Premiere Plus Realty Co.
Jennifer Johansen, Premiere Plus Realty Co.
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Entreprenuers: What You Need to Know Flipping vs. Renting

by Jennifer Johansen 05/23/2021

Photo by PublicDomainPictures from Pixabay

To an upstart house flipper, the difference between renting a property or selling it quickly may seem inconsequential. After all, entrepreneurs get into the real estate game to make money. Why should it matter?

Truth be told, owning rental properties and fix-and-flip business models are like comparing apples and oranges. Although apples and oranges may both be in the produce section, it’s essential to understand the difference between passive rental income and proactive house selling if you want to make a lot of money.

What Makes House Flipping & Renting Different?

The practice of house flipping is not necessarily investing. The business model resembles day trading in which you try to buy low and sell high. But unlike day trading, flippers take proactive steps to increase the value instead of leveraging data.

By contrast, keeping rental properties makes up a passive business practice. People buy a property and factor in any upgrades, mortgage costs and other expenses, then decide whether the rent will pay for all of it with money left over. With any luck, rental property owners cash checks and send someone to fix an occasional leaky pipe. 

Beyond the different revenue streams, initial financing and due diligence, loans will not be the same. A house flipping loan typically runs 18-36 months with a high-interest rate. A rental property investor usually stretches a mortgage out to 20-30 years at the lowest possible rate. While these business ventures remain miles apart, both bring benefits to the table.

Pros & Cons Of House Flipping

It may seem almost counterintuitive, but the top pro of house flipping also serves as its con. When successful, the process results in quick high profits. However, after the sale, the revenue stops, and house flippers must restart the process with no steady income.

Quick sales also unburden entrepreneurs from property maintenance, upkeep and dealing with tenant problems. Of course, house flippers can be subject to higher taxes, such as capital gains.

Pros & Cons of Rental Properties

Although renting does not generate high profits over a short period, steady incomes allow owners to plan reliably. Property values typically increase over time, building your financial stability. Mortgage interest payments can usually be deducted on income taxes. Many rental property owners also enjoy tax incentives such as deducting depreciation.

On the other hand, vacant apartments and tenants who can’t pay the rent mean owners may have to pay the bills out of pocket.

Does A Diverse Real Estate Portfolio Make Sense?

A successful house-flipping business reportedly averages a net profit of more than $67,000 per property, a return of about 41%. Completing 3-4 fix-and-flips in a given year certainly makes the venture worthwhile. By contrast, average rental properties generate an average of about $200-$400 monthly. Rental property investors generate $2,400 to $4,800 annually per rental.

While house flipping can generate exceedingly more money, these businesses can also take significant losses. If renovations exceed anticipated costs or buyers lack interest, losses can be substantial. Maintaining a rental property or two provides a fallback position in the event you take a loss. Equity can be leveraged, and lenders may look more favorably at your fix-and-flip loan application because you have real estate assets. Yes, successful house flippers can make more money. But financial diversity makes good business sense as well.

About the Author

Jennifer Johansen

Jennifer is passionate about the Real Estate business, and has been involved in related family businesses in construction, architectural millwork, and finance for 20 years. She and her husband relocated to Naples, from New York, 10 years ago, although her family has owned property on Marco Island since the 1980's. She has a Bachelor's Degree in Psychology and a Dual Master's Degree in Counseling and Education. She has acquired many necessary skills that are useful in Real Estate from being in the field of Counseling for many years. She holds the belief that building rapport is vital to helping her clients have a positive experience, while achieving their goals. She is very thorough and detail oriented, and has formed many close relationships with professionals in related fields, such as law, title insurance, home inspectors and other contractors. She aims to offer concierge- level service to her clients at every price point. When time permits, she enjoys spending time with family and friends. Having grown up on the South Shore of Long Island, and enjoying her summers on Fire Island, she loves any activity related to salt water, boating and the beach. Additional hobbies include gardening, art, and studying nutrition, wellness and naturopathy. She is knowledgeable about Naples and Marco Island Real Estate, in estate areas, golf/gated communities, and waterfront properties. She is a member of The Naples Board of Realtors and Marco Island Area Association of Realtors.