Have you ever thought about flipping houses on the side? Or maybe you’ve always wanted to buy real estate and rent out your property to make a consistent semi-passive monthly income? Both strategies can potentially make money, but is one option better than the other?
I remember when the housing boom was happening and homes in certain areas were increasing in value by more than 40% per year! Shows like, “Flip That House” became amazingly popular because random people were buying run-down Cali homes, fixing them up in one or two months, and then would sell them for a $100,000 profit! Not too shabby for only 60 days of work.
Obviously the market has dried up quite a bit since then, so is house flipping still profitable? Well sure, it definitely can be. There are homes in my area that need a little TLC and are sold at a 20% discount because of some cracking plaster, worn out floors, and some gross looking carpet. By making the appropriate down-payment and then putting another $5,000 toward some DIY repairs and you could earn a quick $10,000.
Pros to Flipping Houses
- Potential for a quick increase in your cash
- You are restoring homes that may have otherwise have been left to rot
- You are providing the buyer with a wonderful home that they will love for many years
Cons to Flipping Houses
- High risk – market could dry up and leave you making indefinite payments on a house you don’t need
- No chance for a passive income – you must work many hours to earn your lump-sum pay
- Houses sometimes have nasty surprises (like a bad foundation) and you could be left owing far more than the house is worth
Flipping houses can be a good gig if you have an eye for a deal, but when it comes down to it you are basically just earning an hourly wage. For instance, let’s say you earn $10,000 on your first flip. If you put 200 hours worth of work into it, that means your earnings were $50 per hour.
Jeremy Biberdorf of Modest Money has some excellent tips on flipping houses if you’re interested in this potentially profitable enterprise!
Renting Out Real Estate
There are others of you that dream of earning a passive income. In other words, you want to be able to make your own hours and do what you want with your time, but all the while are earning a consistent passive income each month. Sounds like a dream come true right? Well, maybe yes and maybe no.
Renting out real estate will not earn you millions of dollars in your first year of operation. In fact, it might not even net you $5,000 in that first year. This is probably the most unexciting type of investment there is because in the beginning your goal is simply to earn more than $0.00. Some do not succeed at this and leave the industry shaking their head, telling everyone that the real estate game just doesn’t work. Others earn a profit, but it is so slim that they would rather just sell the house and stop putting in all that effort with the property, renters, and the missed payments. But, there still others that decide to stay in the game. In that first year, their earnings are $1,000, in the next year they earn $2,000, and the year after that they are able to invest in another property and earn $4,000. All the while, the value of their rental properties are increasing at 4%, which is adding to their overall net worth. Much can be earned from renting out real estate, but it often takes much time and patience.
- Ability to earn a passive regenerative income
- The value of the property will most likely increase in value as you rent it out
- Can work less and less as you earn more and more (opposite model of the house flip)
- Can sell your estate at the end for a lump sum amount
- Renters can leave you high and dry without payment
- Your properties may be damaged from time to time
- Earning a decent amount of money may take 5+ years
- You end up tying much of your net worth in the house equities
So Which Is Best?
So what option is the winner? Honestly, it all depends on your goals. If you would like a short term influx of cash, then I would probably lead you toward the house flip. If you are thinking more long term with your investments, then you will probably want to get into the rental business. Personally, I plan to earn my wealth through renting out real estate…and I plan to do it with cash.
“Why do it with cash? I thought it was wise to use OPM (Other Peoples’ Money)?” you might ask. Yes, this can be true, but I never want to get that phone call from the bank, asking me to repay all of my loans in the next 60 days. This is how many real estate tycoons go bankrupt. Instead, I am working to pay off my mortgage (which should happen by the end of this year), and then will quickly be able to save up $50,000 or so for a discounted cash home purchase in my area (you see, with cash you can get a 20% discount off from the home value). And, by purchasing a home with cash I have an excellent chance at earning $8,000+ in that first year of investing, which will then make it all that much more easy to purchase the next home with cash, and then the next one, and the next one. After 10 years, I could easily own 7-10 homes that earn $80,000/yr. Plus, the value of the entire estate will be well over $1,000,000. Shoot, if this plan works just half as good as I plan I’ll still be sitting pretty! Renting out real estate is the option for me.
Would you rather flip houses or rent our real estate?
This post was originally published on July 3, 2014 and updated on August 12, 2019.