Long-Term vs Flipping: Building Wealth in Real Estate – The Smart Way

December 27th, 2023

Real estate investing has grown increasingly popular as a means to build wealth. With multiple strategies from flipping to long-term rentals, investors have options to profit from property ownership. In this blog post, we’ll compare two of the most common approaches – flipping versus long-term buy-and hold – to determine the smarter path to create lasting financial freedom through real estate.

Why Invest in Real Estate?

Before analyzing specific real estate investing strategies, it’s important to understand why so many people are attracted to generating income from property in the first place.

Benefits of Real Estate Investing

  • Predictable Returns – Unlike stocks, real estate rents and values tend to follow more predictable patterns and cycles. This makes estimating ROI more straightforward.
  • Inflation Hedge – As inflation rises, so do property values and rents. This helps protect against rising prices and eroding returns.
  • Tax Deductibility – From mortgage interest to property taxes, real estate offers numerous tax deductions for landlords and investors. This saves significantly on taxes owed.
  • Utilization – With leverage, investors can utilize OPM (Other People’s Money) via mortgage financing to control more property than possible with their own capital.

With an average annual return of 10.6% over the past 30 years through up and down markets, real estate continues to deliver for those investing wisely.

Passive vs Active Income – Long-Term Rentals and Flipping

 

While both long-term holds and flipping allow investors to profit from real estate, they differ significantly in the type of returns generated:

Long-Term Rental Strategy

  • Focused on generating steady passive income through rent payments
  • Tenants pay off the mortgage and expenses
  • Profit comes from cash flow and appreciation over decades

Flipping Strategy

  • Focused on active income by creating value in distressed properties
  • Improvements made to resell properties quickly
  • Profit generated by the sales price minus purchase and repair costs

Now let’s analyze the pros and cons of each real estate investment approach.

Pros and Cons of Flipping Properties

Flipping entails buying undervalued real estate, fixing it up, and selling quickly for profit.

Pros of Flipping

  • Faster returns – Flippers can turn a profit in a few months rather than waiting years.
  • Larger lump sums – Instead of small monthly rents, the entire profit is gained at once from a sale.
  • Less ongoing management – Aside from showing or listing the home, flipping avoids regular landlord duties.

Cons of Flipping

  • Risk of overspending – Repair and carrying costs can eat into profits significantly if the flip takes longer than expected.
  • Time-consuming – Locating deals, overseeing contractors, and selling requires hands-on effort over an intense period.
  • Profit unpredictability – Unlike rental income, success relies on finding new flip opportunities constantly.

Pros and Cons of Long-Term Rentals

Long-term buy-and-hold entails purchasing rental properties and keeping them to collect rent for many years or decades.

Pros of Long-Term Holds

  • Passive income – If self-managed, rent can provide mostly passive cash flow for minor work.
  • Tax advantages – Depreciation deductions plus other write-offs lower tax liability.
  • Appreciation – As market rents and values rise, so does equity to cash out or borrow against.
  • Inflation hedge – Adjusting rent annually helps keep pace with inflation to maintain positive cash flow.

Cons of Long-Term Holds

  • Slow ROI – Recouping upfront costs can take years, requiring patience and strong financing.
  • Tenant issues – From late rent to property damage and evictions, being a landlord has headaches.
  • Home maintenance – Occasional repairs like leaky roofs and AC replacements can get costly if reserves aren’t set aside adequately.
Flipping Long-Term Rentals
Timeframe Short-term – resell in months Long-term – hold decades
Ideal Property Type Distressed/undervalued Turnkey rentals
Key Factor For Success Purchase price Cash flow
Returns Faster but lumpier Slower but steadier
Income Type Active Passive
Ongoing Management Minimal Moderate
Tax Treatment Ordinary income tax rates Lower long-term capital gains tax eligible
Risk Level Higher Lower

Getting Started with Real Estate Investing

The prospect of buying rental properties or flipping homes for profit may seem intimidating initially. By following some core tips, new investors set themselves up for the greatest chance of real estate investing success:

  1. Educate Yourself – Read books, blogs, listen to podcasts, review market data, and analyze other investors in your target market. Knowledge truly equates to power with informed buying and management decisions.
  2. Craft a Plan – Determine your budget, timeline, target market, exit strategy, and ideal property type. Set realistic return goals and key milestones to achieve systematically.
  3. Build a Team – From real estate agents to property managers, contractors, lenders, and CPAs – assemble a team of specialists to deliver financial freedom faster through real estate.

Wealth Building with Lasting Rentals

While lucrative in the short-term, flipping requires regularly finding new deals to maintain active profits. Long-term buy-and-hold rentals may offer slower initial returns but over decades they compound earnings through constant rents and exponentially increasing property values. For most real estate investors, the path to true wealth lies in the buy-and-hold strategy rather than hoping for the next housing bubble to provide a quick flip profit.

By understanding the pros and cons and differences between the two models, investors optimize their chances for financial freedom no matter which strategy they pursue. The key is analyzing deals conservatively, spotting undervalued properties in growing markets, and managing smartly for maximum gain.

For personalized advice on strategic property investing, Empire 8 Property offers complimentary consultations to evaluate your needs and risk factors. Their team of experts helps craft a customized plan to start building your real estate portfolio and passive income stream today.

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