Zeenat Vallie

House Flipping vs Rental Income: Which Route to Take. Whether you’re a first-time property owner or a property mogul, deciding to flip your property or rent it can be a tough decision. The best approach is to consider which option is right for you and what your intentions are when entering the property market. When you ascertain your end goal, you will be able to easily decide which option is suitable. Just as importantly, you should always weigh the pros and cons of both options. When we talk about renting a property or flipping it, there is one common denominator- income. There are two different types of income: passive income and active income. Passive versus active income Passive income can be defined as the income you receive without doing any active, physical or ongoing work, whereas active income is that received from providing an active or ongoing service. An active income, for example, would be your monthly salary from a job or business that you actively and physically participated in order to generate the income, while a passive income might be the monthly interest your money earns from a savings account with a bank. By definition, passive income appears to be an easier and more convenient means of income. Is flipping houses a passive or active income? Flipping houses can not be considered to be a source of passive income mainly because it does not involve active and ongoing income. When you flip a house, you will usually spend money to build or rehabilitate the property, take steps to find buyers, then sell it for a profit. Once that property is sold there will be no other income earned from it, so in that sense, it doesn’t meet the test of being passive or ongoing. There is also the fact that actual physical work has to take place before the income can be gotten. Is renting a passive income or active income? The income from a rental property is an example of passive income because the income is being received on an ongoing basis, and also because there is little to no actual physical work that is done in order to earn the income. However, it is not as simple as it seems. Let us explore the advantages and disadvantages of renting. The advantages of renting your property 1.Ongoing monthly income When you rent your house or property, you receive an ongoing monthly income. This income is not affected by your ability to work and should you no longer be able to work your day-to-day job, you will still receive your rental income. 2.Appreciation Properties appreciate over time and when this happens, you increase your equity and in turn, your rental income increases. Depending on the price and location of your home, your property value can appreciate by an average of 3.7 % over a year. 3.Lower mortgage Renting your home is a smart way to lower your mortgage. When you rent out your property, you are receiving a passive income that could be used toward your mortgage payment on the property which effectively lowers it. This minimizes the burden on a homeowner and makes it easier to settle your mortgage over time. The disadvantages of renting 1.Bad tenants Bad tenants can make renting your home a nightmare. Your tenant could suddenly decide to stop paying rent and it's a long and arduous process to evict negligent tenants. According to the state of New York, a landlord has to give a tenant a 14-day notice or demand for rent, before a landlord can evict a tenant for failing to pay rent. In some instances, a landlord has to seek legal advice and this comes at a hefty price. On average, a New York real estate attorney charges a fee between $2500 and $5000. 2.Management Renting a property requires upkeep. If you are going to manage your property by yourself, you need to be prepared for this. This may essentially make your rental property an active income. You need to be available to do repairs, fix anything that requires fixing and ensure that your property is in a livable condition. The advantages of flipping 1.Quick turnover You can make a quick turnover by flipping and using the capital for another investment. The return on investment can be worthwhile, depending on your location and the state of the property market. The sooner you sell, the better. 2.Avoid long term property management When you purchase a property with the intention of flipping it, you may incur some costs when rehabilitating it. However, the sooner you flip the house the better as you avoid the long term management or maintenance that comes with owning a house. The disadvantages of flipping 1.Stand to make a loss You stand to make a loss if you are in a hurry to sell and put your property on the market at the wrong time. If you spent more on rehabilitating your home and place it on the market, you may not make up for the money you spent on the home. The current property market instability predicts that at least 10 cities in the United States are most at risk of a housing downturn when the next recession happens. 2. Holding cost As a property owner, there are several holding costs involved such as utilities, maintenance and taxes. If you cannot sell your property as early as you anticipated, you could spend a sizeable amount on holding costs and this could affect your profit margin when you eventually sell. 3.Short term capital gains tax One of the main disadvantages of flipping a home when you have owned it for less than a year is the short term capital gains. You will still be taxed as if it were a normal income, at your regular marginal income tax rate. Essentially, you will keep less of your profit from flipping the home. Conclusion After considering the pros and cons of house flipping and renting, it may be easier for you to decide which option suits you best, depending on your real estate and financial goals. If you consider yourself someone who is hands-on, has the capacity to manage a house and enjoys a quick return on investment then flipping is for you. However, if you don’t like to idea of getting your hands dirty and can afford to invest in a property long term, then renting is for you. With both options, it’s important to consider what can go right or what could go wrong in order to plan ahead and yield a positive and profitable outcome for your business venture.