Flipping vs. renting out a home: Which real estate strategy is right for you?

If you’re interested in real estate investing, you’ve likely heard about house flipping and owning rental property. Both are good options for people who want to turn a profit on real estate, but they work very differently, coming with different timelines, upfront costs, and levels of involvement.

Choosing the right strategy when you’re just starting out can be tricky, so we’ll break down the key things you need to know.

What’s the difference between flipping and renting an investment property?

When you start investing in real estate, it may be difficult to choose which path is right for you. To begin, it’s helpful to understand the difference between flipping and renting investment properties.

House flipping involves buying a home, making improvements or renovations, and selling it for more than you paid for the home and the repairs.

Renting property involves buying a home and renting it out, collecting regular income from the rents each month.

Put another way, flipping generates more active income. You get paid when you put in the work and sell the home. Ideally, renting generates more passive income. You get a check each month from your rents, generating regular cash flow.

Key details about house flipping

House flipping is a more active, short-term strategy for people who want to profit from real estate. Because it involves improving or renovating homes, it usually appeals to handy people who want to take on a project.

How long it takes to flip a home depends on many factors, including the local market, the scope of the repairs or renovations needed, and your experience. We’ll cover the key things you need to know.

How flipping works

The rough outline for how property flipping works looks like this:

1. You search an area for homes that are undervalued or considered distressed.
2. You examine the home and estimate how much you’ll pay to buy it, the cost of any necessary repairs and improvements, and the price you can sell it for.
3. You make an offer to buy the home at a price that will allow you to generate sufficient profit from the sale.
4. You use a mortgage to purchase the home, get a hard money loan, or find another source of funding to make the purchase.
5. You spend the next month to year managing the repairs and renovations, often doing as much of the work as possible on your own to keep costs low.
6. You list the property for sale at a price that will let you turn a profit after the purchase and repair costs.
7. You sell the home and take your profit, often using that money to buy your next home to flip.

Successful house flipping requires knowledge and experience with the local market so you can properly assess property values and make sure you’re going to be able to turn a profit. Being good with construction is also important for keeping costs down.

Common characteristics of flipping projects

House flipping is an involved process. Much of the profit from flipping a home comes from the repairs and improvements you make to a property, which means you’ll have to put in a lot of work to get the home into good condition.

Many flippers do a lot of the construction and repairs themselves, but even if you’re not that hands-on, you’ll still have to manage planning, permitting, hiring contractors, scheduling inspections, and dealing with holding costs like property taxes, insurance, loan payments, and utilities.

Because of the level of effort involved, house flipping is often treated like a job or business in and of itself rather than a hands-off or more passive investment.

Key details about owning a rental property

Buying a rental property, unlike house flipping, is a much more long-term investment strategy. Landlords can generate monthly income from the rent checks they receive and may see long-term capital appreciation if the home they’re renting out increases in value.

Rental real estate is typically held for years to decades, unlike flipped homes, which investors try to sell within months.

While rental real estate is more hands-off than house flipping, there are still management tasks involved, so it’s important to understand what you’ll need to do to succeed.

How buy-and-hold real estate works

The rough outline of investing in buy-and-hold real estate looks like this:

1. You search an area for homes, looking for properties where the expected mortgage payment will be less than the amount you can charge in rent.
2. In some cases, you may find that it’s easier to do this if you can buy distressed properties and renovate them before renting them out.
3. You make an offer to buy the rental home.
4. You work with a lender to apply for a loan. Usually, you’ll use a mortgage rather than short-term financing such as a hard money loan.
5. After buying the property and renovating it (if necessary), you list the home for rent.
6. After screening potential renters, you sign a lease with the renter of your choice.
7. Each month, you receive a rent check and have to pay for the cost of owning the property, including property taxes and the mortgage payment.

Some investors opt to manage properties on their own, which means taking the time to screen tenants and being available to help their renters with any issues they experience. Others, who want to be more hands-off, hire a management company. Keep in mind that management companies charge a fee for their services, reducing your potential profit.

Why it’s often considered a long-term wealth-building strategy

Buy-and-hold real estate is often considered to be a long-term wealth-building strategy. This is because it offers ongoing returns on your investment.

One way that you see a return is from the regular rent checks you receive. You get cash flow each month that you can put toward things like covering costs such as repairs and property taxes and paying down your mortgage (boosting the equity you have in the home) or investing in other rental properties. Once the mortgage is paid off, you can use a large portion of each rent check for other purposes.

Another way it builds wealth is that, in general, real estate appreciates in value over time. The longer you own a property, the more it will tend to be worth when you sell it, meaning you’re building wealth through capital appreciation in addition to the cash flow you receive.

Passive vs. active income

Put simply, house flipping is the path for real estate investors who want an active way to generate income. Rental real estate is for more passive investors.

House flipping is all about finding a good property, putting in sweat and elbow grease to fix it up, selling it, and moving on to the next deal as quickly as possible.

