By Dale Huber
Broker, DS Huber Real Estate Group
I am often asked the question: “Should I invest in long term rental properties or in flip properties?”
The answer to this question is simple, but it is dependent on your goals and plans.
I personally own plenty of rental homes and have been involved in numerous flips. Our company specializes in acquiring and managing both flips and rentals. I’m very biased toward one but understand the importance of both in a strong investment portfolio.
To determine which best fits your goals, we need to understand the difference between active and passive income.
Active Income is earned by your direct activity in performing a service. This includes wages, tips, salaries, commissions and income from business which requires your participation.
Passive Income is earned on an ongoing basis with little or no ongoing effort. This includes income from investments in items such as stocks and bonds, royalties and rent from rental properties just to name a few.
I’m going to go out on a limb here and say flipping is not investing in real estate. Now don’t hang me yet! If you are flipping homes, you are creating active income. Income derived from flipping is generally taxed as self-employment income. Don’t get me wrong: you can flip homes and make great money doing it. You can even create a business flipping homes and make a great living but at the end of the day you still don’t have an investment from this activity. You have the active income you have earned as you would with any other job or self-employment situation and you have to do it over and over again to keep the income coming in.
Owning rental properties, on the other hand, pays off in many ways over a long period of time. Again, if the properties are purchased and managed properly you will receive passive income year after year. One of the additional cherries on top is appreciation. Typically, over a given period your properties will increase in value as the market increases. If you buy the properties correctly, you create equity at the purchase and through the initial renovation process. (Disclaimer: the following is not to be construed as tax advice. I’m a residential real estate investment expert, not a tax expert.) Some of the common tax benefits derived from rental property are: expenses from interest, travel insurance, and repairs, to name a few, and many other expenses are tax deductible. Depreciation, long term capital gains rates vs short term, and may others can be included on your tax returns.
There are pros and cons involved in both flipping and rentals.
Flipping Pros:
You can make a lot of money in a short period of time You will gain experience in construction and rehabbing You will increase your network: you will need and use many good contacts from contractors, real estate agents, building inspectors, insurance brokers, attorneys, lenders, etc. Prestige with your friends after completing a successful flip.
Cons:
Losing money. This happens to inexperienced flippers all the time due to items unaccounted for in the initial analysis, such as unanticipated expenses including building permits, unexpected repairs, contractor issues and delays, utilities, property taxes, selling costs, and many others. If these things are not accounted for they will chip away at your bottom line and forget about to many of them and the bottom line is gone. There is no way around it: flipping is stressful and time consuming. Getting capital for flipping is usually very tough and expensive.
Rental Pros
Long term passive Income Financing is easier to get then with flipping Conservative leverage or the use of other people’s money, notice is said conservative leverage. That is an entirely different article. Many tax advantages Typically, a very stable investment with increases in property value and rent
Cons
Investments in rental property are not liquid. Markets can change dramatically, affecting the value or rentability of your property. Dealing with tenants and maintenance.
If your goal is to create income relatively quickly to replace a day job or just to have extra income, flipping is a great choice.
If you are looking to create long term passive retirement income, long term investment rental properties is a great choice.
OR you could do both! Many of our clients and I myself employ a strategy of using income from flipping properties to create the capital needed to acquire rental properties, allowing us to create the long-term income many people desire.
Dale Huber is the Broker and Owner of DS Huber Real Estate Group,LLC. The group manages over 500 single family and multifamily units and services about 150 owners from all over the world. If you are interested in investing, property management, buying or selling, contact us at 517-507-9993.
