Reality TV makes reality look pretty good sometimes. In the fixing and flipping homes market, shows on HGTV make it an appealing industry to get into. It looks fun. It looks profitable. It looks like you can set your own hours. All of these aspects could be true, but the truth of fixing and flipping isn’t as glamorous as TV makes it out to be. Newbie investors are learning that fixing and flipping isn’t always profitable.
Everyday, I run into people who are jumping into real estate investing. Even my Uber driver the other day was racing to try his luck at real estate investing. Ooooh Lord! After watching a few TV episodes, he thought he was ready. I am all for “jumping into” new opportunities and learning, but it’s important to do your due diligence; in the form of research, reading, talking with other investors directly, and studying the market. It’s not only about watching TV.
From Flip To Flop— How Investors Are Losing Money
What I learned was that fixing and flipping homes wasn’t as profitable as it first appeared. In truth, fixing and flipping can be a highly risky venture. Data from 2008 exists to back this up. Experienced investors know to not trust the numbers on the profits gained by a TV entertainment home flips. The rough numbers given do not consider many costs, and actors are usually taking home less than the story tells.
Recent data from ATTOM— a premier provider of real estate and property data— proves that money is being lost in flips and fixes. Home Flipping Report openly pulls back the curtain that the average house flip profits are decreasing steadily. The amount of ‘flippers’ using hard cash has also settled at an eight-year low. RealtyTrac quotes that 21 percent of home flip transactions show a gross profit of less than 10 percent. With numbers like that it means that, at the end of the day, these deals most likely lost money.
Tax Issues
In the past, I spent some time flipping properties and really liked doing it. That’s ok if you are an investor and find flipping “fun," but it’s important to draw the line between getting into a pricey hobby or investing for a profitable return.
The giant hole in the house flipping model is taxes. Our friend Uncle Sam takes a significant sum of the profits for flipped properties. These taxes are in the extreme ranges of 20 percent to 40 percent of the profit on the home. If home flippers did not plan for the future tax bill, they land themselves quickly in a tax crunch. No one enjoys getting chased by the IRS for $50k to $500k in back taxes.
On Spec
There is so much speculation in flipping houses. Even if you have a good grasp on the value of your property, there are still factors outside of your control. You could face neighboring foreclosures, natural disasters, interests rates, and the media. These pieces can change the ability to resell for profit within a certain amount of time. In 2008, millions last on this strategy.
My Buy & Hold Style
I love to buy and hold. I think it’s a great model. It means that when I rehab a home, I can count on a tenant who is paying rent— which leads to more money in my pocket. The income on long-term rental properties has a lower tax rate than flipping. You can also defer taxes or make tax-free returns by using 1031 exchanges or self-directed IRAs.
For me, buying and holding allows me to check off the two most important boxes as to why I invest: Time freedom and location freedom. When you have passive income, provided by a good property management company, you can achieve financial freedom and location independence in your life. Most people do not have the opportunity to do this. It’s not possible with fixing and flipping.
Fixing and flipping will always be an option, but take into consideration what the benefits will be and what you need to accomplish in your life.
