Flip Houses or Rent Real Estate?

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Have you ever thought about making money in real estate? I know I have. The only question is, will you make your money by flipping houses (buying them, fixing them up and selling them, and then repeating the process), or will you make your money by purchasing rental properties?

Flipping Houses

Just recently, my wife and I purchased our first home together — a fixer-upper foreclosure. For the past 2 months, we’ve been gutting rooms and rebuilding them to perfection. What was once ugly laminate squares is now beautiful tile; The old scuffed up hardwood is now a deep, rich brown color; and the walls with ugly wallpaper have been scraped and replaced with a shimmering coat of fresh paint.

Our house is beginning to look 10 times better than when we first walked through it and it makes me wonder how much money we could make if we sold it tomorrow.

We bought our house for about $75,000, and after all of our upgrades, we’ll have somewhere around $95,000 into it. But, what will it be worth in the current market? I’d say we could easily get $120,000 for it, leaving us with a $25,000 profit. That’s a huge profit with only 2-3 months of work!

Negatives of Flipping

While there are many success stories about flipping houses, there are also quite a few horror stories. Your new house could have:

  • an unstable foundation
  • a termite infestation
  • mold hidden in the walls
  • a terrible secret that could make it unsellable

Property values can also fluctuate greatly and are beyond your control. Some examples are:

  • an overall plunging economy
  • bad neighbors
  • a deadly event happened nearby

Flipping can be a risky business, and it comes with many negatives, but let’s take a look at some positives.

Positives of Flipping Houses

As we all know, flipping houses can be incredibly profitable as well. If you have a good understanding of property values and a basic knowledge on how much it costs to renovate a house, you could come away with at least $25,000 in cash from each project. As a side gig, this is quite lucrative.

Here are the positives of flipping houses:

  • Relatively quick return on your investment
  • Your return is often quite large compared to the overall investment amount
  • You are the hero of the neighborhood because you have turned a run-down property into a gem, which increases their property value as well

Purchasing Rental Properties

The other way to turn a profit with real estate is by purchasing properties and then renting them out to people in need of a dwelling.

Negatives of Rental Properties

Purchasing a home to rent sounds like a great plan, and quite honestly, many successful individuals have gone this route to create their multi-million dollar empires, but just like any other investment, this one comes with some negatives:

  • Requires a large investment
  • Not a quick return on your purchase
  • Could easily turn into a negative cash-flow if your payments and expenses exceed the monthly rent.
  • Could get bad renters that do not pay and destroy your house
  • Requires maintenance

Positives of Rental Properties

If purchased at the right price, rental properties can be a very lucrative investment, and there are quite a few benefits:

  • a positive monthly cash-flow
  • your tenants basically pay off the house mortgage for you over time
  • tax benefits (depreciation, basic write-offs, etc.)
  • can slowly develop an empire of rentals with an overall large value

With rental properties, your tenant’s monthly rent could cover your mortgage payment, the maintenance expenses, and provide you with some extra cash to put toward the next rental property! These investments will really add up, and you could soon have a million dollar empire of your own (whether you flip or rent though, you may want to consider local ADT security to protect your investment)!

Further Analysis – Flipping vs. Rental Properties

I’m sorry, but I just couldn’t leave this article with general positives and negatives. I (just like many of you) want to know how the numbers pan out between the two methods! The only problem is, we are really comparing apples to oranges….Flipping houses could potentially earn you a large amount of money in a short period of time, whereas purchasing rental properties is an investment in the long-term and could develop into a very large equity as well as a regenerative income source!

Even though they’re apples and oranges, I’m going to do my best!

The Average Flipping Income

The average house flipper is typically handy and can save quite a lot of money on repairs. By putting their own sweat equity into the project, they can normally earn an average of $20,000 per project (with each project taking them 3 months to complete).

