Difference Between Flipping and Renting

The main difference between flipping homes and rental properties is that the former generates active income while the later generates passive income.

Flipping homes is when a real estate investor buys a property, repairs it, then resells it for a profit. With this, flipping homes becomes an active income, which means earning money through day-to-day work. The money you make at your day job and/or from flipping houses are examples of active income.

Investing in rental homes, on the other hand, will provide you with passive income. Passive income is money you receive from your investments on a monthly basis. That money keeps flowing in no matter where you are or what you’re doing. Owning a rental property and receiving monthly rent checks is an example of passive income.

Therefore, a house flipper can only generate money once the house is successfully sold. Whereas when an investor rents out a property, there is usually a guaranteed monthly income until the property becomes vacant.

Pros and Cons of Flipping Houses

There are a few things you should know before you start flipping properties. House flipping offers advantages and disadvantages, just like any other real estate business.

Pros of Flipping Houses

Quicker Returns on your investment

When you flip houses for a living, you have the opportunity to make a lot of money in a short period of time. The goal is to close a deal in a few months (between 3 and 6 months), and if it goes well, you may see a big return on investment and profit.

No property management

You won’t have to deal with property management, which is another significant advantage. You won’t have to worry about finding tenants or dealing with their concerns, such as replacing broken appliances or doing repairs.

Potentially lower risk

It doesn’t have a lot of overhead costs, such as paying people and buying expensive real estate equipment. On renovation supplies as well as other items, there is always a way to save money. Also, the lesser risk comes from the fact that a property that is being flipped fast isn’t affected by long-term real estate swings.

Cons of Flipping Houses

Inconsistent Income

You don’t have a consistent income when you flip houses, and the performance of your investment is tied to the market’s performance. So, if the market is performing well, you have a strong possibility of obtaining a good return on your investment because the property’s value could rise quickly.

The property market becomes less predictable in volatile periods, such as during times of political instability or a pandemic, and your property may not appreciate as quickly. As a result, if you try to flip it too quickly, you will lose money.

Higher Taxes

If you sell a property for more than you paid for it, you may be subject to capital gains tax in the United States. The amount of tax you’ll have to pay is determined by how long you’ve owned the property. This form of investment often has a higher capital gains tax than long-term rental properties. 

Unexpected costs

Making sure the home is in good shape and appealing to potential purchasers is an essential part of flipping. Working with contractors to renovate or upgrade the property is common.

There’s always the possibility that contractors won’t show up, won’t finish on time, or that the renovations will cost more than expected. At the end of the day, this could cut into your profit margins.