Flipping - One of the Most Risky Strategies?

Real Estate Broker · Cape Coral, FL · Member since 2015 · 2k+ posts · 1k+ votes

Out of the three main ways to invest ( wholesaling, flipping, and buy-and-hold) it seems obvious to me that flipping is by far the most risky strategy. This not only comes from personal experience but from commonsense.

Wholesaling - you normally don't have any money invested. The only risk that you really have is in marketing and time.

Buy and hold - normally, if you make a bad investment or if you overspend on fixing up the property you can normally just wait in the property will appreciate and/or over time you will build equity through the paying down of debt service.

Flipping - there are a multitude of things that can go sideways. Paid too much for the property, went over on your rehab budget, didn't upgrade the property enough, upgraded the property too much, market fluctuations, and a multitude of others.

My advice, avoid flipping unless you have so much room in the property that you can not fail.

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J ScottPro Member

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Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes

10y

Wholesaling, flipping and landlording are three completely different businesses, with different business models, financial models, products, tax implications, time requirements, skillset requirements, etc. From a business standpoint, the three business models have very little in common and it seems weird to say that any one is any better or worse than the other two. You could easily throw tax lien investing, lending, owning a shoe store, owning a restaurant or starting an online retail business into the mix as well. Those business models are equally diverse.

People don't pick a business to start simply based on risk. There are many other -- more important -- factors that need to be considered. For example:

- Interest

- Amount of time to invest

- Amount of capital to invest

- Credit worthiness

- Location/market needs

- Cash flow needs

- Long-term goals

- Years to retirement

- Skillset

- Education

- Network/contacts

- Etc.

Why aren't you factoring these things into your analysis? If someone works 80 hours a week, has a growing family, has $1M in the bank, a high-salary job, no debt, stellar credit, doesn't need cash flow and their goal is to generate 8% returns on their cash for the next 20 years, would you make the same business recommendation to that as you would to someone who has no cash, no credit, no job and poor communication skills?

I doubt it.

There are lots of factors that go into deciding what entrepreneurial venture might be right for someone, and to narrow it down to just three possibilities (flipping, wholesaling, landlording) and then saying that one of them probably isn't right based on a single factor, just doesn't make sense to me.