  • The Average Flipper Can Earn $80,000 Per Year

The Average Rental Property Income

Finding an average yearly income for rental property is actually an incredibly difficult calculation which should involve the following factors:

  • mortgage repayment
  • house appreciation (and final equity)
  • positive monthly cash-flow (per year for many years)
  • net present value over time
  • tax breaks

In order to keep the calculation simple, let’s use the numbers below:

  • Equity in your $100,000 house after 30 years = $250,000
  • Monthly positive cash-flow of $500 over 30 years time = $180,000
  • Total value of investment = $430,000
  • Total value / 30 years = ($430,000 / 30) = $14,333 income per year

Final Words

After my incredibly simplified calculations, I have concluded that a house flipper can make $80,000 per year and the property rental method would earn only $14,333 per year. So, you may think that house flipping is the way to go, but there is still an element to add to the equation….

While a house flipper can really only flip one house at a time by themselves, a rental property owner can manage multiple houses at the same time. Instead of just one house, the property owner could own 10 houses and have an average income of $143,333 per year, which clearly wins in comparison to the house flipper.

So, if I did not wish to own more than 5 properties, it would be more valuable for me to flip houses. If I wished to own an empire and own multiple estates however, then I would lean in the direction of rental properties.

What about you? What would you choose? House Flipping or Rental Properties?

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Money

Derek

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

29 Comments

  1. House-flipping probably works best in urban markets where house prices are higher per square foot.
    101 Centavos recently posted..Can Taxes Kill?

    • Yep. That would make sense. Plus, you have a larger market to sell the house to once you’ve completed the project.

  2. I have elected to go with the rental properties simply because of the reduced time element involved. It is easy to manage my property and outsource any work I need done. A simple phone call or two is all that is needed. I am not making a lot of money currently but after mortgages are paid off will be doing quite well.
    cashflowmantra recently posted..CFM Starting a Blogroll Plus a Few Links

    • CFM, I know that you have mulitple properties, so I’m sure it will be worth it for you in the end. You sure are gaining a lot of equity each year! 🙂

  3. I have a few friends who have flipped some houses, and I know they have made some excellent money doing it. However, looming over their heads is the one house that they can’t sell, or that goes bust, and they can stand to lose a ton of money.

    However, my answer to that would be that if you started out with the intention to flip a house and you can’t sell it, then just become a landlord and rent it out. So in the end, you can do both of these options, and still have a way to be successful.
    MoneyforCollegePro recently posted..Apple Founder Steve Jobs Dies at 56: Life Lessons

    • Yep. The moment you can’t sell one of the houses is the moment that your business income screeches to a halt.

  4. I would go with flipping houses and renting them out while you look for a qualified tenant. Once I start picking up rental properties I am going with a property management firm because I defintely don’t want to be a landlord.
    Financial Success for Young Adults recently posted..Why Your Degree Means Nothing

    • That would work too! Although, it’s pretty tough to sell a home that has your renters in it. Not only will your renters be annoyed, but your property most likely won’t look too great for viewings.

  5. RIDICULOUS 1)in a huge declining market the value at which u buy will decline as soon as u buy it and no matter what u do to it the home will likely appraise for less which means financing will b very difficult.2)with 10-20million people out of work who r u going to rent too?? Anyone considering buying homes to sell and or rent better have very deep pockets and IMHO if your pockets are deep why bother.

    • Hi Tom. While your points seem valid, I strongly disagree.

      1) There are many foreclosures that are selling for well below the market price. It’s just a matter of finding the right one. Plus, if you have cash, you could get an even GREATER bargain!

      2) The rental market is actually at an all-time high BECAUSE of the recession. People can no longer afford their mortgages and are forced to rent smaller, less expensive homes/appartments.

      If you purchased homes now, imagine what they could be worth in 10 years when the market bounces back!

      Even though we disagree, I do appreciate the comments Tom! Come back again soon! 🙂

  6. House flipping is much riskier. Rental property will provide that kind of cash flow immmediately however you are increasing assets which should yild more in the long run, I would also add that rental property will shelter some of the income, so you save taxes.
    Krantcents recently posted..Personal Best

    • I do like the idea of rental property. That’s what I would choose as well. Thanks for the comment!

  7. For us I think we will combine both approaches. Our plan is to fix up our house and then rent it while we buy another one and fix it up. Eventually we will sell them and make a profit and live off of it.
    Miss T @ Prairie Eco-Thrifter recently posted..Tips for Wasting Less Food

    • We have a similar idea as well! Once we pay off our house, we might explore that option.

