Reality TV makes flipping a house look intriguing, but it takes a special set of skills and a contact list of reliable contractors to turn a profit. You can make just as much or more income by purchasing a property and renting it out without all the hassle of tearing it apart and rebuilding. The right investment property can make passive income while the value increases over time.
Investment properties earn money over the long term
Flipping a house can be lucrative if you can do a lot of the work yourself. Houses that need a significant amount of work generally require the services of a contractor at some point, and you’re on the hook for the mortgage until you can finish and re-sell it.
An investment property is a home that will provide a steady monthly income. Buying a turnkey property that requires no repairs or construction allows you to rent it out right away. You’ll be most successful if you treat the rental property as a business. Strategically marketing the property and maintaining it is critical to creating a positive cashflow.
Stable, long-term investments aren’t affected by the whims of the market
House flippers face the risk of upgrading a house so much that it outprices comparable homes in the area. It’s hard to make enough to cover the upgrades when the value of the house is depressed simply by its location. Flippers also face losing a big chunk of their profit to buying and selling the property.
Long-term investors mitigate that risk because the mortgage principle declines year to year. The tenant’s rent pays the monthly mortgage fee while the landlord reaps the tax benefits of depreciating the property, deducting mortgage insurance, and deferring tax liability on any value increase. Operating as a business, landlords can potentially deduct 20% of the rental income earned from their taxes.
Determine your level of effort
Flipping a house requires a delicate balance between labor and time. It’s faster to hire a team of contractors who can do the work quickly, but the labor costs are astronomical. Doing most of the renovation yourself is much more cost-conscious but can take a lot longer. There may be underlying issues that force you to hire a professional. Either way, time is a factor, as the mortgage can quickly eat away at any profit margin you expect.
Long-term rentals in a city or neighborhood with strong rental demand take very little effort. People who need a place to stay temporarily but aren’t interested in buying are the perfect market for long-term rental. Identify stable renters who will occupy the apartment or house with minimal damage. Property investment in an active urban area with young working professionals, graduate students, and members of the military make finding renters easy. You can determine the average household income, job categories, and comparable home prices for any property using a tool like Statistical Atlas.
Conclusion
Generating passive income from real estate is one of the most effective ways to build wealth. While flipping a house for profit might seem more exciting than owning a long-term rental property, investing in a property for the long term comes with tax benefits and the likelihood that it will generate future cash flow and gain value over time.
