House Flipping vs. Real Estate Investing – Which Is Better?
I am often times asked the question which is better: house flipping or real estate investing?
They are actually both real estate investing in essence. However, when a lot of people think about "real estate investing" what they really mean is "buy and hold real estate investing".
So when it comes to the difference between house flipping and real estate investing (the buy and hold kind), there are big differences.
To reach an answer, it helps to define each term and put them in perspective.
House flipping is the process of buying a house and then selling it at a profit within the shortest time manageable. An investor is aiming to make a good sum of profit within a very short period of time, thus the word flipping.
Many house flippers learn how to flip houses with no money and do extremely well turning a profit in a short time with very little of their own cash out of pocket.
The typical house flipper does not hold onto the property for the purposes of income. In fact, the shorter period of time the house flipper holds the property, the better their profits usually are.
Real Estate Investing
Buy and hold real estate investment (oftentimes termed "land lording") on the other hand, means buying a house or property, holding it for a period of time thereby creating cash flow through rental income. The buy and hold real estate investor may at some point in time sell that property at a profit - or he may keep it forever.
The real estate investor might also buy the property, renovate it and rent it with the purpose of re-selling it at some time...but usually not in a short (two to three month) period of time. Many buy and hold real estate investors purchase a property, become landlords and then decide they don't like land lording and then sell the house, hopefully at a profit.
The differences between the two kinds of real estate investing, for our purposes here, relate to time frame, appreciation over time and cash flow.
House Flipping vs. Real Estate Investing - Which Is Right For You?
The main difference between the two investment strategies is that in house flipping, the investor is looking for quick profits while the buy and hold real estate investor is more concerned with steady income.
Like we said before, the real estate investor may eventually sell the house, but he probably wants to hold onto it, either live in it or rent and then sell at a later date. This later date is usually a year or so down the road.
The Anatomy of Flipping a House
House flippers target houses that they can buy at a cheaper rate than the normal market rate. This guarantees them a profit when they sell the same house at the market rate or any other best price that they can get from it.
When you are just getting started flipping houses, its good to look at a few key points seasoned house flippers look at when considering purchasing houses under duress. Some of these are:
1. A house under auction failure to payment of a debt
2. A house under tax lien
3. A house in the process of foreclosure
4. A house under estate sale
5. Any housing looking old and an eyesore to the surrounding community
Renovation When Flipping Houses
Quick renovation then selling is the most popular way of house flipping. The flipper buys the house, renovates it in a short time and then sells it.
Usually renovating is a more exact way of locking in profits, especially if you can precisely estimate the cost of materials and labor required to do it. Getting building experts in the specific renovations required will be helpful, and if done correctly, will gain a very good profit in the end.
This enables the house flipper to get a quick market for the house and at the same time fetching a very good price when it is resold.
House Flipping Tends to be Less of a Hassle
House flipping can be more hassle free than real estate investing especially where the flipper is just buying a house and selling it without doing any renovations. However, in most cases, a house flipper does need to do significant renovations in order to create price appreciation and profit.
Depending on the market or community where a house flipper works in, the house flipper can make higher return on investment (ROI) if he can flip the house in as short a time frame as possible.
Whereas the long term buy and hold real estate investor may wait for long periods before the property can be sold, doing renovations over time funded by money generated from either rents or outside investors, it may make buy and hold real estate investing more lucrative over time.
The profits fetched from long-term real estate investing can be higher over time if the investor is gaining the dual benefits from price appreciation and rental income.
However, for short term and relatively quick return on investment, I am usually in favor of house flipping...but you be the judge!
Which one is right for you?