  8. I will never forget my experience of renting out my former home, only to see it nearly destroyed by renters! We followed all the guidelines, checked references, etc. and they still skipped out after trashing the place. It costs us so much in repairs that we chose to sell. However, my dad has several rental properties and he hasn’t had any problems, but he also uses a property management company, which we didn’t do. Done the right way, I can see how both options could be quite lucrative. Great information and advice on investing in real estate.
    Monica recently posted..Wall Street Protest: Protesters’ Rage is on Target, but They’re Not

    • Sorry to hear about your house! There are always those horror stories out there, but then again, there are success stories like you dad’s. Maybe the trick is to have an intermediary like a property management company.

  9. A house flipping deal may be great, and it sounds like yours is, but the operational part is to make sure the repairs get done fast and cheap to reduce expenses, and the the house is sold fast and high to increase income. These are the risk points. I’ve never done it because the commissions and expenses usually leave only a couple or three months of extra carrying time or not much room on the price. If I were more confident that I could predict reno costs and sale price then I would probably do one. I am currently considering one now in fact.

    For a rental deal the key is in making sure it’s always rented, that rents go up as high as possible, and that expenses are as low as possible. These are the risk points. Even short vacancy can make a rental cash flow negative for the year. I’ve bought and sold many rental units and they are very risky. Just because they are paid off does not mean one should take their eye off the ball (my opinion, it should never be paid off).

    Both of these businesses totally rely on the competence of the operator. A good one can make lots of money, a bad one will not make much or lose.
    Alex | Perfecting Dad recently posted..Teaching Kids About Money: 6 Benefits of a Bottle Picking Business

    • You definitely hit the main points. Good luck with your ventures in the future if you decide to buy a fixer-upper!

    • Flipping houses is risky, but so are the lower income rentals! I’ve heard so many stories about low-income rentals getting trashed, and often times, the turnover is way too high to be profitable. But, I suspect that since the purchase price was so cheap, a few months of vacancies isn’t that big of a deal? I’d love for you to elaborate!

  10. I am absolutely 100 percent on the “rental” side of the equation. Flipping houses is more speculative — what will you sell it for? — while rentals are a slightly safer bet. In my head, “flipping” is like stocks while “renting” is like bonds.

    While my properties have mortgages, I can earn about $100 – $200 a month per property in cash flow. Once the mortgages are repaid, I can probably net about $800 – $1,000 per month in cash flow per property. So my goal is to have 5-10 properties, which would give me monthly cash flow of $5,000 – $10,000 per month in about 30 years. It’s the ultimate “delayed gratification” — but a great retirement plan!
    Paula @ Afford Anything recently posted..Why I Quit My Job – and Why I Almost Didn’t

    • Sounds like a good plan! Have you ever thought about speeding up the process?

  11. First off I want to say great blog! I had a quick question that I’d like to ask if you don’t mind. I was interested to find out how you center yourself and clear your thoughts prior to writing. I have had trouble clearing my thoughts in getting my thoughts out there. I truly do enjoy writing but it just seems like the first 10 to 15 minutes are usually wasted simply just trying to figure out how to begin. Any suggestions or tips? Cheers!
    Terrie recently posted..accelerated martial arts

    • Quick bullet points are the way to go! Every time I have a thought throughout the day about a potential article topic, I write it in my notebook. Then, when I have some more time, I write bullet points that I might like to talk about for each specific topic. It really helps when I need to write a quick article! If you have any more questions, feel free to email me through my “Contact” tab above. 🙂

  12. WOW I really appreciate the information hear. I’m sure I’ll be able to put it to great uses. Thanks enjoyed 😀
    Jessica recently posted..my reviews

  13. In phx its simple. If you have the money to hold you are way better off to rent the homes out. You can get homes so cheap and they are renting for so much. I guess thats why we get 20 offers on every foreclosure home on the market.
    Zac Coplan recently posted..Top Realtor In Gilbert Arizona

    • Wow! Sounds like one hot market! Maybe I should keep my local hot market a secret….. 😉


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