When a lot of people think about real estate investing, they’ll think about owning a rental house, investing in real estate investment trusts, and fix and flip real estate.
Many people are exposed to real estate through shows like “Fixer Upper” or “Fix and Flip”, and when seeing the profits you can gain by flipping properties, think that is the best way to make money from real estate.
Although it may seem like an attractive option, there are some reasons to avoid fix and flip real estate:
- There can be a lot of competition, especially if fix and flip isn’t your full-time job.
- High risks may impact profits.
- The taxes on fix and flip real estate are very high.
- Market correction.
- It takes a lot of time.
What is Fix and Flip Real Estate?
Flipping property and buying/holding real estate are two very different investment strategies. When you own real estate, you are able to accrue gains and avoid the volatility of the stock market.
If you’re looking for a quicker turnaround time on your investment, or don’t want to deal with constantly finding tenants and dealing with the housing market, you can flip properties.
Flipping: a term to describe purchasing a revenue-generating asset and quickly reselling. This typically involves doing some additional rehabilitation work to the home to improve its value.
The idea is to buy a vacant under-value home, put some time and effort into fixing it up (the fix portion), and then selling it at a higher value (the flip portion.) This process could involve minor renovations from replacing flooring to total house redesign.
There are typically two ways to flip properties:
- Fixing up a property by tending to structural, condition, or design issues that you fix to create value. This usually requires remodeling and mild to intense renovation.
- Purchasing a home that’s below current market value due to financial distress that you sell for profit. This strategy requires trying to find homeowners that are overleveraged and at risk to going into default.
You would be trying at least get back the cost of the initial purchase price of the property, the cost of renovations and selling/holding, and of course, the additional premium from putting in the work to rehab the property.
Why Avoid Fix and Flip Real Estate?
This reason is largely dependent on the kind of real estate investor you are. If you are a passive investor you should consider avoiding fix and flipping property. It’s a very active form of real estate investment.
You would have to be on the property every day, managing the contractors, ensuring that the level of service is up to quality, and constantly on top of the project.
Additionally, the competition for this sector is quite high. A lot of individuals who are doing fix and flip real estate use it as their primary source of income, and it’s their full-time job. It could be challenging to compete if this was your side job or if you’re working a different full-time job.
You have to constantly be watching the market, trying to find the best contractors, looking for the right properties, trying to find the best ways to cut costs to increase profits, etc. This is a lot of work if you don’t have the time for it.
If you have the time to be a very active investor, this could be an excellent strategy.
There’s a decent risk to flipping properties. You could buy a property only to find out, when replacing the flooring, that there are severe foundational issues with the property and you have to spend tens of thousands to fix the foundation.
There are lots of opportunities for hidden costs that can add up to a detrimental amount. You have to put a lot of time and work into doing due diligence to avoid these risks, and even then, you are not guaranteed to know everything about your property. This is why fix and flip real estate can be high risk.
If you want a useful and low-risk resource to start building your portfolio with tangible private market assets, check out Diversyfund, where it’s easy to build a portfolio of fully vetted, multifamily real estate.
When it comes to taxes, fix and flip properties are not an advantageous route. If you don’t hold the property for more than the year, you’re taxed at a rate of 30-40% because you haven’t held the property for long enough.
But if you hold the property for over a year, you now have to pay capital gains tax, which is typically 15-20%. Either way, you’re hit with lots of taxes.
- capital gains tax: the tax you pay for profiting off your investments.
Typically, real estate is a great way to avoid taxes, except this investment route, is not tax-efficient. You don’t have most of the protections of buying real estate. You get more protections from a buy-and-hold property purchase than flipping real estate any day.
In 2007-2008, there were a lot of people in the fix and flip real estate business. The market was oversaturated with everyone trying to buy fix-uppers, and then in 2008, the market corrected itself.
People lost money on their flips, or they had to turn their properties into buy and holds and weren’t able to handle the property management of multiple homes. Right now we’re in a similar situation; the market is currently correcting itself, and this could mean that you don’t have the same potential for profits.
If you don’t have a lot of time on your hands, but want to get into real estate investment, fix and flip real estate may not be for you. It takes a lot of time to research the market, creating good relationships with contractors, constantly trying to figure out the best way to make money.
If you have a full-time job and want to do fix and flip on the side, possibly reconsider, or evaluate the time required to make this a profitable investment of your time and money. If you want to invest in real estate for no money down, check out our series on this topic:
- How to Get Into Real Estate With No Money Down-Seller Financing
- How to Get Into Real Estate With No Money Down- Hard Money and Gift Money
- How to Buy Real Estate With Credit Cards
Fix and flip real estate can get you a really fast return on your money since experienced individuals can flip a house in about six months. Unlike the stock market, real estate typically is a safer investment strategy.
However, be aware of the risks involved with fix and flip real estate. The costs (hidden and apparent) can be really high and the taxes are astronomical. It can take a lot of time and effort, and you have to be a very active investor.
Investing in real estate will allow you the opportunity to have the financial freedom you deserve, but there are many barriers and challenges to real estate investment. The Orlando Academy created a “Real Estate for Beginners” course, based and designed around Orlando Miner’s 10+ years of real estate investing experience. With over $500,000,000 in transactions closed, the program has been proven to work over the last 15 years.