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?
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
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?
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.