Why You Should Consider Flipping Houses for Profit (Instead of Investing for Cash Flow)

by | BiggerPockets.com

You have to spend money to make money, right? So when you start out in real estate and purchase your first buy-to-sell house, you are going to find yourself rather cash poor. But that’s OK! In the long run, you are going to be making huge profits. It can be hard to see at first because your bank accounts may appear depressingly empty. Signing that contract, laying down that cash, and then paying for all the repair work… Ouch! But keep your eyes on the prize — the profit will be worth it in the end, and if you persevere, you will see green.

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Why Choose Flipping Over Rentals?

Although rentals are in many ways an easier, safer, longer-term investment, I like to take my chances and invest in buy-to-sell properties. This is also called flipping houses, a process through which you buy houses, improve them (either aesthetically or structurally), and sell them on for a higher price. Alternatively, if you’re really in the know about the market, you can simply buy a property at the right time, hold onto it for, let’s say, 6 months, and sell it when the market peaks for a tidy profit without any renovating (keep in mind that this is a very high-risk game, and I strongly suggest against investing this way). Personally, I find the former a more enjoyable, more interesting, and more rewarding tactic. Before the housing crisis of 2008, house flipping was a very popular way of making money in real estate, but once the market plummeted, many people backed away from this style of real estate, deeming it too risky. Now, however, with our markets stable and strong once more, flipping houses is regaining popularity across the globe.

Why? Because it works! Yes, the first few purchases and rehabs might force you to eat Vegemite on toast a few nights. But that won’t last if you are good at what you’re doing. Remember, for every house you turn a profit on, you’re earning cold, hard cash. This is cash you can either keep, effectively making it profit, or invest in more properties to flip. The most important part of any house flip is that you are buying the right property for the right price. Keep an eye out for houses that have been on the market for a long time where you might be able to strike a deal with the seller. But don’t buy places so dilapidated that you have to spend tens of thousands just making the space live-able again. (Leave this type of property for when you have quite a few deals already under your belt). And remember that no matter how beautiful the finished house is, location always matters! Think about good districts in terms of employment, schools, and amenities when looking to buy any property.

Related: 6 Clever Ways for House Flippers to Save Big on Remodeling Supplies

Some real estate investors choose to buy and rehab houses for renters. This is fine if you have a large amount of money sitting in your bank account, but for those of us who don’t have this luxury, selling is always the best option. Although tenants will hopefully provide you with a monthly lump sum, the collected rent is unlikely to cover your personal expenses, and you will need numerous such properties in order to gain financial freedom. Now, for the vast majority of real estate investors, when it comes to flipping houses, the properties are renovated to be sold immediately, rather than waiting decades for the trickle of rental income to finally turn into a profit.

Low-Cost Housing Flips Reap the Biggest Rewards

Lots of cheaper house flips are more profitable than one large house flip. Although you can successfully flip a large house for significant cash, the time and energy spent renovating is usually equivalent to completing three or four low-cost flips. Therefore, I would recommend that anyone new to house flipping start out at the lower end of the market. Plus, these properties cost less in the first place and you’re more likely to be able to secure any financial backing you need. As the market improves, deals are harder to come by, but if you take the time to look and research, you can find them.

Once you’ve found your property, there are some types of renovation work that are guaranteed to increase the value of any house. These are:

  • Adding square footage. This doesn’t mean tearing the entire property down. Don’t! Invest in a structurally sound house that you can simply improve by converting the basement or even the attic.
  • Changing floor plans. Improving the functionality of any house layout is bound to add value and increase its market appeal (meaning, adding or removing walls).
  • Adding bedrooms and/or bathrooms. This is simple math The more people who can live comfortably in the house, the higher market price you will be able to achieve.

Related: 4 HGTV-Level Upgrades to Make Your Flip Stand Out
You might be able to buy a run-down 2-bedroom house for $60,000, but once you’ve extended the kitchen and made a large, open plan living room and put another bedroom and bathroom upstairs, you should be able to sell the property for close to $200,000. Yes, this sort of work requires more labour, more initial outgoings than just a lick of paint and re-landscaping the garden, but the profit you will see at the end of the day is more than worth the investment. (The above numbers are an example of a suburb on the outskirts of Toledo, Ohio).

Remember, it’s OK to be cash-poor at times. In fact, it’s positively a good thing. Not only does a lack of cash force you not to spend and therefore minimize the costs of a house-flip, but it also spurs you into action. If you really want to get into real estate, you’re going to have to take the hands-on approach. You’ll be a better, smarter, more intuitive investor if you have some knowledge yourself when it comes to how construction works. Learn how to plaster a wall, tile a bathroom, install basic electrics. All these skills will keep costs down and give you the upper hand when you do have the money to hire professionals. But learn how to do all these tasks well if you’re expecting to sell your house for a significant sum of money.

