When looking for investment opportunities the stock market offers potential but a tremendous amount of risk. An alternative to buying stocks is real estate investing which is different than flipping houses, although you can make money with both.
Making Sense of Real Estate Investing vs Flipping Homes
To shed some light on this we need to first understand what each term means in both the street vernacular and investing vernacular.
· Real Estate Investing Model
With this model you either purchase a property yourself or in a partnership where the property is owned for the sole purpose of generating an income. This income is derived from renting out the property to tenants. If the investment property requires renovation then those renovations would be performed prior to the units being rented out. The owner can earn money in two ways with this type of investment they generate income from the rent minus any expenses. These properties are usually discussed based on their cap rate which is the percentage earned per year for example a 5% cap rate would mean it take 20 years to recover your original investment.
Along with the rental income, if the property increases in value over time this “appreciation” can be used to either borrow money against the equity or when the property is sold. The difference between the price you paid and current price it was sold for would be taxed as capital gains which is more favorable when compared to individual income tax rates. There is no compulsion to sell the property so you can earn income from the rental in perpetuity.
· Flipping Houses Model
In this model an investor would purchase a property to renovate it for a quick sale and profit. The investor would identify distressed properties or those being foreclosed on by local banks. These properties are usually sold “as is where is” at a discounted price. You could try to resell those properties but would not make anything on the sale.
Where the money-making opportunity comes is when the property is renovated. Playing on your renovating expertise you will be able to allocate capital to the renovations so the value of the property would increase dramatically, you can get more details here. After having completed these renovations you would then try to quickly sell the property for a profit and move on to the next opportunity.
Contrasts Between Both Investing Approaches
With the real estate investing approach you are using a “buy and hold” approach which provides a steady stream of income over a prolonged period of time. Along with the stream of rental income you may be able to benefit from appreciation of the property.
With house flipping you are looking to sell the property for a lump-sum then move on to the next opportunity. Flipping houses is more labor intensive and hands on but the upside is you can make quick cash. With real estate investing you don’t have to be as hands on but the income potential is spread out over years instead of weeks.