Flipping Houses or Rental Properties - Which Is More Profitable?

You're ready to invest in real estate, but you've hit a brick wall: you don't know whether to rent out your new property, or flip it for a quick profit. Flipping is tempting - it's quick and can be lucrative - but is the most profitable solution?

Every investor has their own opinion on which route will make you the most money. In theory, they can both offer great returns. Let's take a closer look at each one to see which is more likely to fill your coffers higher.

Flipping Houses - The Pros and Cons & How Much You Can Earn

The Upside

The most obvious benefit to flipping houses is instant gratification. Rather than having to wait years to pay off a property and reap all the profits from your monthly rental check, you can enjoy immediate gains when flipping a house.

And unlike the stock market, which can change in the blink of an eye, real estate markets are predictable. Overall, flipping is considered a lower risk investment strategy.

The Downside

But there are considerable costs that come with flipping a home. Distressed properties, the types of properties that are ideal for flipping, may come at a lower upfront cost than, say, a brand new home. But repairs may require a significant investment, depending on the state of the home.

Transaction costs can be high on both the buying and selling end, which is something all investors need to consider.

Another important thing to consider: the market itself.

Take the story of one flipper who purchased a duplex for just $40,000. After extensive renovations and converting the floorplan to a single family home, the home was put on the market for $170,000. What the investor failed to realize was that despite the fact that the home had granite countertops, hardwood floors and new windows, it wasn't the type of home people in the neighborhood were looking for. He wound up selling the home one year later for just $125,000. He didn't earn a cent from this flip.

Moral of the story: You can't just buy a cheap property, upgrade all of the usual suspects (kitchen, flooring and bathrooms), and expect to reap huge profits. You need to study the market, find out what types of homes people are looking for, and find a property that you can turn into that "ideal" home.

Flipping Is Still Profitable

Still, flipping can be a lucrative way to earn great returns, and flip those returns back into - well, flipping more houses.

According to RealtyTrac, investors flipped 156,862 homes in 2013. What was the average gross profit? $58,081. You may walk away with a little less than this, but this figure is still an impressive return nonetheless.

Many people who are professional flippers say they make at least $25,000 profit on the homes they flip - and some make as much as $100,000 on certain properties.

If you're looking for a quick return and have the means to flip several homes throughout the year, you can make substantial profits from your investments. We're familiar with flippers selling 10 properties in a year, and taking home $300,000. That's a return that's hard to beat with most other investment vehicles. But you need the time and resources to pull off so many flips in a year. Still, earning even just $30,000 off one flip in a year is nothing to sneeze at.

Rental Properties - The Pros and Cons & How Much You Can Earn

The Upside

Rental properties offer the benefit of steady, long-term income. While that income may not be substantial, it adds up over time.

With rentals, it's not the monthly income that's attractive - it's the ability to hold onto a piece of property for the long-term without having to pay for it in the meantime. Tenants are paying off your mortgage, property taxes and insurance for you. Meanwhile, your property is gaining value. And you never had to pay a cent out of your own pocket.

Once the mortgage is paid off, you can keep most of the rental income for yourself - minus the cost of property tax, maintenance and insurance.

And eventually, you can sell the property to earn a nice profit on top of the income you've earned from renting.

It's also considerably easier to hold multiple rental properties and earn income in a passive way. You can hire property managers to oversee the maintenance of your properties and collect rent checks on your behalf.

Flipping, on the other hand, requires a more hands-on approach. You could possibly hire someone to take care of the leg work for you, but the cost would eat into your profits significantly.

The Downside

The only real drawback to rental properties is that the return isn't quite as substantial as it would be with flipping. You realize gains slowly and over a long period of time. If you have a 30-year mortgage on the property, you'll be waiting three decades to collect most of the profits on your monthly rental checks.

There are exceptions to this rule, of course. If the property is located in an area where you can charge substantially more than your monthly upkeep and mortgage costs, there's the potential to see a higher return more quickly. But these properties are rare and usually snatched up quickly. If you've invested in a community rental property, like an apartment building, it's also possible to earn a higher monthly return.

Flipping or Renting - Which Will Earn You More?

The truth is that both methods are equally profitable. It all comes down to how much you can invest and how often. It also depends on your goals.

If you're looking for quick, large returns, flipping is the obvious choice. And if you have the time and resources to purchase multiple properties each year, you can continue generating substantial profits, provided you are successful in choosing the right property and upgrades.

If you're in it for the long haul, renting is a smarter option. Over time, you can continue building up your portfolio of rentals. Once the mortgages are paid off, you can continue collecting rent checks, or sell the properties to earn a large return.