Why do investors opt to rent instead of flip?
SW AZ · Member since 2023 · 25 posts · 12 votes
Why do investors opt to rent instead of flip?
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Rental Property Investor · Raleigh, NC · Member since 2016 · 396 posts · 995 votes
2yFlipping is a job, while rentals is an investment.
With flipping, as soon as you stop flipping, you also stop getting a paycheck. This means you never actually escape "the rate race". You have essentially traded your current 9-5 job, for a different job. Yes, flipping can be lucrative (if you know what you're doing), but it can also be highly risky. There is also a limit to the number of flips you can do at once and thus it's extremely difficult to scale this business model.
Owning rentals on the other hand is *mostly* passive income that appears in your mailbox each and every month, which allows you to free up your most valuable resource -TIME. This gives you the ultimate in flexibility in life, which is typically what most people actually want.
Legacy: If you want to pass something down to your heirs, then flipping is taxed at your highest income rate, so those nice profits get quickly eaten by the IRS. Meanwhile rentals are one of the biggest tax shelters ever created and you will likely never pay income taxes on the vast majority of your wealth. Over time this leads to an exponential increase in your overall net worth as opposed to flipping.
56 Replies
- Rental Property Investor · Raleigh, NC · Member since 2016 · 396 posts · 995 votes2y
Flipping is a job, while rentals is an investment.
With flipping, as soon as you stop flipping, you also stop getting a paycheck. This means you never actually escape "the rate race". You have essentially traded your current 9-5 job, for a different job. Yes, flipping can be lucrative (if you know what you're doing), but it can also be highly risky. There is also a limit to the number of flips you can do at once and thus it's extremely difficult to scale this business model.
Owning rentals on the other hand is *mostly* passive income that appears in your mailbox each and every month, which allows you to free up your most valuable resource -TIME. This gives you the ultimate in flexibility in life, which is typically what most people actually want.
Legacy: If you want to pass something down to your heirs, then flipping is taxed at your highest income rate, so those nice profits get quickly eaten by the IRS. Meanwhile rentals are one of the biggest tax shelters ever created and you will likely never pay income taxes on the vast majority of your wealth. Over time this leads to an exponential increase in your overall net worth as opposed to flipping.
- 2yGreg ScottPro MemberRental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
Renting vs Flipping is easy.
The US government taxes you like crazy for a flipping business to the point where you are paying a fortune in taxes. Meanwhile, the tax laws favor those that rent out real estate, such that you may pay no taxes.
Development is a completely different animal from flipping, but if you build & sell, it still is not as tax favored as buy & hold.
- SW AZ · Member since 2023 · 25 posts · 12 votes2y
Thank you Ben and Greg! I appreciate the insights very much 💡
- 2yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
Flipping is also higher risk and requires more money. You need money to buy the house and money to do the renos.
Both put people into homes, but in different ways. Not everyone wants to own or can afford to.
The nice thing about real estate is there are many different ways to invest and you can find one that works best for you.
- 2yRyan KellyBusiness MemberReal Estate Broker · Austin, TX · Member since 2018 · 1k+ posts · 1k+ votes
@Renee P. As others have said, flipping is a job to produce income, just like any other job. The only outcome after all the work is cash earned before taxes. It burns quickly. You haven’t actually invested in anything yet.
Owning rentals is about building wealth through appreciation, cash flow, others paying off your debt, and significant tax advantages. If you talk to most experienced flippers, they are either keeping a number of flips as rentals, or have regrets they should have kept more.
Ryan Kelly Group - Keller Williams5112 Reviews - 2yKonstantin GinzburgPro MemberMember since 2021 · 376 posts · 242 votes
@Account Closed
The preference in flipping vs renting comes down to what the goals of an individual investor are. If the investor needs a quick influx of capital, then a flip would be their ideal strategy since they would receive a large payment at sale. If they choose to rent however, there will be no large up front infusion of immediate capital but in the long term; there will be a much higher return on their investment. Many investors prefer this delayed gratification strategy and rent for a pro-longed period of time. There are many reasons why renting does lead to a greater long term payoff. During a flip, your primary source of profit is from the forced appreciation value of the property. If you rent a property out, your revenue sources are forced appreciation of property, passive appreciation of property over time due to inflation, rental income, debt paydown of mortgage, depreciation expenses that provide tax benefits, as well as several other sources. There is no right or wrong way to invest since both renting and flipping strategies do work. It is simply a matter of: do you need the money now or are you ok waiting for more money later?
