Have you ever thought about flipping houses? If you’re pretty handy, it is definitely possible to buy up a place that nobody else wants, fix it up to look brand new, and sell it for thousands more than what you initially paid for it. We have all seen the show on TLC and have witnessed individuals making $100k or more in a matter of months, but is this a good way to earn your income? What about renting out properties? Which is better?
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Flipping houses definitely has it’s positives and negatives. Let’s take a good look at each side:
Positives of Flipping Houses
- Currently a high supply of foreclosures
- Demand for home purchases are increasing
- Potentially high return after just a couple months of work
- Can take profits to reinvest into the next flipping project
The biggest positive for flipping houses is the chance for a big return in a relatively short period of time.
Negatives of Flipping Houses
- Cost of fixing up is often more than expected
- If no one is interested in the property, you are stuck making loan payments
- You’d like to sell quickly, but real estate is not a quick mover, unless you severely under-price the home
- No residual income. Once you make your cash, that’s it.
There are a couple large negatives for flipping houses. They can be difficult to sell quickly because people like to take their time when buying a property, and the income is very labor intensive. It would be much nicer to invest in a project that provided income with little to no work.
The difference between flipping houses and rental properties is pretty similar to investing in penny stocks vs. index funds. Over the course of life, the penny stocks need constant tweaking, but could earn you some big bucks. However, this can be sporadic and for a short period of time, but index funds will bring you a consistent return for very little effort.
Positives of Rental Properties
Rental properties have proven to be a great investment for a long time, which is why it is still a common practice today for many millionaires. But what is it about them that makes the wealthy like them so much?
- The income is relatively passive, which allows the rich to invest their time in other regenerative income opportunities
- Receive consistent cash flow
- Great investment for tax purposes (depreciation is a biggie)
Negatives of Rental Properties
Rental properties aren’t necessarily for everyone, since there are a few downsides.
- Takes many years to recoup your initial investment in cash
- May have the difficult situation of bad renters
- Need to perform constant maintenance on the property
When one reviews the negatives with the positives of both flipping houses and buying rental properties, I believe that rental properties win hands-down for the long term, but flipping houses win the votes of many for the short term. If you want to make $20k in the next couple of months by flipping a property, you go right ahead and do it. After all, $20k is nothing to sneeze at. However, if you are looking to increase your long-term net worth and provide an increased cash flow for yourself, then you should invest in rental properties. Since rental properties are fairly passive, once you recoup enough money to invest in the next property, you can then receive multiple incomes from those multiple projects. This is the beauty of passive income – over the long haul, you will earn more money per month this way, and you will own hundreds of thousands of dollars in real estate equity.
What is your preference? Flipping houses 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.