The Myth of Flipping Property for Passive Profit
The risks of resale can be more frustrating than fruitful.
Ah… is there anything better than making a few (thousand) easy bucks doing something that’s already in your career’s wheelhouse?
Thanks in part to television shows like those found on HGTV, there’s a perception that buying property on the cheap before quickly offloading it at a higher price—or “flipping,” as the cool kids call it—is both lucrative and simple.
If you’re a real estate agent, the temptation to explore this revenue stream might be strong. After all, you already sell property for a living. How hard can it be to get into the flipping game?
The answer? Very.
The Fix Is In
Cheap properties are low in value for a reason. Perhaps the building has been foreclosed by a bank, is in a rough neighborhood, or isn’t up to the standards modern homeowners are looking for.
Properties that haven’t been attended to for some time can be a hotspot for mold, pests, and more. Without having access to a resident with firsthand knowledge of what it’s like to occupy the building, it’s up to you to investigate all the nasty surprises lurking within the walls.
Were low-quality building materials used in prior repairs? Are any pipes broken? Does the basement have a penchant for water damage?
All these issues need to be properly inspected and addressed before you can sell.
Renovation costs for unloved properties can be prohibitively expensive, but the money pit doesn’t stop there.
Consider this: Once you complete renovations, the value of your property will hopefully go up… but that can mean higher taxes. And you are responsible for paying the taxes until you’re able to complete the flip.
Not to mention you better hope your piggy bank is stuffed to the gills, because if you don’t pay for your property with cash, you’ll be adding a brand new mortgage to your financial portfolio. Lucky you!
Throw homeowners insurance into the mix, and you can see how the costs can become overwhelming. Handling taxes, insurance, renovation fees, and mortgage payments while you wait to offload the property to a buyer is more financial strain than a lot of people are willing or able to handle. And given that there’s no guarantee the property will sell within the timeframe you want, you should be prepared to shoulder these expenses for as long as the market dictates.
Working Your Life Away
According to the most recent edition of ATTOM Data Solutions’ U.S. Home Flipping Report, the average time it takes to flip a home is 186 days. That’s over six months of doing paperwork, inspecting and renovating damages, paying taxes and mortgage bills, and marketing until you finally close the deal with a buyer.
Flipping properties is far from a passive revenue stream; it’s a full-time project that is likely to eat up at least half a year every time you do it. Is the potential profit worth that amount of time and stress to you?
The report also provides the average ROI on a flip: 44.3%. That might sound like a lucrative number, but the figure doesn’t include all the extra costs mentioned above.
It’s much more realistic to expect a profit margin of 10-15% when the flip is all said and done… and that’s if everything goes your way (which is far from a sure thing). That’s a relatively small gain for a project that requires such a substantial commitment of time, money, knowledge, and resources.
Don’t Flip Out
For many real estate professionals, property resale can be far more trouble than it’s worth. But if you’re still determined, there is a path to turn this practice into an additional source of income.
Just don’t fall prey to delusions of fat paychecks with minimal effort, or else your sanity might be the only thing that flips.
This article is for informational purposes only.
Berger, Rob. “10 Things I Learned from Flipping Real Estate (and Why I’ll Never Do It Again).” Dough Roller, 5 September 2018.
Eberlin, Erin. “Pros and Cons of Flipping a Property.” The Balance Small Business, 13 November 2018.
McWhinney, James. “5 Mistakes That Can Make House Flipping a Flop.” Investopedia, 30 October 2018.
Pierce, Justin. “Why You Won’t Get Rich Flipping Homes.” The Washington Post, 2 April 2018.
“U.S. Home Flipping Returns Drop to Nearly Four-Year Low in Q2 2018.” ATTOM Data Solutions, 6 September 2018.
Weintraub, Ezlizabeth. “The Dangers of Buying Flipped Foreclosure Houses.” The Balance, 11 June 2018.
“Why I Don’t Flip Homes.” Passive Income M.D., 17 May 2018.