It’s no longer a surprise that more people are turning to real estate for an added stream of income. Besides, Canadian real estate can be more than just a place to live in. There are a lot of ways to earn an income from real estate, but 2 of the most common ways are: flipping houses and renting out properties.
Which one’s best suited for you? Let’s find out.
The main difference: flipping your house vs renting it out
Choosing between flipping your house and renting out can be a tough decision, since they’re both good for generating revenue. Flipping means reselling a property right after renovating it, so that it can be resold at a higher value. Renting out, on the other hand, is putting a property up for lease or rent.
The main difference between these two real estate investment strategies lies in the way they yield income. House flipping needs active management and can be considered as active income. Meanwhile, renting out can be considered a form of passive income.
Which is best for you?
Let’s take a closer look at house flipping and renting out by weighing out their pros and cons.
The pros and cons of flipping houses
1. Pro: You’ll earn big quickly
Your capital won’t be tied up for long, although you’ll still have to deal with contractors and realtors. The average timeframe for house flipping is six months. This includes buying a house, making renovations and selling it.
Watch out for unexpected expenses, repairs and mistakes for these’ll not only extend your timeline, but will also cut into your profit.
2. Pro: It’s for short-term
House flipping’s a short-term investment. In just a few months, you’ll be able to wrap up your project and enjoy your income. There’s also no need for long-term management, since the property will be off your hands.
3. Con: Higher taxes
One of the extra costs of buying and selling houses is the tax on capital gains. Whenever a property is sold at a value greater than it’s purchase price, it’s automatically subject to capital gains tax.
4. Con: You’ll depend on the market
Flipping houses relies on the premise that once you’ve renovated and improved a house, it’s market value will increase. This also depends on market conditions. In an active and growing house market, it’s definitely possible. Unlike in rental properties, income from house flipping has some irregularities.
The pros and cons of renting out the property
1. Pro: Steady monthly income
Rental properties are long-term investments that’ll provide steady monthly income. This investment is a form of passive income and can be a major contributor in building wealth. Residential rentals are the most typical form of income properties, but some investors also opt for commercial real estate.
2. Pro: Your property will appreciate
One of the best things about real estate investmenting is the promise of appreciation. The longer you hold on to a property, the more likely its equity will build. This is usually the case for rental properties, due to it’s long-term nature. As home equity appreciates, rental dues increase in parallel as well.
3. Pro: There are tax incentives
Investment income such as interest and rent is considered income and will generally be taxed according to your income tax rate.
Renting out properties also has tax incentives. Rental property expenses – such as property taxes and mortgage interest – can actually be written off. The biggest win is with the tax benefits that come with depreciation. Depreciation reduces a property’s value over time, as a result of wear and tear.
4. Con: You’ll do long-term management
Even if renting properties involves passive income, it doesn’t mean there’ll be zero work entailed. Being a landlord isn’t for everyone, since this also calls for management skills and property upkeep.
5. Con: Risk of vacancy
Just like flipping houses, the success of your investment is at the mercy of the market. Rental real estate properties naturally go through vacancies. Economic conditions, location and seasonality can contribute to vacancy rates.
Thus, in planning out your finances and projections, always consider vacancy rates that can lead to lower returns.
Final verdict – which should you choose?
Reviewing the pros and cons of various real estate strategies gives you a glimpse of what fits your financial situation and goals. If you’re aiming for profit in a shorter period of time and have skills for a hands-on project, consider house flipping. On the other hand, if you’d like a more long-term yield, then a rental property may be the option for you.