Real Estate Investments

By Kristen Castillo

May 1, 2017 5 min read

House flipping -- buying a house, improving it and then selling it for a profit within a short period of time -- was popular a decade ago, peaking in 2005. That's when TV shows were dedicated to the topic and it seemed as if everyone was doing it.

It got quiet for a bit but now the real estate investment is trendy again. According to a report from property database ATTOM Data Solutions, flipping hit a 10-year high in 2016, with just over 193,000 condo and single-family homes flipped -- a 3.1 percent increase from the year before.

Flipped homes that year sold for a median price of $189,900, with a gross flipping profit of $62,624 above the median purchase price of $127,276. The gross flipping return on investment was 49.2 percent.

*The Right Time?

Flipping may be making a resurgence, but investors such as Jake Harris, managing partner of Harris Bay, a real estate investment company, say it's always a good time to flip a house.

"The market doesn't dictate the profit or the success of a flip," he says. "Everything is predicated on the purchase price. If you can buy a property at an under market price, you will be able to sell it for a profit most of the time."

Harris cautions would-be flippers to think about the high transactional costs of approximately 10 percent.

He explains selling stock has small commissions and fees and takes minutes while real estate has high commissions and fees and can take one to four months to complete. Also investors will lose money holding onto a property too long.

Harris' money breakdown: Buy a property for 75 to 80 percent of market value; spend about 8 percent on market value remodel; sell the property with 10 percent transactional fees; make a profit and pay taxes.

So a home purchased for $150,000, remodeled for $16,000 and sold for $200,000 will have $20,000 transactional cost. The profit? $14,000.

*Not So Easy

Flipping a house may seem easy, but think again.

"With all of the 'Flip This House' shows on TV, many people see the quick profits and assume they can do it, too," says home inspector Michael Marlow of Veteran Home Inspections. "As a home inspector, I see the flops that result."

He advises prospective flippers to only take on a project if they know what they're doing. "So many of the flips are unpermitted work and it shows," says Marlow, who has done a few successful flips of his own.

The home inspector suggests avoiding guru-type seminars on flipping homes and instead doing basic research on the internet, on sites like BiggerPockets and FlipNerd.com.

*Getting Started

Once an investor does the basic research, it's time to find properties that are below market value. Realize that many listings have already been reviewed and passed over by experienced investors.

"The key to flipping is buying homes at the right price," says Ernie Rafailides of Bayview Management. He suggests hiring a real estate agent to help you understand the market and learn what buyers want.

Always get permits and insurance. Make sure contractors you hire are licensed and insured as well.

"Consider setting up a separate corporation or limited liability for this adventure -- even though you may be personally guaranteeing loans, separate entities limit your liability and may protect you from other issues not involving a lender," says Rafailides.

Have a backup plan for the property, such as renting it if it won't sell and knowing how much rent to charge.

*Work, Work, Work

Flipping is not for the shy, inexperienced or cash-strapped. The projects are intensive and require significant amounts of time and commitment.

"It's lots of work," says Aaron Norris of The Norris Group, a real estate investing company, who says the get-rich-quick shows on TV make flipping "seem riskless," which he calls unfortunate.

"Small mom and pop investors all over the country work hard to get these deals, fix them up and then resell," Norris says. "They create jobs, improve neighborhoods, and everyone benefits when that happens."

Networking in the industry is important which is why Norris recommends joining local real estate investment clubs. Investors will learn about raising money, buying strategies, self-directed IRAs and other topics.

"You'll rub elbows with realtors, other investors, contractors and lots of people in surrounding service sectors," he says.

Still, flipping isn't necessarily a long-term opportunity.

"While flipping may initially boost your cash flow, the main problem is over the long haul, you will be always chasing cash and deals to make money and avoid taxes," says Rafailides.

Start small, with one property, and see how it goes.

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