House flipping is a type of real estate investment strategy where an investor buys a house to make cosmetic changes to quickly put it back on the market and turn a profit.
You may have come across house-flipping as one of the many ways to invest in real estate. But knowing what it is and knowing if it is worth it are quite different.
If you’re interested in entering the fixer-upper scene or an oldie looking to reevaluate your options, read until the end of this article to find out if house flipping is the best real estate investment.
Benefits of House Flipping
- It’s a short-term investment
It’s hard to answer the question, “is real estate better than stocks?” because they are fundamentally different types of investment. One of the benefits stocks typically have over real estate is that liquidity is easier. In as little as three days, you can trade your assets for cold hard cash, which is a huge advantage for some investors.
However, unlike owning traditional rental properties, house flipping requires a shorter-term frame to turn a profit. With the right expertise, you could flip a house in four to six months, take your profit, do another flip, or invest in something else.
- Make good profit quickly
As highlighted in the previous point, you don’t have to worry about the ongoing maintenance or security of the property or signing tenant leases because house flipping is a short-term investment. That also means that it’s a fast way to profit and move on to the next venture. You can complete a flip and secure a healthy profit margin that runs into thousands of dollars in a few months.
If you make an average of $25,000 per flip, with four flips a year, you could earn $100,000.
- Real estate investment experience
Routine house flipping helps you build valuable skills that are transferable to other aspects of real estate. Continuously purchasing and selling homes makes you better at negotiating through practice and becoming more familiar with current market trends. You could also develop valuable contacts with contractors who can supply you with materials at a reduced rate. You’ll also improve your people management skills by interacting with different people, from your suppliers to your workers and potential homebuyers. So you stand to gain a lot of valuable experience from flipping houses.
Drawbacks of House Flipping
- The market can fluctuate
Yes, with house flipping, you stand to make a lot of money quickly. But not without the risk of losing it too. When people buy a fixer-upper to perform a quick flip, there are a lot of expensive roadblocks they might encounter.
If you take on more than you can chew, you might find that the house requires more work than previously thought. So if your budget doesn’t cover the necessary renovations and other unexpected expenses, your investment could turn into a money pit.
Also, you have to rely on the market being favorable when you’re ready to sell, and if it isn’t, you might consider yourself lucky if you manage to break even.
- It can be stressful and time-consuming
House flipping is a stressful and time-consuming task that requires some patience and the right kind of expertise. It’s exhausting to finance a house, make cosmetic changes, and put it back on the market within a matter of months. You have to contact the right contractors, secure deliveries at an affordable rate, oversee the workers, and take care of a million other things that might crop up.
However, it’s not impossible, and with every house flip, you gain more experience that makes the process a lot smoother.
- High taxes
Taxes are one of the pitfalls house flipping newbies fail to anticipate. As you might know, selling a house is subject to taxes as most people sell their homes at a higher price than they initially purchased them. This is known as a capital gains tax, and it varies depending on how long you own the house.
Gains from flipping houses fall under short-term capital gains taxation, so if your revenue is worth $50,000, you stand to pay 22% in taxes. In comparison, rental property, classified as long-term capital gains taxation, is only liable for 15% of the same amount.
There are an endless number of strategies for investors to secure income when it comes to real estate. You could stick to the traditional rental property investment, purchase REITs, buy-and-hold, and so much more. With so many viable options, it’s hard to conclusively say if house flipping is the best option for real estate investment.
However, based on your risk profile, immediate capital, and patience, you can determine if it is best for you by carefully weighing its unique benefits and drawbacks.