When I tell people I'm a real estate investor or I work for a real estate investment company, one of the first questions I get asked is, “Do you flip houses?”
Although this question gets a little annoying after a while, it's understandable why people ask it: Most people get their real estate investing knowledge from what they see on TV, and property flipping shows are everywhere.
So when I tell people what I actually invest, I'm often met with a blank look as they try to fit what I do into the “real estate investing” paradigm.
In my opinion, reselling is the worst, I believe you are much better off buying a turnkey property than reselling…and my plan to build net worth does not include reselling.
Here are 5 reasons why I think flipping is a bad idea…
5 reasons why you shouldn't flip your house
Reason 1: Flipping is a speculative activity, no different from investing in the stock market.
In other words, when you buy an asset with the intention of selling it for a profit, it is actually speculation, not investment.
Investing should be thought of as acquiring assets that generate cash flow, such as rental properties or successful businesses. Speculation is acquiring assets with the intention of buying low and selling high, such as reselling, investing in the stock market, or buying art and other collectibles.
So flipping is a gamble because you never really know if you're going to get a high price. I know flippers who bought thinking the market was going to go up, but it actually went down. In the end, they said they lost money (but I think they did).
Reason 2: Reselling takes a lot of time and effort.
I said that flipping is similar to stock market investing because it is really just speculation (buy low, sell high), but it does have one advantage over stock market investing: you can influence the price of your investment by making improvements to the property.
So you knock down a wall, put in new cabinets, paint, etc. The problem is, if you want to improve it, you have to either spend your time or your hard-earned money to hire someone else to do it for you. Whether you do it yourself or hire someone else to do it, it's going to cost you.
Reason 3: Resale is very price sensitive.
First, you need to buy the property cheap. A low purchase price is truly the secret weapon in reselling, but few people do it effectively. Many people just buy a cheap house they find, usually on the MLS. Then there's the permits, contractors, materials, and other expenses that come with selling.
So if a year ago Brazil's forests were devastated by a termite infestation, suddenly the price of raw materials skyrockets. Or, as the market starts to heat up, contractors increase costs and start to spread themselves too thin. Before long, they'll find that costs are out of control, and already-tight margins become even tighter.
Reason #4: Reselling is a surprisingly emotional business.
This is an emotional business because at some point, you forget that you're running a business and instead start making decisions based on what you want in a home.
You'll realize this if you go shopping for countertops at Home Depot: You'll pass up anything affordable that looks decent and gravitate instead toward something you love (hint: it'll be more expensive), and then you'll fight this problem every step of the way, from cabinets to fixtures to paint colors to appliances.
Reason 5: Reversals are unpredictable.
Once you purchase a property, you may soon start to discover problems you never knew existed, like mold, termites, wood rot, etc. Or, when you peel off the old carpeting or wallpaper, you may find that the home is a historical relic, and the city may want to charge you more to restore it to its original condition.
Then, once all the work is done and you’ve sold your resold property, you’ll be starting from scratch again with a whole new set of problems.
Look, there's a reason there are real estate flipping shows on TV – because the risks are so high. You can make huge profits, but you can also lose huge amounts of money. It's unpredictable, it's emotional, it's difficult, but it makes for great TV.
But it should be on TV.
Smart investors should not seek investments that are laborious, time-consuming, emotional, unpredictable, and costly gamble-like. In fact, when such “opportunities” present themselves, they should run in the opposite direction.
Let's be honest, turnkey real estate investing is boring and probably wouldn't make for much TV. But think about it. That's exactly what you should be doing: investing that's simple, predictable, cash-flowing, and puts money in your bank account on a regular basis with very little effort on your part.
You get investment income and cash flow to replace your income. Instead of swinging a hammer and sweating on a demolition job, you can spend your time doing what you love: spending time at the beach, attending your child's piano recital, sitting on the front porch with your spouse.
Flipping real estate is a labor-intensive gamble. Turnkey real estate investing is a true “lifestyle investment” that gives you the money, the time, and the freedom to do whatever you want.
Which do you choose?