and Equity Growth – The long-term nature of rental properties means that you’ll have a chance to accrue equity –both as you pay the mortgage down, and as the property appreciates in value –something that you can use to finance future investments.
- Tax Benefits – Owning a rental property also opens the doors for some pretty significant tax breaks. In many ways, income property offers better tax breaks than any other investment, and this is something that savvy investors use to their advantage.
- Potentially Lower Risk – While no investment is without risk, long-term investing is far less dependent on the market than house flipping. While successful flipping is largely contingent on timing the market and purchasing at a specific point in time when property values are appreciating, the long-term nature of rental property means that there’s a bit more room to ride our market fluctuations.
Cons of Long-Term Investing
Of course, even long-term investing has its risks. Here’s a look at a few now.
- Wear and Tear – When you rent your property out, you have to consider wear and tear. Things will tend to wear out faster when you have renters. Still, you can deduct the cost of this wear and tear come tax time by claiming depreciation.
- Unexpected Costs – As a landlord, unexpected costs should be expected! If there’s something that can break, wear out, or go wrong –chances are it will. This doesn’t mean that rental properties will make you go broke, but it does highlight the importance of planning and budgeting for future repairs, as well as maintenance.
- Additional Stress – Finally, being a landlord comes with its own share of stresses and headaches. Many landlords quickly find that they’re in over their heads when it comes to overseeing their properties. The good news, though, is that most of these hassles can be outsourced to a reputable property manager, allowing you to avoid having to deal with many common issues including emergency phone calls, flooded bathrooms, late rent, and tenant screening.
Questions to Ask When Determining Flip or Long-Term
Still on the fence? Here’s a look at a few questions you can ask that’ll help you to discover which investment options is the best fit for you.
Will you need the capital in the next year or two? If yes, then you won’t want to tie up your money in a long-term investment like a rental.
Is there a good chance property prices will drop in the near future? While we can’t predict the future, buying a fixer-upper at a time when property prices are expected to drop would be a very risky move.
Do you have funding to buy and renovate a property? House flipping often requires considerable capital –for the down payment, necessary repairs, and unexpected issues that arise along the way. Make sure you have funding, or enough capital, before you start looking at fixer-uppers.
Are you comfortable with a high-risk investment? Flipping houses is considered high-risk –if you’re not comfortable with a high-risk investment, then you’ll want to give house flipping a pass.
At the end of the day, the decision to flip or buy a rental depends largely on your investment goals and your financial situation. Of course, if you’re looking for a faster return, and the market conditions seem favorable, interest rates are low, you have funding for a renovation project –and are comfortable with risk, then house flipping might be an option to consider. If, however, you’re looking for something more long-term, less risky, and as a way to start amassing both long-term wealth, as well as an immediate and steady stream of cash flow, then a buy-and-hold strategy might be a better option. It certainly can be an ideal way to amass equity and then leverage future investments.
As always be sure to talk with your accountant to see what the tax implications are for both house flipping and long-term investment purchases. Then consider which option you’re most comfortable with –and go from there.
All the best in your investment journey!
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