Ever found yourself wondering “Should I buy rental properties or flip houses?” Here are the pros and cons of buy & hold vs fix & flip houses, and why you might choose one or the other as a real estate investor.
Real estate investing comes in many shapes and sizes, from single family homes and apartment buildings to commercial buildings, storage units and everything in between.
That’s part of the beauty of being a real estate investor; there are so many options, and there’s no shortage of creative ways to buy your next project!
Two of the most common types of real estate investments are buy and hold rental properties, and fix and flip houses.
Each of these two investment strategies has pros and cons that appeal to different investors (or even to the same investor for different reasons!), and are worth a closer look when deciding which real estate investing strategy to try.
If you are asking the question, “Should I buy rental property or flip houses?” – here are some things to consider.
Buy and Hold Rental Properties vs Fix and Flip Houses
Buy and hold rental properties are long term investments that people buy, and then keep in their real estate portfolio for years.
They rent them out to tenants who pay rent, and the rent is used to pay the mortgage on the property. The money left over after the mortgage and other monthly expenses are paid is monthly cash flow, which is a source of passive income for the investor.
Fix and flip houses are properties that are bought by real estate investors at a bargain or below-market-value.
They usually are in need of major rehab or renovation work.
Once the renovation process is complete, they sell the house for a profit.
Rental Properties vs Flip Houses
There are some investors who only want to buy rental properties and would never flip houses.
There are other investors who are house flippers and have no interest in keeping any of their properties as rentals.
And there are some investors who utilize both strategies in their real estate investing portfolio; they own rental properties AND they flip houses!
Each real estate investing technique has pros and cons depending on what exactly you’re looking for.
Let’s take a look at the pros and cons of buy and hold rental properties, and the pros and cons of fix and flip houses.
The Pros of Buy and Hold Rental Properties:
- Mortgage pay down (with the rent checks from tenants.)
- Monthly cash flow (once mortgage and expenses have been paid each month.)
- Appreciation in home value over time (which is beneficial when selling or refinancing in the future.)
- Tax advantages (to reduce amount owed.)
The Cons of Buy and Hold Rental Properties:
- It’s a slow investment process (cash flow is earned monthly, but in small doses. It’s a “get rich slow” process.)
- Rentals need to be managed (either by investor or by a property manager for a fee.)
The Pros of Fix and Flip Houses:
- Short timeline (a few months or less, on average.)
- Potential for a sizable profit.
- Exciting and fast-moving.
- Can utilize sweat equity to increase profit margin.
The Cons of Fix and Flip Houses:
- Profits are taxed at a high rate.
- Renovations can be a challenge to coordinate and manage.
Which is better, flipping houses or owning rental houses?
The answer, of course, is it depends!
It depends on the goals (both short term and long term) of the real estate investor.
It depends on the personality of the real estate investor.
It depends on the skills of the real estate investor.
There are a lot of factors that determine whether buying rental properties or flipping houses is a better fit for you, and you might find you’re one of the investors that end up doing both for different reasons at different times!
That’s one of the best things about real estate!
There are countless ways to invest in real estate, and you can always try something new.
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