- House flipping involves buying, renovating, and selling properties for quick profits, typically within 9 months. It requires a substantial initial investment and hands-on involvement in the renovation process.
- Buy-to-let, a more passive approach, entails renting out properties to generate steady rental income and benefit from long-term appreciation. It requires a lesser initial investment and offers a more stable income stream.
When it comes to property investment, the choices can be overwhelming, especially for beginners. Two popular strategies that often pique the interest of aspiring investors are house flipping and buy to let (renting out properties). Each approach has its own merits and considerations, and the decision between the two depends on various factors such as financial goals, available resources, and the amount of time you are willing to commit.
In this article, we’ll delve into the key aspects of both strategies, comparing their potential returns, associated risks, and the level of involvement required. To solidify your understanding and to help you make an informed decision about how you’re going to kick-start your property investment journey, we’ll provide you with an example – we’ll run the numbers to see how much we could make if we flipped the property vs if we rented it out. By the end, you’ll have a clearer understanding of whether it’s better to flip a house or rent a house out.
House Flipping: A Short-Term Hands-On Approach
House flipping has gained significant attention thanks to television shows and success stories that showcase impressive returns within a relatively short period. This strategy involves purchasing a property, renovating it to enhance its value, and then selling it for a profit. It’s an exciting venture that offers the potential for substantial returns, typically realised within around 9 months.
For beginners, house flipping requires a careful evaluation of the initial investment needed. This includes the purchase price of the property and the funds required for renovation. It’s worth noting that while financing options exist, such as mortgages or cash investments, the recent increase in interest rates has influenced mortgage costs. This change affects the accessibility of financing options and impacts the overall profitability of the venture.
One advantage of house flipping is its hands-on nature. As a flipper, you’ll be actively involved in the renovation process, from managing contractors to making design decisions. This active participation can be rewarding for those who enjoy creative projects and are willing to put in the effort.
For instance, consider the property flip described in our guide on how to flip houses in the UK – The example showcases how a successful flip yielded an impressive Return on Investment (ROI) of 34.88%. This success was achieved through careful analysis, accurate calculations, and strategic execution.
Next, let’s explore the buy-to-let strategy, a.k.a rental property.
Buy to Let: A Long Term “Hands-Off” Approach
On the other end of the spectrum, renting out properties, commonly known as buy-to-let, offers a more passive investment approach. With this strategy, you purchase properties and rent them to tenants, generating a consistent rental income over time. Additionally, property values tend to appreciate, contributing to long-term gains.
One of the primary attractions of the buy-to-let strategy lies in its potential to provide investors with reliable and recurring rental income. By becoming a landlord, you position yourself to benefit from a steady cash flow, as tenants pay you rent every month that covers your mortgage payments, building insurance and still leaves you with a surplus (this being your profit).
Furthermore, the buy-to-let strategy can also offer long-term appreciation, as property values have historically shown an upward trajectory over time (Over the past 50 years, the average price of a house in the UK has increased from £7,758 to £285,861). This dual benefit of rental income and capital appreciation makes buy-to-let an appealing option for those seeking a balanced approach to property investment.
When it comes to the initial investment required for buy-to-let properties, it’s important to consider both the property’s purchase price and associated costs. As with house flipping, investors can choose to finance their buy-to-let property through a mortgage or opt to use their own funds. However, securing a BTL mortgage is significantly easier than securing a mortgage on a property that is run-down as those are usually considered unmortgageable. The ability to secure a mortgage for a buy-to-let property is a notable advantage for those looking to enter the property market with a more limited initial capital.
Recommended Article: Buy-to-Let Mortgages Explained
One of the distinctive features of the buy-to-let strategy is its relatively passive nature, earning it the reputation of being a “hands-off” approach. Unlike the hands-on involvement demanded by house flipping, renting out properties allows investors to step back from day-to-day management to a certain extent. However, it’s important to recognise that while buy-to-let may offer a degree of autonomy, it is by no means entirely hands-free.
Property management tasks such as addressing tenant concerns, arranging repairs, and ensuring legal compliance are still part and parcel of the buy-to-let experience. It’s worth noting that while some months may require minimal intervention, others might demand more attention, such as coordinating maintenance or dealing with unexpected issues. There is always a need for ongoing engagement and a proactive stance to ensure the property remains in good condition and tenants are satisfied.
Key Points of Comparison
When deciding between house flipping or renting, it’s essential to consider a range of factors that can significantly impact your investment journey. Let’s delve into these key points of comparison to help you make a well-informed decision that aligns with your goals and circumstances.
1. Initial Investment
Both house flipping and buy-to-let require an initial investment, but the nature of this investment differs significantly. House flipping typically demands a more substantial upfront capital, encompassing the purchase price of the property, stamp duty, renovation costs, and legal fees. The potential for higher returns in a relatively short time frame is balanced by the need for a larger financial commitment.
On the other hand, the buy-to-let strategy generally involves a lesser upfront investment with smaller gradual investments along the journey. Similar to house flipping, your upfront costs will include the purchase price of the property (or your deposit on it), stamp duty, legal fees and tenant finding costs.
Recommended Article: Full Buy-to-Let Costs Breakdown (Updated)
While the initial capital required might be lower compared to house flipping, investors should consider ongoing costs such as property management fees, maintenance, and potential void periods between tenants. It’s important to weigh these financial aspects carefully, as the initial investment influences both potential returns and associated risks.
