Pros and Cons of Renting VS Flipping

So, why do I offer this advice even though I’ve been flipping houses for the past 8 years?

It’s not a secret that I feel strongly about passive residual income, but I remember another investor telling me once, “Man, If I had just held onto all of my properties in the past, I’d be a millionaire by now!”. This is a common sentiment I hear from other people who have either previously owned a home and sold it decades ago or people who are active in the flipping community.

Keep in mind that this is only my opinion and each person has to decide for themselves what path to take, but consider the purpose of why you decided to take an interest in real estate in the first place. For me, the most important thing is freeing up my time to spend it how I want to.

Pros of Renting:

1. Property Appreciation - In theory, the value of the property will go up over time. What that means is more money over the long haul. It also means that you're building wealth. The problem with flipping a house is once you sell the house, you can never make money off that house again.

2. Property Depreciation - This is the process used to deduct the cost of buying and improving a rental property. Simply put, this helps reduce the amount of taxes a company or business pays via tax deductions and that means more money in your pocket.

3. Mortgage paydown - As you keep collecting that monthly income you're slowly paying down the property, like a forced savings account or a piggy bank. Lots of things you can do with this.

4. Tax Deductions - I mentioned a big tax benefit above but here are more. I can’t remember where I saw this acronym, but remember TIMMUR/D; Taxes, Insurance, Management, Maintenance/repairs, Utilities, Reserves and Depreciation ( #2). This is just a small list but there are others.

5. Stable Cash Flow - Are you one of those people that like the peace of mind and security of knowing that there’s a check coming in each month regardless of what you’re doing and that your money is working hard for you even while you’re sleeping? Me too.

Cons of Renting:

1. Smaller/slower income - I’m speaking mainly from a single-family rental perspective. Collecting a few hundred dollars a month for all of your hard work is just not that appealing assuming you’re paying for property management, setting aside cash for repairs and capital expenditures and factoring in for vacancy/rental loss.

2. Vacancy / Eviction - Having to evict a tenant is a time consuming and stressful experience. It’s painful to find out you’re now footing an additional bill and now you have to get legal help to get your property back and hope it doesn’t get damaged in the process!

Pros of Flipping:

1. Quick/immediate Cash Gain - Let’s face it, sometimes a big paycheck is nice to see. If you had to pick whether to use your startup capital to get 1 property to flip or rent and they both costed the same then you should expect for it to be worth your time to make at least *$30,000-50,000 per flip and if you can manage your time well and do 2-3 per year that’s a healthy chunk of cash. A single rental of the same size would probably net you around *$36,000 (Average rent: $3,000/mo. x 12). *Both before factoring taxes, mortgage obligations, etc.

2. Less timeframe - Flipping is usually done in 3-6 months and because of this the cash is available faster than with rental properties

3. Gateway to New Development - This feels like the next logical step for a house flipper. You learn all the basics of renovating an old property and then you start to notice 

Cons of Flipping:

1. High taxes - Tax rules define flipping as an “active income” and profits on flipped houses are taxed at the highest bracket. Ask your CPA or tax professional for advice on ways to offset this.

3. Higher Risk - Ever try budgeting for a vacation or event only to realize later that these things turn out to be more expensive than you originally thought? Same with flipping, only you probably have less control when contractors peel open a wall and the plumbing or electrical was bad and now you found an additional expense to fix that wasn’t on the budget.

5. Market Volatility - Speaking of risks… it’s the end of 2022 and we’re still getting interest rate hikes that affect the buyer’s ability to purchase houses, OUCH! Flipping is one of those things that is sensitive to how well the market is doing. Market changes can dramatically impact selling price and thus profit.

I just want to end by saying that both strategies are different but not necessarily better or worse. In fact, the best strategy I’ve learned about so far is a combination of both strategies; the BRRR (Buy Rehab Rent Refinance Repeat). This method requires you to add value to the property by either reducing costs, increasing income or adding sweat equity and in the end you get essentially a “free” property that will continue to generate income for many many years.

It's also important to realize what exactly you're excited to do, not just about the money but the strategy you feel motivated about working on.

So which direction sounds more appealing to you? Or is there another path that I haven’t mentioned? Leave your thoughts below.