While renting does require finding good properties, you don’t need to identify nearly as many potential purchases because you are likely to build your portfolio slowly. You do need to put some effort in if you’re managing your rental property yourself, but hiring a management company can make the day-to-day a passive real estate investment.

Neither is the right choice for everyone. It’s all about the level of involvement, time, and risk you’re willing to put in, and both can be a great way to invest in real estate.

Flipping houses: Pros and cons

Flipping houses is the active, short-term option for people who want to invest in real estate. There are lots of reasons to consider it, but your success can vary depending on the market and your experience, so it’s important to consider both the pros and cons.

Pros

Some benefits of house flipping include:

• Shorter timeline. You can realize a profit more quickly than with a rental property if renovation and selling go well.
• No long-term responsibility. A good flip can be over in a matter of months, so you won’t have to worry about spending years dealing with tenants and property management.
• Gain experience and repeat the process. As you get more experience in flipping homes, you’ll have a better idea of how the process works, making it easier to find good opportunities to profit. You’ll also build relationships with people in construction and real estate, which can benefit your flips.

Cons

Some of the drawbacks of house flipping include:

• Higher risk. Flipping profits depend on good renovations and the market letting you sell the home for a high price. If the market changes from seller’s market to a buyers market or renovations run over budget, you could lose tens or hundreds of thousands of dollars.
• Upfront costs. You need a lot of capital to flip homes. You have to buy a property, pay the (often high) financing costs, cover the price of renovations, and deal with holding costs.
• Taxes and fees. If you sell a home within one year of buying it, which is hopefully the case when flipping, you’ll pay short-term capital gains taxes, which are higher than long-term capital gains rates. You’ll also have to pay closing costs.

Owning a rental property: Pros and cons

Rental property is the long-term option for real estate investors. There are lots of benefits, such as recurring income, but there are also risks and long-term responsibilities to consider, so think about the pros and cons before you become a landlord.

Pros

Some reasons to invest in rental property include:

• Ongoing income. So long as you have a tenant, you’ll get a regular rent check every month.
• Build equity. As you use the rent checks to pay down your mortgage, you’ll gain equity in the home.
• Long-term appreciation. In many markets, homes tend to rise in value over time, further boosting your equity.
• Tax benefits. There are a number of tax advantages to owning rental properties, such as being allowed to deduct certain operating costs and depreciation.

Cons

Reasons to avoid rental property include:

• Vacancy. If you can’t find renters, you’ll be stuck paying the costs of owning the home without getting a rent check to help pay those costs. You’ll need to research vacancy rates in the area where you plan to buy.
• Ongoing costs. Owning property means paying the related costs for things like maintenance and repairs. You also have to pay a management company or deal with tenant issues on your own, which takes time.
• Lower initial return. In many markets, most or all of your rent income will go toward the mortgage, so it takes longer to see a return than it does for house flippers.
• Costs can rise. Things like insurance, property taxes, and maintenance costs can all increase, affecting the profitability of your property.

Which investment strategy is better for beginners?

Both house flipping and rental real estate involve a lot of planning and work, but both may be a good fit for beginners depending on your risk tolerance, goals, and experience.

House flipping may be a good fit if you have high risk tolerance, a lot of upfront capital, and perhaps most importantly, experience in the trades, construction, or project management.

Rental real estate may be more appealing to people who want a longer-term approach to building wealth with less day-to-day involvement and lower starting costs.

Both methods require a lot of knowledge of your local real estate market and financial stability. Make sure you’re really in a good position to take on such a large investment and whether real estate aligns with your goals.

FAQ

Before deciding between rental real estate and flipping, consider these questions.

What’s the main difference between flipping a house and renting one out?

Flipping a home is a short-term, active strategy that relies on buying a home, fixing it up, and selling it for a profit as quickly as possible. Renting is about long-term ownership and generating income and equity over time.

Is rental income considered passive income?

Yes, rental income is generally considered passive income because you get a regular rent check as long as the property is occupied, even without active effort. You may need to put in some work if you deal with tenant issues, but you can also hire a management company to do that on your behalf.

What risks come with owning a rental property?

Owning rental property does come with some risks, such as vacancy, unexpected maintenance needs, changes in local rental demand, and problem tenants that refuse to pay rent or damage your property. All of these issues can impact your monthly income and long-term returns.

The bottom line: Flipping and renting each have unique benefits and challenges

House flipping and buying rental property are both good options for people who want to get into real estate investing. There’s no one strategy that works for everyone. Choosing the right strategy for you depends on your knowledge of the local market, your experience, and your goals for investing.

If you’re ready to start investing in real estate, you can explore financing options with Rocket Mortgage.

This article is for informational purposes only and is not intended to provide financial, investment, or tax advice. You should consult a qualified financial or tax professional before making decisions regarding your retirement funds or mortgage.