Conclusion

The first house you buy will be a gamble. But flip it right, invest the profit in the next property, and soon you’ll be well on your way to achieving significant profits every single time. But it is not as easy as all the television shows make it look — it takes a lot of hard work, time, and quite literally blood, sweat, and tears. Oh, and money. Don’t forget to carefully budget your renovation works before you purchase the property. Overestimate how much everything will cost, have a contingency plan, and make sure you have enough money in place to see the project through from start to finish. The last thing you want is a property half completed, unsellable, un-rentable, and draining money from your accounts. Think carefully, plan ahead, and you will succeed at making profit. Desperate times call for desperate measures so be desperate!

Do you choose to flip for profits, or do you prefer to hold for the long run? 

Let me know with a comment!

About Author

Engelo Rumora

Engelo Rumora “The Real Estate Dingo” is a successful property investor, motivational speaker and serial entrepreneur that quit school at the age of 14 and played professional soccer at 18. He is also a soon to be published author along with becoming a TV personality in his very own real estate house flipping show. To find out more go to engelorumora.com . Engelo Rumora has been involved in over 400 real estate deals and founded five businesses in Ohio. The most successful is Ohio Cashflow, a company that specializes in providing turnkey properties in several Ohio markets. The newest venture is List’n Sell Realty, a real estate brokerage based in Toledo, Ohio and soon to be known as the #1 discount broker in the country.

19 Comments

  1. Your article is very informative. When you typically look for a house to flip, what do you look for. When starting off should i find a house in a “rental” neighborhood which are more affordable, or take a higher risk with a more expensive house that still requires a lot of work.

  2. Bliss J. E. Mitton

    Many expect to make around $200/month income from their rental. One vacancy per year can eliminate this income. Rehabbing a house and getting a $20,000 profit is better. $20,000/$200 = 100 months (8.33 years) of guaranteed income. Plus, no tenants, repairs, liability or insurance and tax increases. Also, you have cash reserves for emergencies or to rehab another house. Instead to hopping for inflation you are selecting to use the time value of money. Money received now is worth more than money received later (or not at all). Cash will provide the most passive stream of money.

    Initially, selling contracts and rehabbing will move you ahead the quickest. later, cherry pick quality rentals. All along, build cash. You don’t have to do it all in the first 27 seconds. With good money management, your quality of life will improve every year.

  3. Julie Marquez

    A lot of good analyzing must be done with buying lower end houses, estimating rehab costs, and selling them at a profit. And then do the right amount of rehab in terms of additions and value add. But yes, flipping can be a fun and rewarding way to make money, especially if you have made a streamline business out of it.

  4. Dan Heuschele

    Your calculation left taxes out of the calculation. Note that for me I would see ~$11K on a $20K “profit” after taxes on the flip but I typically do not pay taxes on my buy n hold cash flow due to ability to depreciate a property. Note when I will have a property nearing the end of its depreciation period I will be 1031 exchanging it to start the depreciation over.

    Also as George Smith pointed out you need to keep flipping to continue making money. Sure you can leverage that income into a passive investment but that is no different than any other job. Buy n hold is not really passive (even when using a property manager) but with the right processes it can get close to passive for an on-going income stream.

    Also as you alluded to you can purchase a property with equity opportunity to buy n hold. For example I can purchase a duplex property and rehab the units one at a time for instant equity that matches the flipper profit but without tax consequences. Granted I can only typically obtain 70% of that equity increase via refinance but that 70% may be higher than the flipper will see after they pay taxes (due to no taxes paid on the equity taken out via a refinance) . The successful flipper would only need to be paying income taxes of at least 30% for the buy n hold to be obtaining the same money into their pocket; if the flipper is paying more than 30% in income taxes (fed and state) then the buy n hold after refinancing received more money than the flipper after taxes.

  5. Joshua D.

    Great Post! wish I could vote it up 20 times.

    We have flipped 2 houses and are currently on our 3rd so i am by no means an expert but I love the “low price point” flipping. Both of our were under 50k and sold for more the 100k. This is a great place cuz even at 7% interest our payment was still $500 a month. supper safe place to be.
    I do disagree with the title, as I much prefer my rentals over flipping as they are WAY less work once you are done buying them. But I get where you are coming from.
    Thanks for promoting this type of investing

  6. Rob Cook

    Do not forget to account for holding costs. Even if you buy all cash, the opportunity cost of those fund is a real cost. So, for example, not only do you have to accurately assess the cost of the intended renovation work, but also the TIME and DURATION of both the renovations and then the marketing to settlement duration. If you figure on 2 months renovation time, and then a 3 month marketing period once completed, and then a typical 2 month under contract period prior to settlement, you are facing 7 months of carrying costs right there. That is usually BEST case assumptions and time periods. Interest payments, utilities, and real estate taxes have to be monetized and accounted for, essentially ADDING them to your total cost of acquisition/renovation/marketing. Also, if you do the renovation work, your time should be accounted for at an appropriate rate of pay or your analysis is just BS from the start. Until ALL of these costs are accounted for, PLUS any final closing costs including sales commission paid by you as seller, you cannot calculate a “profit.” And if it drags out, the marketing time, to 6 months to find a buyer, instead of the two months anticipated, how will that affect your numbers? What if it will only sell for $85K when you anticipated and planned on a $100K sales price? Or of course, takes $25K in renovation costs instead of the $15K you anticipated? Don’t box yourself into a corner, and get bled dry before you can sell it! I will NEVER buy a flip house that I could not also rent out if I have to do so. A plan B, built in up front, just in case! You might be able to rent it for a positive cashflow, as opposed to dumping it for a $25K LOSS.

