To Fix and Flip or Hold and Rent?
The great thing about real estate is just how many options you can exercise. There are so many real estate areas, and with the right conditions and research, it’s possible to be successful at any of them. Obviously, however, it’s a whole lot harder to be good at all of them. That’s why it’s so important to be focused on one particular aspect of real estate. Play to your strengths, and you’ll be a lot more likely to make profits.
Let’s compare two strongholds of the real estate business: fixing and flipping, and holding and renting. This comparison should serve to exhibit which one of the two is more your speed.
So What Does Flipping Entail?
But first, a disclaimer. Contrary to what pop culture might tell you, flipping doesn’t make for automatically easy cash. There’s a lot of work and research involved in the process of becoming rich this way, and human mistakes or changes in the market can adversely affect the business. Too many people go into the house flipping industry with an entirely naïve perspective, believing that all that stands between them and a boatload of cash is the simple procedure of buying, renovating and selling a house. The truth is that there is nothing simple about any of those steps, and require hard thought, work and investment.
That said, the more time a person spends flipping, the better they’re bound to get at it. And from a numerical point of view, it seems pretty obvious that the better you are at flipping the huger your ROI will tend to get. Even if you only earn $10k or even $5k per flip, your profits will be huge if you’re turning them over fast. Say you earn $7k for each flip when you use sub-contractors, and you’re able to flip a house in a couple of months. So you can flip 6 houses in a year, and make $42k in that time!
You Don’t Have to Worry About Maintenance
Maintenance costs have a tendency to accrue. This is especially true if the property is old, or designed in a unique manner that requires constant upkeep. The problem can be aggravated by bad tenants who don’t pay rent, or don’t take care of furniture. Renting out a property can mean being constantly hounded by maintenance issues. With flipping, however, you only have to pay maintenance costs from the time the house is renovated to when it is sold. Selling the house for quicker cash may be more suited to your needs than tackling maintenance issues in the long run.
You Have the Time to Spare to Handle Projects
Flipping involves a lot of active work. If you’re the sort who doesn’t want to passively earn income, it can be an excellent idea to flip houses in order to make your money. Since fixing and flipping doesn’t allow for a consistent stream of revenue to come in like renting does, you have to keep flipping houses over and over in order to make it a source of income.
Flipping has an Economic Cost
Opportunity cost refers to the cost of something you have to give up in order to do something else. Say you can either go to a movie or read a book. The opportunity cost of going to the movie then would be the time you could have spent at home reading instead, as well as the money that you could have spent on something else. No matter what you choose to do with your time and money, there will always be an opportunity cost.
Flipping houses for money takes up time, time which you could spend elsewhere building up your career. You need to decide whether the money you’re making by flipping is worth the money you’re giving up by not working at a more traditional job.
Flipping Involves Taxes
On top of all your normal taxes, you will have to pay an extra 15% when you flip for a living. Flipping income generally undergoes the same taxation as self-employment, which generates the highest income taxes.
What does Rental Entail?
Rental Involves More Consistent Pay-Off
Rentals earn less income, but they do so consistently in the long term. It’s important to investigate the property more thoroughly prior to purchase, and to vet potential tenants. Flipping allows for less things to be addressed than does a rental.
Renting may not involve the same amount of money as flipping, but the income is permanent, whether or not you’re working.That makes rental income passive, i.e. it is earned without much effort. This is opposed to the active income generated by flipping, which involves work on a daily basis. That’s why rentals are often so suited to retirement. Financial independence after retirement is a problem many people deal with, but it can be rather elegantly solved through renting.
Of course, there will still be some amount of work to put into a rental. As we mentioned earlier, rentals do involve more maintenance work and upkeep. And tenants have to be dealt with as well. However, if you don’t wish to do this yourself, you can simply hire a property manager to take care of such details in your stead. It’s best to account for such a manager before purchasing a property.
Where flipping involves a large amount of additional tax, rental property actually has tax incentives. This is because flipping isn’t taxed as investment income but as self-employment, whereas rental property is considered to be an investment. This means you can draw on the help of certain write-offs in order to offset your taxes. Investment income will generally be taxed at 15% in comparison to the 25% to 43% flipping can be taxed at! Plus, you can even allow you to write of additional expenses like depreciation.
In the end, it all boils down to your individual situation. If you’re planning to retire within the next 5 years, renting property is a good way to make sure you’re financially independent afterwards. On the other hand, if you believe flipping to be a better financial option for you than your current career, go for that instead.