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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
10y
Wholesaling, flipping and landlording are three completely different businesses, with different business models, financial models, products, tax implications, time requirements, skillset requirements, etc. From a business standpoint, the three business models have very little in common and it seems weird to say that any one is any better or worse than the other two. You could easily throw tax lien investing, lending, owning a shoe store, owning a restaurant or starting an online retail business into the mix as well. Those business models are equally diverse.
People don't pick a business to start simply based on risk. There are many other -- more important -- factors that need to be considered. For example:
- Interest
- Amount of time to invest
- Amount of capital to invest
- Credit worthiness
- Location/market needs
- Cash flow needs
- Long-term goals
- Years to retirement
- Skillset
- Education
- Network/contacts
- Etc.
Why aren't you factoring these things into your analysis? If someone works 80 hours a week, has a growing family, has $1M in the bank, a high-salary job, no debt, stellar credit, doesn't need cash flow and their goal is to generate 8% returns on their cash for the next 20 years, would you make the same business recommendation to that as you would to someone who has no cash, no credit, no job and poor communication skills?
I doubt it.
There are lots of factors that go into deciding what entrepreneurial venture might be right for someone, and to narrow it down to just three possibilities (flipping, wholesaling, landlording) and then saying that one of them probably isn't right based on a single factor, just doesn't make sense to me.
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Charlie DiLisio
Investor · Lake Worth, FL · Member since 2014 · 378 posts · 184 votes
10y
@J Scott I agree totally with what you said. I think its more risky not to do anything. There are many ways to profit from real estate and I prefer flipping because of my experience and control of the property. We all have our skill sets and we should be open to learning as much of the business as possible. It is a mindset and I find it exciting and challenging. Best of luck to all of us. I am looking forward to reading your book J. Experience is the best teacher and other points of view are invaluable to our success.
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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
10y
Adam based on your statements I agree 100%.
J Scott has of course expanded on your thoughts.
To state it simply flipping is the highest risk for beginners.
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Adam BartomeoBusiness Member
OP
Real Estate Broker · Cape Coral, FL · Member since 2015 · 2k+ posts · 1k+ votes
10y
@J Scott
Thank you for your response. It was very thorough and extensive. I understand that you have more skin in the game then most as you have intellectual property and credibility on the line and must defend what you are passionate about. This is understandable.
Understand that I do not bring this up to argue but to educate. I agree and disagree with some of your statements. Here are some responses:
- you are correct in your assumption that you can compare many other investment vehicles. But, the majority of ones that you named are not common for most people. And, that is not the discussion that I wanted to have.
- all three that I named are very similar because they all deal with residential real estate. Also, these are the three most common followed by investors.
- you had mentioned about skill sets and other factors that come into play. You are 100% correct there are lots of other factors that come into play but given everything is equal (i.e. Education, funds available, credit) flipping is by far the riskiest. You must see that...
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Nelson Del Castillo
Investor · trumbull, CT · Member since 2015 · 117 posts · 44 votes
10y
@Adam Bartomeo I agree flipping has lots of risks, if you are in the middle of a flip and the market crashes like it did in 2007 there is little chances of recuperating your investments unless its a property that can cash flow as well or break even at the end of each month and you hold it till values come back. On another hand, with a buy and hold rental property for cash flow if the market crashes your more likely to sustain the wave. All business are calculated risks, I agree with J scott what you choose to do should also be based on other factors like skill sets, knowledge and goals like J mentioned. Flipping might be less riskier for some one who knows the ins and outs of that niche than for example some one who does not know anything about that business. At the end, everyone one has different strategies and what works for some one else might not work for me.
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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
10y
Being experienced in both buy and hold as well as buy and flip I will attest to the fact that regardless of your level of experience the risks associated with flipping, although lower with experience, are still higher than buy and hold or wholesaling.
That should be obvious based on the old adage "the higher the risk the greater the reward". House flipping by definition is higher risk/higher reward.
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Bhekizwe M.
Bulawayo, Zimbabwe · Member since 2015 · 1k+ posts · 253 votes
10y
different strokes for different folks.just taking notes
0 Reply
Polar Prutaseranee
Flipper/Rehabber · Tustin, CA · Member since 2015 · 433 posts · 103 votes
10y
It's all about minimizing risk. Everything is risky. Do your due diligence and minimize risk and you'll be fine. There's always something that can go wrong with any transaction.
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Adam BartomeoBusiness Member
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Real Estate Broker · Cape Coral, FL · Member since 2015 · 2k+ posts · 1k+ votes
10y
@Polar Prutaseranee
Flipping is more risky then wholesaling or renting because of all of the variables. Even if you minimize the risk there are still more variables and more risk
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John Ratigan
Investor · Berwyn, PA · Member since 2016 · 39 posts · 8 votes
10y
i feel like you get liquid by flipping, then you get rich by renting. like do some flips to get some cash, then use that cash to invest in positive cash flow rentals. then you can refi those rentals in time and use that cash to buy more.
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Adam BartomeoBusiness Member
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Real Estate Broker · Cape Coral, FL · Member since 2015 · 2k+ posts · 1k+ votes
10y
@John Ratigan
That is a great strategy and one that I have used. But, the flip is much more risky and this is why it has a larger pay out. Everything has to be precise when flipping or you can lose very quickly.
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Tyler Weaver
Investor · Cincinnati, OH · Member since 2008 · 319 posts · 243 votes
10y
Flipping has less exposure to long term market trends than buy and hold. If you are faced with a 10 year market trend that the graph looks something like this: \ Then buy and hold, especially all levered up can sink you quickly. Where in flipping you would be in and out of properties quick enough that hopefully it doesn't move against you more than your expected profit anyways.
It might not be so easy as just waiting with buy and hold. If you bought wrong, and are in the hole on equity from day 1. And also are negatively cash flowing because you missed an assumption then the timeline on when this investment is causing pain is dragged out for years and the mistakes can add up in $. While you are losing money, the rest of your money is tied up in it, and its unlikely people will be rushing to give you more of it with that track record. If you mess up in flipping at least you get to take it on the chin and move on...
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David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
10y
Originally posted by @Tyler Weaver:

