By The Hospitable Team
Thinking about investing in real estate and aren’t sure which strategy would offer you the best ROI: flipping houses or owning rental properties? Any of these approaches could be an excellent way of increasing your income, but choosing one method over the other, you should consider your overall goals.
To help you identify the best investment strategy for your lifestyle, in this article, we’ll look at some of the pros and cons of flipping vs. renting houses.
Flipping vs. Renting: What’s the Difference?
Flipping properties and owning a rental property are two different real estate investment strategies.
House flipping is buying a property, usually at a low price, improving it, and then selling it for a higher price to get a profit. Flippers typically try to turn properties around quickly since their income depends on how many flips they do each year.
Flipping is considered active income—a business involving a lot of work. You need to find a property to flip, buy it, get insurance, oversee contractors, manage the renovation or repair project, and more. In fact, it could take up just as much time as a full-time job.
Renting means owning a property and having someone pay a fee to live there. It’s a long-term, more passive investment, although it’s not absolutely passive because regular tasks still need to be handled. As a landlord, you’ll be involved in finding tenants, taking care of maintenance, and collecting monthly rent.
Some rental property owners buy homes to turn them into vacation rentals. They often list their property on OTA websites such as Airbnb, Booking.com, and Vrbo to reach travelers and attract potential guests.
In this case, the rental property owners are usually actively involved in managing the properties and communicating with guests. But with the help of vacation rental software like Hospitable, it’s possible to automate most of the routine tasks, for example, guest messaging, and have more time to focus on other important activities.
All your STR business in one convenient window
Start today with a 14-day free trial.
Pros and Cons of Flipping Houses
Flipping can be very lucrative, but it comes with its potential pitfalls. So if you’re considering this strategy, you need to know the pros and cons you will face before you get started and have a strategic plan to help you reach your goals.
Let’s look at some pros and cons of flipping houses to help you get a realistic idea of the risks and potential rewards so you can make an informed decision.
The advantages of flipping vs. renting:
- Quicker return on investment—the average time to flip a house is about six months, although if it’s your first time, you should expect the process to take longer.
- Less hassle—although you’ll need to devote a lot of time to renovating the property, as soon as the remodel is complete and the property is sold, you can move on to another project. You don’t have to worry about finding tenants and collecting rent.
- No ongoing maintenance costs to include in your budget—after you have sold the house, the new owner will be responsible for ongoing maintenance and repairs.
The disadvantages of house flipping:
- Flipping could be risky—the only money you will make is when you sell the house, so you should be lucky to find flipping deals and buyers interested in your property.
- Potentially higher overall costs—the repairs and renovations may cost more than you anticipated, and there’s always a risk that contractors don’t complete the work on schedule. The transaction costs are also high on both the buy and sell sides. All these expenses can significantly affect your profits.
- Higher taxes—the quick turnaround in properties can significantly boost your tax bill. In the US, if you own a property for less than a year, you can expect to pay a higher capital gains tax rate based on your earned income.
Pros and Cons of Owning a Rental Property
Owning a rental property can be financially rewarding as well. This strategy is one of the best for financial freedom, although you should know the risks and responsibilities.
So what are the advantages of owning a rental property?
- Steady ongoing income—it’s one of the biggest benefits of renting properties. You can get regular passive income no matter where and what you are doing. If everything goes well, this passive income can grow to exceed the money you spend on the upkeep of your rental property. Running a vacation rental can be even more profitable than renting the same property long-term to a single tenant and can allow you to become financially independent.
- Increase in property value—the longer you hold your property, the more likely you are to benefit from inflation, increasing the property’s value. And if you’re lucky to purchase your house during a buyer’s market and sell it during a seller’s market, you’ll make even more profit.
- Tax benefits not available to flippers—in the US, the income generated via rental properties is taxed at a lower rate. You can deduct certain expenses, including repairs, maintenance or upkeep, and property management fees. And if you decide to sell the property after owning it for more than a year, you’ll pay taxes at the long-term capital gains rate, which is also lower.
Now let’s take a look at the cons of renting:
- Risk of low occupancy that can hurt your income—even if your house is located in a popular area, there will likely be times that it is not occupied. The most important way to counter this is to be realistic about your prices and ensure they’re competitive.
- Maintenance costs—any rental property requires ongoing maintenance and repairs to maintain its value and ensure that it is in top condition to keep your tenants or vacation rental guests happy. So you should factor maintenance costs into your budget and be ready to invest your time or hire someone to help you with it.
- Active management—although renting out a property is seen as a great way to earn passive income, it comes with responsibilities, so you must put in time and energy. And if you are thinking about owning a vacation rental home, you should be prepared to devote even more of your time to property management.
The good news is that you can still make money even if you’re too busy to handle all day-to-day tasks. You may hire a property manager to handle everything for you, but you’ll need to pay them for the work. The better option is to streamline your routine operations using vacation rental software like Hospitable.
Hospitable can help you automate most of your daily or repetitive tasks and manage your short-term rental property more efficiently. You’ll be able to focus on growing your business and have more time for doing things you enjoy. With Hospitable, you’ll be able to manage multiple properties and still keep your full-time job.
All your STR business in one convenient window
Start today with a 14-day free trial.
Flipping vs. Renting: Which Strategy Is Better for You?
Deciding between flipping vs. renting houses comes down to your financial goals, lifestyle, and preferences. Flipping houses is a great way to make money, but it takes time, effort, attention to detail, and patience to be successful, so it’s not for everyone. Flipping properties can be time-consuming and stressful because it is not a passive investment, and you must be actively involved in the process from start to finish.
That’s why a lot of people feel more comfortable starting with investing in a vacation rental property. It’s a great strategy if you need regular income and want real estate to be integral to your overall investment portfolio. Buying rental properties carries significantly less risk than flipping, and it’s a better choice if you’re looking for a more passive income approach.
Buying a vacation rental is a significant decision, so it’s important to determine whether a property is worth your investment. Check out our guide on how to evaluate a rental property and learn about the metrics you should take into account.
This article will help you determine how to evaluate vacation rental property to inform your buying decision. We’ll also talk about evaluating ROI on a rental property and determining whether the rental is worth the investment.
Our VP Customers, Matthew, hosted a Hospitable Masterclass together with Tony, where they talked about getting the most out of the world of short-term rental investments. Missed the show live? Let us bring you the selected inspirational insights in our blog format.
Wondering how to make extra money on Airbnb without investing in your own property? An attractive option is a corporate lease on Airbnb that offers a lot of flexibility in subletting a property. In this blog post, we’ll take a closer look at corporate leasing and give you some tips on building a profitable business through it.