Since you stated that your goal is putting people into homes they own (this is a very noble goal); one option I would advise you look into is a lease to own business model. In summary, this model has investors purchasing a home and then leasing it to renters with the caveat that the renter has the option to assume the loan or buy the property after a few years if they meet certain requirements. - 2yRobin SimonBusiness MemberLender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votesIts always going to depend on the specific properties, markets, etc - there will always be a calculation on the returns from flipping vs. holding (BRRRR) and its going to be different every time - best success is typically from investors that can unemotionally trust the numbers and be open to either exit based on the project
Quote from @Account Closed:
Hi all,
I have watched countless videos on real estate investing. Some investors are all about buying “doors” to rent. Then there are the flippers and developers. Please help me understand why, besides getting monthly income and putting off taxes, people are so stuck on rentals. I understand producing cash flow to demonstrate I have an income to be able to borrow in the future….so I don’t mind starting with a few rentals to bring that in but then I want to transition to building single family homes. Personally I want to PUT people in homes they will OWN. To me it seems while I pay tax on the sale of a single family home, I get a bigger chunk of money to work after each. I just want to make sure I won’t get sidelined with taxes so high it renders the work/sale null and I get little profit. What is the average profit percentage on building a single family home? Any help is appreciated :)
Harpoon Capital515 Reviews Quote from @Account Closed:
Hi all,
I have watched countless videos on real estate investing. Some investors are all about buying “doors” to rent. Then there are the flippers and developers. Please help me understand why, besides getting monthly income and putting off taxes, people are so stuck on rentals. I understand producing cash flow to demonstrate I have an income to be able to borrow in the future….so I don’t mind starting with a few rentals to bring that in but then I want to transition to building single family homes. Personally I want to PUT people in homes they will OWN. To me it seems while I pay tax on the sale of a single family home, I get a bigger chunk of money to work after each. I just want to make sure I won’t get sidelined with taxes so high it renders the work/sale null and I get little profit. What is the average profit percentage on building a single family home? Any help is appreciated :)
Why rent vs flip, because wealth is built not flipped. Biggest mistake of my life, not keeping 50 or so more of the 500 I flipped, cost me millions!! Sure, if you want to flip a few here and there to make a big chunk, but cash flow is king. You want 500k or 15k a month income for 20 years ? BTW stop watching videos, and reading books, total waste of time.
All the best
- 2yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
@Account Closed
you got some good answers here. there's no either / or - you can do both if you want. i've done a few BRRRRs, and if done right, they're pretty great - you're into a property for $0 and on to the next one. it's a lot harder than it used to be because interest rates have gone up and there is way more investor demand for deals.
flipping is very, very tough. the best flippers are professional flippers. a lot of new investors think they'll "do a flip to generate some income to buy rentals" - and they probably won't. flipping is actually expensive.
hope this helps
@Renee P. Flip to generate your seed money and then invest in rentals to preserve and grow your wealth.
If you become successful flipper you’ll pay ~50% taxes on your ordinary income. As a rental investor you can defer most of your taxes, which is nearly as good as not paying it.
A lot of it comes down to personal preference, but one path you work smarter and another you work harder.
- SW AZ · Member since 2023 · 25 posts · 12 votes2y
Thanks again all for these wonderful insights. I really appreciate you all taking the time to clarify from your perspective and experience. @Konstantin Ginzburg yes I like this idea of being able to accomplish my goal of getting cash flow regularly for a certain period of time and then giving them an option to buy so they can also accomplish their goal or have something to show for their inputs. I would think a renter would take better care of the property in that case too? I was thinking if I rented out properties to put some type of clause in the rental agreement that the property would be inspected 1x every month to start and then 1x every 2-3 months after the first 3? 1 - to ensure the tenant is not wrecking havoc and 2- to catch any clogs of drains, check air filters or repairs that may be coming up. What do you guys think?
- 2yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
@Account Closed
you hire a good PM and they worry about all of that.
- Rental Property Investor · New Braunfels, TX · Member since 2022 · 409 posts · 408 votes2yWe change the AC filters every 3 months in all of our rental properties. It gets us inside to make sure our investment is being taken care of and my tenants like that we take care of it for them. My longest tenant has been in the same house for 22 years. His rent paid for the house after 7 years.
Quote from @Account Closed:
I was thinking if I rented out properties to put some type of clause in the rental agreement that the property would be inspected 1x every month to start and then 1x every 2-3 months after the first 3? 1 - to ensure the tenant is not wrecking havoc and 2- to catch any clogs of drains, check air filters or repairs that may be coming up. What do you guys think?
- SW AZ · Member since 2023 · 25 posts · 12 votes2y
@Account Closed ok thank you! Great idea!
- SW AZ · Member since 2023 · 25 posts · 12 votes2y
@Nicholas L. how do you make sure the property manager is doing good work on your properties? That the tenants are happy and they are staying ahead of repairs/not waiting until they become bigger problems?
- Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @Account Closed:
Hi all,
I have watched countless videos on real estate investing. Some investors are all about buying “doors” to rent. Then there are the flippers and developers. Please help me understand why, besides getting monthly income and putting off taxes, people are so stuck on rentals. I understand producing cash flow to demonstrate I have an income to be able to borrow in the future….so I don’t mind starting with a few rentals to bring that in but then I want to transition to building single family homes. Personally I want to PUT people in homes they will OWN. To me it seems while I pay tax on the sale of a single family home, I get a bigger chunk of money to work after each. I just want to make sure I won’t get sidelined with taxes so high it renders the work/sale null and I get little profit. What is the average profit percentage on building a single family home? Any help is appreciated :)
This is very good question.
I am one of those people that do everything.
I can say the difference is the transformation in logical thinking. First when we don't know much about investment, we just want to buy door, one door,two doors etc etc...but then we progress, and we make business alignment with other third party, we could become flipping.
While owning door is not passive, it's 70% active investment, flipping is 200% active investment.
It involves and requires a lot and a lot business planning, business connection, market strategy and such.......while renting is something like any kid with 2 million dollar can just throw a dart in Cleveland and would buy multifamily in that city. Flipping requires different mentality and strategy.In short term, flipping has more risk/reward than owning rental, specialy if you have your own contracting biz.
- 2yJose JacobPro MemberInvestor · 11040 · Member since 2019 · 188 posts · 111 votes
Renee,
Rent Vs Flip. You build your long term wealth by buying doors to rent. You make $$$ as short term by flipping houses. Fix & Flip has too many components in it. You need to know the market value very well when you buy and After Repair Value to make good margin on a flip which comes with lot of experience. Ask yourself, are you a hassler ?, Do you have enough capital to buy house ALL CASH ? (There are private money lenders for 80/20) Do you have a team of contractors ? Do you knowhow to price a house when you buy? Do you know most of the prices of the materials ? Do you know how to find OFF Market properties to buy to flip ? You have an YES to all these questions, you can fix and flip. Otherwise buying doors will be a better option for you.
- SW AZ · Member since 2023 · 25 posts · 12 votes2y
@Jose Jacob thank you. This is a great list of questions and points to make sure I have covered before proceeding!
- Member since 2019 · 7k+ posts · 4k+ votes2y
Looking at Jose answer ....
in short flipping is high risk high reward game
buying door for cash-flow is like medium risk low reward game.
RE developer is very high risk high reward game.
that's the way i look at it. - Member since 2019 · 7k+ posts · 4k+ votes2yFlipping when successful could create very substantial dollar amount gross profit in short term …. Like 50 IRR
Quote from @V.G Jason:
Taxes and parking cash.
What do you make when you flip? You make cash. You want to own the actual hard asset.
door is more like 9 to 11 IRR these days - Flipping is a ton more risky though. So add risk to those other points for me. Just not something I could manage. I do fix up, but I rent. I don't do do fix & flip, I do fix & rent.
Quote from @Carlos Ptriawan:
Flipping when successful could create very substantial dollar amount gross profit in short term …. Like 50 IRRQuote from @V.G Jason:
Taxes and parking cash.
What do you make when you flip? You make cash. You want to own the actual hard asset.
door is more like 9 to 11 IRR these days - Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @V.G Jason:
Flipping is a ton more risky though. So add risk to those other points for me. Just not something I could manage. I do fix up, but I rent. I don't do do fix & flip, I do fix & rent.Quote from @Carlos Ptriawan:
Flipping when successful could create very substantial dollar amount gross profit in short term …. Like 50 IRRQuote from @V.G Jason:
Taxes and parking cash.
What do you make when you flip? You make cash. You want to own the actual hard asset.
door is more like 9 to 11 IRR these daysIt is extremely interest rate sensitive activity
how there is public company that wanna do this repeatedly is beyond me
But since I use living in the flip strategy is becomes very manageable
- Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @Carlos Ptriawan:
Quote from @V.G Jason:
Flipping is a ton more risky though. So add risk to those other points for me. Just not something I could manage. I do fix up, but I rent. I don't do do fix & flip, I do fix & rent.Quote from @Carlos Ptriawan:
Flipping when successful could create very substantial dollar amount gross profit in short term …. Like 50 IRRQuote from @V.G Jason:
Taxes and parking cash.
What do you make when you flip? You make cash. You want to own the actual hard asset.
door is more like 9 to 11 IRR these daysIt is extremely interest rate sensitive activity
how there is public company that wanna do this repeatedly is beyond me
But since I use living in the flip strategy is becomes very manageable
So rather than immediately sell I would just wait two years before selling it tax free , I could do this every 3 years without no end
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