Flipping has less exposure to long term market trends than buy and hold. If you are faced with a 10 year market trend that the graph looks something like this: \ Then buy and hold, especially all levered up can sink you quickly. Where in flipping you would be in and out of properties quick enough that hopefully it doesn't move against you more than your expected profit anyways.
It might not be so easy as just waiting with buy and hold. If you bought wrong, and are in the hole on equity from day 1. And also are negatively cash flowing because you missed an assumption then the timeline on when this investment is causing pain is dragged out for years and the mistakes can add up in $. While you are losing money, the rest of your money is tied up in it, and its unlikely people will be rushing to give you more of it with that track record. If you mess up in flipping at least you get to take it on the chin and move on...
This is an excellent point. The way I look at it, different strategies expose you to different sets of risks in different proportions. Therefore, different strategies tend to be better or worse suited for different markets at different points in the RE cycle. In a down market when prices are low and there is plenty of upside I prefer buy-and-hold. As things improve and prices go up, then the buy-and-hold numbers tend to make less sense and the flip numbers get better. As things heat up further both the buy-and-hold and the flip numbers become too tight and it may make more sense to do wholeselling or work as a RE agent. The theme in my mind is the hotter the market, the higher the market risk and the shorter the investment hold period that makes sense. I have yet to develop the skills to pull this strategic transition off smoothly, but this is my theory. Thoughts?
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Doug Watts
Investor · Austin, TX · Member since 2015 · 43 posts · 25 votes
10y
Buy it at the right price and you'll have multiple exit strategies. It will work out one way or another if you buy it at a wholesale price.
5 Reply
Joshua Pavao
Miami, FL · Member since 2015 · 100 posts · 34 votes
10y
Everything you listed as "risks" for flipping can very easily happen on a buy and hold property without the proper education (purchase too high, go over rehab budget, over rehab/ under rehab).
There are definitely investors purchasing non rent-ready buildings so a rehab budget comes into play, as well as knowing what materials are best and more sturdy since over rehabbing things for them to be ruined after one year may be costly.
In my opinion(just like you saying 'flipping is the riskiest' is just an opinion), I believe it's far more risky to be uneducated than it is to take calculated risks.
Educate yourself thoroughly in whatever you're doing, and even with flipping houses, having success like J. Scott has had really isn't that far off.
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Adam BartomeoBusiness Member
OP
Real Estate Broker · Cape Coral, FL · Member since 2015 · 2k+ posts · 1k+ votes
10y
@Joshua Pavao
Your statement is correct... To a degree.
When you flip almost ALL risks are magnified because the time horizon is shorten from 10-30 years to 1.5% of a B&H.
Don't misunderstand me, I DO flip. And, I do it successfully. My experience and education show me that it is the riskiest investment out of the three mentioned. It's the difference of investing in stocks and bonds. Bonds are much easier and safer. Where stocks are much more volatile and risky.
You are also correct about it being my opinion. This is why I put a question mark in the title.
Last, if you think by just being educated you can be like a J. Scott you ARE mistaken. This is why I have folks with master degrees answering my phones and sweeping my floors. Education isn't enough!!! You need desire, integrity, sustainability, and a host of other qualities to be the best.
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Adam BartomeoBusiness Member
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Real Estate Broker · Cape Coral, FL · Member since 2015 · 2k+ posts · 1k+ votes
10y
@Doug Watts
I preach this to everyone that I talk to but again buying right can help but it will not cure all. Buy right and put to much money into the property and you can't flip it. Then you turn it into a B&H because you couldn't flip it. So, B&H becomes the better investment.
If you would have not taken the risk and just started with B&H you would have been better off. Hence, less risk.
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Joshua Pavao
Miami, FL · Member since 2015 · 100 posts · 34 votes
10y
Edited
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
10y
Originally posted by @Adam Bartomeo:

@J Scott
Thank you for your response. It was very thorough and extensive. I understand that you have more skin in the game then most as you have intellectual property and credibility on the line and must defend what you are passionate about. This is understandable.
Understand that I do not bring this up to argue but to educate.
I think you misinterpreted the point of my original post...
I wasn't arguing that your conclusion (flipping holds more financial risk then B&H or wholesaling) was incorrect; I was arguing that your entire premise (that risk is the main factor in choosing an investment strategy) was misguided.
And, I don't believe that you really buy your premise either. If you did, you'd be recommending that people do option #4: Not investing with any of those three models and instead just putting your money in an FDIC bank account. That has the lowest financial risk (by far!), and if risk is what you're trying to optimize for, that's easily your best option.
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Adam BartomeoBusiness Member
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Real Estate Broker · Cape Coral, FL · Member since 2015 · 2k+ posts · 1k+ votes
10y
@J Scott
My apologies for misinterpreting your first response. It was not my intention.
I am unsure why you understood my original post to represent my point view being risk free. Even as I reread it I am confused.
With your experience you are well aware that risk tolerance is determined by the individual and is a very personal matter. You are correct, I do not buy into a no risk strategy. I don't think life was given to people so they can live in a closet but for them to have experiences.
My original post was intended to spark a conversation where we might learn WHY RE investors choose flipping over B&H when it is clear there are higher risks. There really hasn't been any good arguments for flipping over the other two, from a risk stand point.
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Manolo D.
Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
10y
I'd like to input what I believe in. I believe that a new development (building a house), is much of lesser risk than flipping. It is also more rewarding when you compare the 3 you mentioned, I just prefer to think out of the box. I also do not believe in monthly change income, having an income of $150-$300/door doesn't even cover my car payment, and investing 20k to get 200/month is not really enticing, even 200k to get 2k/mo is not, I spend way more than that.
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
10y
Originally posted by :

