The long-time debate continues: flipping houses vs. renting? Which is right for you? The short answer is that it depends entirely on your goals.

The timeframe for flipping a house is usually around six to eight months, and if you do things right, you can make a lot of money on just one deal. Does a 30% gross profit sound good? Yes! How about a significant portion of those profits going toward expenses and taxes? Not so good.

Renting, on the other hand, is a buy-and-hold strategy that seeks to capitalize on long-term gains.

There are so many variables that go into flipping houses vs. renting strategies. To help you choose which real estate path is right for you, I’ve rounded up a list of the pros and cons of each strategy. By the end of this article, you’ll have a better understanding of these real estate investment strategies and which one best fits your lifestyle and aligns with your financial goals.

When deciding between rentals vs. flipping, it’s important to first understand the difference between passive and active income.

Passive Income is money you receive every month from your investments. Regardless of where you are or what you’re doing, that income keeps coming. An example of passive income would be owning a rental property and receiving rent checks every month.

Active Income is earning money through day-to-day work. As soon as you stop working, income stops coming. An example of active income would be the money you earn at your day job and/or income from flipping a house.

You may be scratching your head at this statement. Flipping is not investing because while it’s possible to earn a ton of money doing it, you have to earn it. Flipping a house requires a great deal of work. Even if you’re not the person physically doing the labor to fix up the house, you still probably oversee the project, coordinate with contractors, get your plans approved by the city, buy insurance, set up a timeline and budget, etc. You are spending time and energy flipping a house, which is why it’s considered active income.

By definition, investing is the act of committing money or capital to an endeavor (business, stocks, real estate, etc.) with the expectation of obtaining an additional income or profit.

I’m not trying to discourage you from going house flipping route. I’m simply saying that it should be considered a business and not an investment. If you plan on keeping your day job and flipping a house on the side, be aware that most or all of your “free” time will likely be spent working on this project. The best thing you can do before becoming a house flipper is learn everything you possibly can about how to flip houses and make a profit.

As with most things, flipping houses has pros and cons. Understanding the unique aspects of house flipping vs. renting will help you determine whether the pros outweigh the cons and if you should pursue this strategy.

Pro #1 Quicker Returns on Your Investment

Your capital is tied up for a shorter period of time than buy-and-hold properties. As previously mentioned, the average timeframe for a house flip is around six to eight months. Keep in mind that this is an average. If this is your first experience flipping a house, expect to encounter a few bumps in the road, which may very well extend your timeframe. The faster you can flip a house, the greater return on investment (ROI) potential.

Pro #2 No Long-Term Property Management

A major draw to flipping houses is that once the remodel is complete and the property is sold, you can wash your hands and move on (hopefully with a lot of cash in your pocket) to the next flip. You don’t have to worry about finding tenants, collecting rent checks and maintaining the property. You basically avoid the hassles of being a landlord.

Con #1 Inconsistent Income

This is where you need to look at the opportunity cost of flipping houses vs renting. Opportunity cost is an economic term that means “what you give up in order to gain something else.” In other words, if your full-time job is flipping houses, you’re giving up a steady, consistent income from working in another career.

Of course, it’s possible to make money flipping. However, it will be important to determine if the money you earn through flipping will produce more or less income than your current day job. Flipping creates active income, and as soon as you stop working, income will stop coming in.

Con #2 Taxes

Flipping comes with extra costs from buying and selling, including taxes on capital gains. Closing costs when both buying and selling a property can add up and cut into your overall ROI. The self-employed pay the highest income taxes, which can be as much as 43%. Without getting into too much detail, you should expect to pay an additional 15% on top of your normal taxes.

There’s a big difference between short-term and long-term capital gains tax rates. If you own a property for less than a year, you can expect to pay a capital gains tax rate based on your earned or “ordinary” income.

Read this article for a more detailed breakdown of how passive and active income is taxed and how the flipping houses vs renting strategy might be affected.

As previously mentioned, house flipping can earn a lot of money in a relatively short amount of time. Renting an investment property usually produces less upfront income but generates income consistently over a long period of time. In other words, your rental property will produce passive income, especially if you hire a property management team to handle finding quality tenants and maintaining them and the property.

Owning rental property has the potential to generate great returns, especially if held over several years. While you won’t enjoy a lump sum of cash, like flipping a house might produce, you will collect consistent income in smaller amounts for as long as you choose to own and rent out the property. Let’s discuss the pros and cons of having a rental vs. flipping.

Pro #1 Ongoing Monthly Income

Buying rental property is a long-term investment. If you were injured and unable to work, you would still be receiving monthly income from your rental. Passive income can allow you to become financially independent, build lasting wealth and retire.

