Why Invest In Flips & Why They Work (Most Of The Time)
By: Brandon Clay
What is flipping, why it works, and how to profit from flipping real estate.
You’ve probably seen the shows.
Flip or Flop, Flip This House, The Vanilla Ice Project…and so much more. Fact is, flipping houses is cool again. Even Vanilla Ice is cool again.
There’s something about taking something that needs work, fixing it, then reselling it for a profit that resonates with audiences. It’s part business, part turn-around story, and part human interest. People like watching shows about flipping properties.
What Is Flipping?
Flipping real estate either means buying low and selling high (in a rising market), or buying a house that needs repair and fixing it up before reselling it for a profit (“fix and flip”).
Many people make a living from flipping houses and there are plenty of shows to prove it…right? Of course, that’s just the Hollywood version of flipping real estate, but there’s truth behind the drama.
Why Flipping Works
There are a few reasons why flipping real estate works…
1. Strong Market: For example in Texas, people need houses and apartments right now. Hence, it’s a good environment to flip real estate. If the market isn’t as strong, here’s where the ‘most of the time’ comes into play. Flipping becomes more challenging in a weaker market – especially if you bought just before the market turned. You can still flip, but you need to find a better deal – which brings me to #2…
2. Motivated Seller: This is the foundation of a house flip. A seller is motivated to sell you a deal. Either a homeowner needs to sell (death in the family, divorce, sudden move, etc.) or the bank needs to clean-up its balance sheet. In either case, the owner of the house has a reason to sell real estate quickly and take a less-than-market price for it.
3. Equity capture: Equity capture is when you buy an asset (house, apartment, etc.) for less than it’s worth. For instance, when you buy a house in a $150K neighborhood for $75K, fix it up for $25K and you’re “all in” for $100K. That gives you $50K in equity capture. That equity capture is what makes flipping profitable.
4. Appreciation: In general, real estate doubles in value every twenty years. It is forced to rise over the long term with inflation of building materials, labor, and scarcity of land – but that’s the long-term. In the short-term, real estate can also appreciate rapidly thus allowing for the house flipper to profit from an appreciating market.
How To Profit From Flipping
There are a number of ways to profit from flipping real estate. But the first step is finding a deal.
You find the deal by researching the market, chatting with multiple real estate agents, and checking with various wholesalers in the market. You can even market for deals yourself if you’re so inclined. Once you find a deal (house/apartment with enough equity to justify a flip), then comes the next step – doing the deal.
One way to flip is DIY: buy a run-down house, pour in some “sweat equity” with a personal remodel, then relist the house a few months later hoping to profit from the transaction. It’s work, but doing it yourself can save you money because you didn’t need to hire a general contractor.
A second way to flip is as an investor: You play the role of investor and hire the general contractor, hire the realtor, and manage the project as closely as possible. You may need to go through a couple of projects to find the right team, but it’s worth it in the end. In either case, you can profit $5,000 – $50,000 (or more) on a flip project. You can also lose money if any number of things go wrong, so be careful and get educated before you start.
A third way to flip is to partner with an experienced real estate investor in their deals. You can do that by loaning equity for the purchase, signing on their loans, or setting up an outright partnership. You profit as the investor and the other partner gets to do more deals if it works out – a true win-win.
BTW – If you’re aiming to invest in real estate like a nomad (with little involvement in the investment) then you probably don’t want to flip real estate on your own. Each flip may tie you up when the project is active. But that shouldn’t stop you from finding a good partner to work with.
Flipping can be a fun AND rewarding experience. But there are risks with any investing – including flipping real estate. So find some good books and start the journey today!
REI Nomad, LLC
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