If you regularly watch reality TV shows or read articles about “overnight” millionaires who gained their fortunes by flipping properties, you’ve likely fallen in love with the idea.
However, is flipping a property an easy way to make money? Is it something you should seriously consider as a wealth-building strategy?
The Property Flipping Model
Property flipping takes different forms. There are different strategic approaches available to real estate investors, but it always starts with the same idea.
An investor purchases a property, usually for a low price (especially if the property is in a state of disrepair). Then, the owner spends time and money fixing the property, modernizing it, and listing it for sale.
The property is then sold to a buyer for far more than the original purchase price and associated repair expenses. The average fix-and-flip ROI varies by location, rehab costs, median resale prices, and other variable factors.
In a best-case scenario, you could make $20,000 to $100,000 or more with a single fix-and-flip sale. Worst-case scenario, investors lose their initial investment.
When Flipping Property Doesn’t Work Out
In reality, flipping a property can be difficult based on the chosen market, competition, access to financing, and average ROI yields under 25 percent in many states.
Popular as it is, house flipping is becoming less profitable. Real estate investors who make a lot of money flipping properties are generally experienced. We rarely see reality shows or articles about people who lost money in an attempt to replicate the success of others.
Why is property flipping unfavorable for some aspiring real estate investors?
Alternative property investment models
Flipping a property can be lucrative, but there are alternative ways to make money from property. For example, if you invest in a rental property, you’ll capitalize on a stream of consistent rental income, often exceeding what you spend on a monthly basis.
Investors can generate healthy monthly profits and benefit from the property’s long-term appreciation in value. Generally speaking, it can be more profitable over the long term when compared to flipping a property. It’s also an easier endeavor for newcomers who work with a property management firm.
Excessive financing costs
Most newcomers in the property flipping world can’t finance fix-and-flip costs. They don’t realize how expensive it is to acquire and maintain a property. Several months later they realize they’d exceeded their budget and decreased the profitability of the flip.
Poor rehab cost estimates
It’s difficult to estimate rehab costs, especially if you don’t have experience. At first glance, a little sweat equity and DIY repair may seem feasible. However, once you get started, severe and hidden problems can arise and quickly cut into profits.
Timing issues
Some property flippers fail to realize their full potential due to timing issues. If you buy a distressed home when the market is at its peak, and you try to sell it during a downturn, you could easily lose money. There’s no guarantee your property will sell fast. This forces investors to incur additional maintenance expenses while they wait for a buyer.
Local market competition
An estimated five percent of all home sales in the United States are “flipped properties.” Flipping property appeals to many people, so it attracts a multitude of investors. Real estate industry professionals keep their eyes open for potential fix-and-flip properties, which means you’ll encounter tough competition. In some markets, it may be harder to find good deals on property. If you don’t secure a low price, ROI will typically be lower.
Most of the problems mentioned above can be attributed to a lack of knowledge, skills, and inexperience.
The Bottom Line
Flipping property can be a smart way to make money, especially if you have the knowledge and experience. However, for most people and especially newcomers, it is a complex endeavor with a steep learning curve.
If you’re interested in flipping properties, there’s no reason to be anxious. Focus on learning instead of quick profits and set healthy expectations about the advantages and drawbacks.
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