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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.
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.
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.
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.
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.
Maurice F. Reidy & Co., Real Estate, Worcester's Oldest Real Estate Brokerage Company, Now In Our 114th Year.
Maurice F. Reidy & Co. offers clients and customers in the central Massachusetts markets a real estate advisor and brokerage that provides expertise in sales, leasing, and consulting services for all types of property. Joe Reidy, Realtor Emeritus is the owner/broker of the firm.