Pro #2 Your Property’s Value Should Increase Over Time

Real estate benefits from inflation. As long as you purchase in the right place at the right time, rents and cash flow will likely rise with inflation. The longer you hold onto your rental property, the more equity you will build. As the value of your rental increases year after year, so can your rent.

If you decide to sell the property down the road, you can enjoy a sizeable return. This is especially true if you purchased the property at the right time (during a buyer’s market) and sold at the right time (during a seller’s market). A seller’s market occurs when there is a shortage of housing on the market, with a large number of people looking to buy or rent. This is the best time to sell, as you’ll likely get more than your asking price based on supply and demand.

Pro #3 Investment Property Has Tax Incentives, Flipping Does Not

Investment income is usually taxed at 15% (20% if you make a lot of money). If you compare this tax rate to flipping income at 25-43%, you’ll see just how much money you can save.

Rental property owners can also write off expenses such as repairs, maintenance, driving to and from the property, the cost of a property manager, and the list goes on and on. But your single biggest advantage is writing off the depreciation of your asset. Depreciation can potentially save you thousands of dollars a year in taxes.

Con #1 Risk of Vacancy

You may be thinking, all of this sounds great, but what if I can’t find quality tenants and my rental sits vacant for months? As with any type of investment, there is always some degree of risk. In certain instances, it can be difficult to keep your rental filled for long periods of time. While your rental is vacant, you are obviously responsible for covering the mortgage.

When investing in a rental property, you need to account for and even expect between one and three months of vacancy per year and add that variable to your budget. If you can’t afford to pay, let’s say, two mortgages for three months out of the year, you’ll want to put more money away before buying a rental property.

There are several ways to minimize the chance of your property sitting vacant. This article provides helpful tips for landlords and property owners.

Con #2 Not all Rental Property is Passive

I know I said that rental property is passive income. However, there are caveats to this idea. You could actively try to find deals on rental property, research the best markets, and manage any updates or repairs to those properties, etc. If you plan to manage the property yourself, consider your rental a 1) investment and 2) a part-time job.

To make your rental property a true investment, hire a management company to handle the day-to-day tasks, like finding quality tenants, securing rent checks, and responding to maintenance requests. At RealWealth, we help our members with this strategy, connecting them with property teams who sell properties and professionally manage them.

There are two main strategies for flipping houses. The first is buying a house or apartment below market value due to financial distress. The second is buying a true fixer-upper.

Investors using the first strategy should identify properties whose owners are unable to maintain or manage them or are over-leveraged and facing the risk of defaulting on their loans.

Investors looking into fixer-uppers should be prepared to invest additional capital for repairs, maintenance and improvements. The idea is to increase the value of a property by fixing it up then turning it around and selling it.

Want to learn more about flipping? Read one of the best 11 books on house flipping, according to Millenial Money Man.

Let’s say you find a property you are interested in buying and renting out. Before purchasing, you will want to calculate your rental earnings. Research average rents in the area and other properties similar to yours. This will give you an idea of how much rent you can charge and whether you’ll be making money or losing money. If the numbers work in your favor, you may then choose to move forward with the investment property.

The hold part is what makes the renting or buy and hold strategy lucrative in real estate investing. The longer you hold onto your rental property, the more equity you build, in addition to the monthly income you receive. When considering flipping houses vs. renting strategies, you’ll want to assess the amount of money you need over time to reach your financial goals.

As I mentioned above, flipping is more of a full-time job than an investment strategy. If you plan on flipping the house yourself, expect to spend countless hours putting in new floors and windows and updating the kitchen, bathrooms, exterior, etc. If you plan on hiring a contractor to do most of the work, plan on spending a great deal of time overseeing and managing the project.

Use Flips to Generate Cash for a Rental Property

If you can’t afford to purchase a rental property right now, you may consider flipping a house first and then using that money as leverage to buy and hold another property as a rental. Investors can borrow against their equity or leverage other projects with their current one. Leveraging your equity makes this strategy a much more cost-effective financing option.

Is it better to flip or rent? After reviewing the pros and cons of flipping houses vs. renting, you should have a good idea which strategy is best for you and your financial goals. If you like getting your hands dirty, consider yourself a very handy, resourceful person, and like the idea of possibly a quicker return, then perhaps house flipping is the best strategy for you.

If you prefer the idea of passive income while keeping your full-time job and handing the reins over to a great property management team, then investing in rental property may be the best fit. At RealWealth, we help our members build portfolios using passive real estate investments by connecting them (for free) with property teams in nationwide top-performing markets for investors. If you want full access to our network of nationwide property teams, join RealWealth today!

For more information about real estate investing, go to the “Learn” tab on our website. Here, you’ll find additional resources, including where, when, and how to invest, as well as dozens of helpful tools and tips.