My original post was intended to spark a conversation where we might learn WHY RE investors choose flipping over B&H when it is clear there are higher risks. There really hasn't been any good arguments for flipping over the other two, from a risk stand point.
In my original post, I lost a number of reasons why someone might choose flipping over other strategies.
To recap:
- Goals
- Experience
- Interests
- Available time
- Available money
- Creditworthiness
- Negotiation skills
- local market
- Etc.
If you have no cash and no credit and hate landlording, B&H is probably not a good choice for you.
If you don't have much real estate experience, aren't a good negotiator and don't have lots of time to devote to finding deals, wholesaling is probably not a good choice for you.
If you don't have cash, credit or time, real estate is probably not for you at all.
Does that answer your question about why some investors may choose flipping? I could have chosen any of the three methods when I started (or many more), but flipping for better with my market, skills, interests, goals, experience, etc.
There's no one right answer... Or wrong answer. Evaluate the opportunities and your own situation and that will lead you to a business model.
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Gino BarbaroPro Member
Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
10y
@Adam Bartomeo
Hi Adam
I would not consider flipping a home an investment. To me, it is more comparable to purchasing a stock, then selling it at a higher price. It's a great strategy, but not a traditional "investment". Wholesaling is in the same category
Buy and hold investors look for cap appreciation and a yield, (Cash flow). It is also a model where the investor is trying to create wealth. There is a different mindset with flipping and holding. I agree that both business models are different, and that each has its own advantages.
I also think that risk can be measured by a person's financial intelligence. With buy and hold, once you see risk premiums dropping, as we are in this environment with falling cap rates, this strategy is becoming risky. I heard a smart investor say, "It's not what you buy, but what you pay for it that counts."
Gino
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Chris Martin
Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
10y
The three main ways to invest (wholesaling, flipping, and buy-and-hold)? For residential, I'd say land development (e.g. new Developments) and building (new construction) are way more common than wholesaling or flipping. Certainly by numbers. Granted, if you only count people with no money (the 'wholesalers') or the majority of people who are more concerned about their appearance and lifestyle (the flippers) then maybe those three are the top three, but in the reverse order.
I contend that in most market cycles, builders (e.g. $1.27B last year in new permits in Wake county, NC) especially the smaller Mom&Pop builders, have a higher overall risk than flippers. And the land developers (speculators may be a better word) were absolutely clocked in the great recession. igher risk than a flipper.
Seems like most people have forgeotten about the GR. Experience a few market cycles and I think your perception will change.
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Jason Krick
Investor · Reading, PA · Member since 2014 · 196 posts · 118 votes
10y
Adam Bartomeo J Scott Since I'm a newbie (just closed on my first property, which will be a rental), I will tell you why I think flipping is a big draw to the new folks. It is simply this--quick money. Many people want to start now, and don't have the time, patience, or ability to save up the money required for a down payment, renovation costs, and reserves to purchase a rental. The belief is that, with a good enough deal, they can find an HML or private lender to fund the majority of a flip. They rehab, sell, and suddenly have $20,000-50,000 cash that they didn't before. This cash can then find another flip, or the purchase of a B&H property. I don't think risk tolerance comes into play initially. The dominant, driving forces, are how to quickly establish capital to continue investing. This is also why wholesaling is appealing. It is viewed as a way to inexpensively enter the business. While I don't subscribe to the beliefs above, I think that these reasons are what drives many new investors. Keep in mind that they(we) don't have the experiences as you seasoned investors. Therefore, the view on things like long-range outlook, risk-tolerance, etc. are skewed.
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