  7. Jay C.

    Everything in the above article has been around for eons. As well everyone who subscribed to that way of thinking when the great recession hit were basically wiped out. Now take the buy and hold crowd who actually has the money to buy and hold the recession was nothing but a blip on the radar. In fact we bought more homes from they types in the article above and we still own them and most of them have doubles and tripled in value. Personally I love the flippers. They buy and hold cats are boring but when the flippers get out of control us buy and hold folks can pick up there demise at a nice tasty discount. Now get out they and borrow borrow borrow and flip you some houses !

  8. Carine Mondesir

    Thank you so much for sharing your knowledge. If you decide to flip houses how much is too much to invest to buy the house. Also, Let’s say I am a first time home owner and I decide to buy the house, live in and a few months later I decide to sell it. Can people make money by selling their homes? Is this consider real estate investment/good business?

    • Wendy Hoechstetter

      Carine, “how much is too much to invest” is very subjective, although there are guidelines that say that 70% of ARV (after repair value) minus the flipping costs (which include renovations, design fees if any, and all carrying costs) is the target purchase price.

      If you’re going to live in if yourself, you should also factor in the cost of your move in and the move out, especially if you plan to live there only briefly. That could jack your expenses through the roof if you have a lot of stuff and need to use a professional mover. At the low end of the market, I can’t see that working to actually make money.

      Some people do what is called “house hacking”, which means you buy a multifamily property, say a duplex or 4-plex, move into one unit and rent the others out, rehabbing as necessary, sometimes one unit at a time, and thereby living essentially rent-free, if you buy right and the numbers work. But that’s a buy and hold strategy, not a flipping one.

      You also obviously have to consider how much money you personally have to invest, and how much you can borrow from others. You may be in the $15,000 purchase price range, while someone else might be investing millions – and I do know people who do just that.

  9. Scott Schultz

    Good article, I am currently doing 2 flips, my 19th and 20th in 7 years, i will say, it is necessary to also buy rentals, as the taxes on your profits will kill you. I ave also determined, flipping is NOT investing, it is speculating, gambling, and a Job, it puts you in the “S” Quadrant of Robert Kiyosaki’s Cash Flow Quadrants. I have also found that the Ceap houses are NOT the sweet spot, I prefer to spend a little more, and be selling to the “move up” buyer, yea it may come with home sale contingencies, but generally these buyers understand what they are doing, and dont nit pick as much. also the rehabs tend to go better, I like houses built mid 70’s to today, vs the 100+ year old disasters. I have made way more money with less work if i buy a mid range house, say buy between $60K-$160K and have an exit price from $110K-$250K vs buying a sub $50K junker and trying to make it a $99,900 list price.
    There is no secret formula to this all, no percentage guidelines to follow, its all about knowing your market, and your costs, and not over looking cost to close when you sell I.E Realtor Commissions, title fees ect. and dont forget taxes, utilities, and Lawn/snow. these are often not calculated and can dig deep into your profit. for example, buy at $60K put in $20K, Sell at $120K your not making $40K, after utilities, taxes, and mortgage costs and cost to close, you are probably looking at $28-30K and not even realize it till tax time. Good luck out there!

  10. What about houses in the 400,000 range !??? If you can buy it at 200k put 90k into itand can sell it for 400k? Isn’t that going to be a bad deal for a flip because people with that buying power would prefer custom build outs?

    • Wendy Hoechstetter

      The definition of “that kind of buying power” is very dependent on the area you are investing in. In some areas, that’s a lot of money and will buy a substantial home in a very nice area. In others, you won’t get much more than a garage in the worst part of town, if that, and obviously everything in between.

      It also depends on the demographics. There is a segment of the market at the high end in some regions where young people making a lot of money (the tech crowd, usually) and executives moving from other countries actually want a turnkey home, sometimes even down to the furnishings and even the linens and kitchenware, but in others, yes, at the higher end, people *will* want to do their own. You have to know your market really well.

  11. Heather Shannon

    Thanks for the tax info on buy and hold Dan H! I agree this only presents one side of the story for flipping vs. buy and hold and I’d like to have a mix of each.
    Engelo, I live in Chicago and I’m wondering how you define low end flips–is it based only on purchase price? Or the amount you’d have to put in to rehab it? Also, I’d love to get some of those skills you mention about doing things yourself (plaster, basic electric, etc), but don’t know where to start. I took a basic woodworking class recently, but it was more for furniture than construction. Any ideas?

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