One of the primary ways I see people lose money in real estate is by confusing "property flipping" with "real estate investing".
Aspiring real estate investors watch shows about "fixing and flipping" on TV that make it look easy, enticing, and profitable, and they get lured into the world of infomercial gurus and real estate investment clubs that promote DIY property flipping as the get-rich-quick strategy of the day. Keep in mind that those gurus and investment clubs make money by collaborating to market hopes and dreams (usually in the form of some expensive "educational" products—books, CDs, home study courses, seminars and the like) to the less affluent. Although the magical strategy-of-the-day for getting rich quick through real estate varies over time and from late night infomercial to late night infomercial, one of the hot button concepts marketed to aspiring novices today is that finding-fixing-and-flipping distressed properties is the path to riches.
Why “Property Flipping” is NOT the same as "Real Estate Investing"
- Property Flipping is the process of acquiring a distressed property, usually improving it (unless you are wholesaling to another flipper who will do the improvement), and then re-selling the improved property for a profit over and above your acquisition, improvement and holding costs (or so goes the proposition).
- Real Estate Investing is the process of acquiring a property for the purpose of holding it over time and renting it out. It is an ‘asset’ that generates a monthly stream of passive residual income and has the potential to appreciate in value over time. This is how you build wealth through real estate and how you become financially free—when your aggregate passive income from your portfolio of cash flowing investment properties (propertly adjusted with a maintenance and vacancy expectation) exceeds your monthly expenses. I will not even get into all of the incredible tax advantages that are associated with buy-and-hold real estate investing that are not associated with property flipping (you can consult your CPA on that one, and be sure to ask about the "property dealer" trap).
Why Property Flipping is a Losing Proposition for Most Individuals:
- It is a Job, Not an Investment. The absolute best case scenario is putting in a lot of time and hard work to generate ‘ transactional income’ (a lump sum of money made per transaction that will quickly be depleted unless you do another transaction). If you stop working, the money stops flowing. Creating a job for yourself that requires you to work is the opposite of pursuing financial freedom through cash flow properties.
- It is High Risk and YOU Take ALL the Risk. Assuming you can find and buy a distressed property for a decent price, what if the property needs way more work than you were anticipating and your repair budget is blown out of the water? What if it takes much longer than expected to renovate, or takes way more time to sell than you factored in and your holding costs skyrocket? It is all on YOU. If you aren’t flush with cash and you borrow hard money for the acquisition and rehab, the stakes get even higher.
- You Don’t Have an Advantage. Sorry, the home study course from the guru at the investment club doesn’t count as an advantage, no matter how much ‘insider info’ they promise. You are competing against established multi-million dollar operations that will absolutely dominate any individual in terms of their resources, capital, inside connections, market expertise, efficiency, and economies of scale. They acquire the best properties, enovate them for the lowest cost (buying materials at a bulk discount and using their own construction crews), rent them out to qualified tenants to create ‘turn-key’ investment properties and then move them through efficient distribution channels (ie: sell pre-ordered portfolios of turn-key investment properties to private equity funds or international buyer channels) so they can replenish their capital and continue to dominate. The individual DIY Fix-and-Flipper is typically only going to get access to properties that numerous companies (which do this professionally) have passed over….which means either the properties are not desirable or they are over-priced. If the property was passed over by these highly efficient companies because they couldn’t make it profitable for themselves, how is it going to turn out for the individual who buys that over-priced or undesirable property, pays more money to renovate it and takes more time to sell it?