Over the last 17 years, I have flipped 150 houses and purchased 20 rental investment properties. I have also been a real estate agent, broker, and employing broker. A lot of people have asked me whether it is better to flip houses or buy long-term rentals. This is not an easy question to answer because they are two completely different types of investing. Flipping houses is more of a job, whereas buying rentals is more of an investment. That does not mean I think it is bad to buy flips as they can make you a lot of money in the short term. However, I feel that buying rentals is more of a true investment in your future.
Why is flipping houses more of a job than an investment?
When I flip a house, the process usually looks like this:
- Find a great deal
- Negotiate the deal
- Secure financing
- Buy the property
- Fix up the property
- Sell the property
I average about a $30,000 profit on each flip I complete. I can make a lot of money flipping, but once I sell a house, the money stops coming in. I then have to find a new house and repeat the process all over again. I do not think of flipping as real estate investing, but a way to earn income. I still love flipping because it is fun and you can make a ton of money doing it (there are also many risks as well).
How is buying rental properties more of an investment than flipping?
When you buy a rental property, here is what the process looks like:
- Find a great deal
- Negotiate the deal
- Secure the financing
- Buy the property
- Fix up the property (if it needs it)
- Rent the property (or have your property manager rent it)
I will not make as much money from my rental properties as I do flipping in the short-term. Sometimes, it will take me years to earn the cash back that I invested in the rental property. However, that money will keep coming in every month as long as I own the property. I also have a lot of equity in the properties because I get a great deal on them just as I do my flips. Some may say that equity is useless unless you sell, but you can also refinance a rental and take cash out. I have refinanced many of my rentals and gotten back my entire down payment and the money I spent on repairs. I have a cash flowing property with no money invested, and equity. I also do not pay taxes on the cash from a refinance, but I do pay taxes on the money I earn from a flip.
What other advantages do rental properties have over flips?
The longer you own a flip, the more money it will make you. Here are some of the ways your investment gets better and better with time:
- If you have a loan on the property, you will slowly pay it off increasing your equity.
- Rents will increase over time with inflation.
- There are amazing tax advantages with rentals that I explain here: What are the Tax Advantages of Rental Properties?
- You can hire a property manager to make the rentals a mostly passive investment.
- Property values will most likely increase over time.
- You should be making money on the property every month after all expenses.
I buy as many rental properties as I can because, with each property, I add to the passive income I make every month. In the end, I will make more money with rentals than with flips.
What advantages do flips have over rentals?
One problem with rental properties is that not all markets are suited for them. I purchased 15 rental properties from 2010 to 2015 in Northern Colorado. I stopped buying rentals because our housing prices increased so much that rents could not keep up. When I stopped buying rentals, I focused on flipping houses because I feel you can flip in just about any market. I could have continued to flip when prices rose, but it was hard to find decent rentals. In 2017, I started buying rentals again but they were commercial instead of residential. My last purchase was a 68,000 square foot strip mall.
While I have had to work hard to find good rental properties, it has been easier to find houses to flip. I am also less picky about what kind of houses I flip. When I buy a rental, I need to worry about the market, the house, and the economy in ten years. When I buy a flip, I must worry about those things for about 6 months because that is when I will be selling the property.
What is better? Flipping or buying rentals?
It is hard to say which technique is better because they are so different from each other. I use both strategies together to invest as much as I can. I use flips to earn income, which allows me to buy more rental properties. I think if all things were equal, I would want to invest in rentals instead of flips because of the long-term passive income they provide. However, that does not mean flips cannot be a good way to make money as well.
About the Author:
Mark Ferguson, of Invest Four More, is a long-time real estate investor in Colorado. He fixes and flips 20-30 homes a year and owns 20 long-term rentals. If you want to learn some of the tactics he has used to build a life with plenty of earned income, passive income and free time for his family and hobbies, check out the Invest Four More store to view his multiple eBooks and products with coaching from Mark.
The information in this blog post is being provided for informational purposes only and not for the purpose of providing legal or real estate investment advice, and no liability is assumed by Auction.com with respect to such information.