2. Financing Options
Access to financing plays a pivotal role in property investment, especially for beginners seeking to enter the market. House flipping and buy to lets offer distinct financing options that may not be suitable nor accessible for every investor.
House flipping often requires a more substantial initial investment, which might limit financing options for some investors. While mortgage options exist, the stringent criteria and potential difficulty securing financing for properties in need of significant renovation can pose challenges. Additionally, the relatively short-term nature of house flips may result in higher interest rates and a more demanding repayment schedule (or possibly early repayment charges if using a mortgage). For these reasons, many house flippers will instead opt to use cash to fund the project – this also allows them to secure a better deal on the property, thus increasing their potential ROI.
The buy-to-let strategy, on the other hand, provides a more favourable landscape for accessing financing. Mortgages tailored for buy-to-let properties are widely available, making it a more accessible choice for beginners. For aspiring investors, using a reputable mortgage broker like Lendlord can help you find the best mortgage product for your particular needs and at the lowest rates available.
3. Potential Returns
House flipping is renowned for its potential to yield quick profits within a relatively short time frame. Successful flips can lead to substantial returns, especially when the right property is acquired, renovated efficiently, and sold during good market conditions. However, the time-sensitive nature of flips also exposes investors to market volatility and potential economic fluctuations, which could impact the final return on investment.
Recommended Tool – House Flip ROI Calculator
Conversely, rental properties generate a steady cash flow through monthly rent payments, offering a reliable source of income for investors. Over time, properties in well-selected locations may experience appreciation in value, contributing to potential capital gains. While the returns from buy-to-let might not match the rapid profits of house flipping, the strategy offers a more stable and predictable income stream.
Recommended Tool – Buy to Let Profit Calculator
4. Time Commitment
Time commitment is a crucial consideration for property investors, as different strategies require varying levels of involvement.
House flipping demands a significant time investment, particularly during the renovation phase. Investors must actively oversee the property’s transformation, coordinate with contractors, and manage the refurbishment process. The hands-on nature of house flipping often entails a more intense and time-sensitive approach, requiring meticulous planning and efficient execution to meet deadlines.
Note – You can of course hire a project manager to oversee all of this for you but it will eat into your potential profit.
On the other hand, rental properties lean towards a more hands-off approach. While initial property selection and management require attention, the ongoing time commitment is generally lower compared to flipping. Renting out properties involves maintaining landlord-tenant relationships, addressing maintenance needs, and ensuring legal compliance. While the monthly responsibilities are more distributed over time, consistent engagement is crucial to ensuring the property’s successful performance. Again, these are tasks that you can partially outsource to a property management firm but it will cost 10-12% of your monthly rental income.
5. Associated Risks
Both property flipping and rental properties come with their own set of risks that investors should be aware of.
House flipping exposes investors to risks associated with property renovation and market dynamics. Renovation challenges, unexpected costs, and market fluctuations can impact the projected returns of a flip. Additionally, the potential for extended holding periods or difficulty selling the property could affect profitability.
In the buy-to-let realm, tenant-related risks and property maintenance are key considerations. Tenant issues, such as rental arrears or property damage, can impact cash flow and require swift resolution. Property maintenance and repairs are ongoing responsibilities that can impact profitability if not managed effectively. While buy-to-let properties offer a more consistent income stream, unforeseen challenges with tenants and property upkeep should not be underestimated.
However, what’s key to note is that whilst these unfortunate situations can occur, they are unlikely – especially if you conduct thorough due diligence on the property and its location.
Flipping vs Renting: Running the Numbers
To provide you with a direct comparison, let’s consider an example property – a three bed end-of-terrace property in the desirable L9 postcode (Liverpool). This property is in need of modernisation so it’s perfect for a house flip. For the rental scenario, we shall assume that the property is in great condition (this will of course affect the purchase price).
To find out how we arrived at this properties start value, end value, renovation costs and potential rental income, we would recommend the following guides:
This table showcases the potential outcomes of both strategies based on various scenarios.
Note – We’re making two assumptions in our scenarios: 1) The housing market stays flat during the first 12 months meaning no capital appreciation, and 2) The market begins to move after this flat year at the historical average of around 3%.
|House Flip (Cash Purchase)
|House Flip (Mortgage Purchase)
|Renting It Out (75% LTV Mortgage)
|End Value (if market stays flat)
|Profit Made In 12 Months
|£3,600 (rental income only)
|5 Year ROI
As you can see, flipping this property delivers a superior ROI in the first year compared to rental property. However, once the property has been flipped, that’s that (Unless you go on to flip another property of course) but the rental property continues to earn a regular rental income and as capital appreciation of 3% per year kicks in from year 2, you almost double your money after 5 years.
Rent or Flip Calculator
For those seeking to run the numbers on their own properties (either owned or potential purchases), we would highly recommend using the two following tools. These take into account variables such as property prices, rental income, and renovation costs, helping you make an informed decision.
What’s Better: Flipping a House or Renting It Out?
In conclusion, both house flipping and renting out properties have their own merits and considerations. The choice between the two depends on your financial goals, available resources, and willingness to commit time. If you’re looking for substantial returns in a shorter timeframe and enjoy being hands-on, house flipping could be a rewarding choice. On the other hand, if you prefer a more passive approach with consistent rental income and long-term appreciation, renting out properties might be better suited for you.
Note: This article is intended to provide an overview of the two strategies and should not be considered as financial advice. Always conduct thorough research and seek professional guidance before making investment decisions.