From Los Angeles to New York, house flippers made an average profit of $67,900 through flips. It is important to know the pros and cons of flipping houses to make it a profitable venture.
Read our guide to know what can guarantee your house flip success.
Key Takeaways
- Flipping is a short-term investment that can generate high profits quickly, if done right.
- Flipping is a safer investment compared to stocks and bonds.
- The property can become a money pit if you don’t inspect it thoroughly before buying.
What is House Flipping?
House flip is a business strategy where an investor buys a property, fixes it, and resells it for a profit. House flipping is a short-term investment strategy with the goal of selling the house quickly after it has been renovated.
Real estate investors usually look for distressed properties that are put up for auction or are pending foreclosures.
Pros and Cons of Flipping Houses
Flipping as a trend has continued to gain speed since 2005. But is flipping a good business strategy for you? Let’s look at the pros and cons of house flipping.
✅ Pros of Flipping Houses
1. You Can Make a Quick Profit
Based on current data, successful home flippers can make an average of 26.9% profit on flips. Some factors that play a role in maximizing your gains are:
- The location of the property.
- The condition of the housing market.
- The mode of buying the property.
As an investor, you can choose a property based on the available capital and the amount of effort you are willing to put in.
Flippers favor foreclosed properties as they are almost always priced lower than the market value. Although there is a slight dip in foreclosure activities, it is still 18% higher than last month and can add to your profits.
That being said, it is crucial to conduct a home inspection before investing in any property to minimize the risk of it turning into a money pit.
2. You Have Complete Control Over the Process
House flippers have absolute autonomy over the entire process. You decide how much time, effort, and capital you want to invest in the flip.
However, with great power comes great responsibility, as you still have to manage the process to ensure profits.
3. You Will Develop an Understanding of Buyer Needs
With every flip, you will learn more about changing buyer preferences, and their behavior, down to the specific requirements in your chosen area. The benefits of this are manifold.
- It will help you develop repair plans and optimize expenditure, increasing profits.
- Flipping will improve the chances of a faster sale.
- It will bolster your confidence for future flips and help you spot opportunities.
Buyer needs and preferences evolve with time and depend on various economic and environmental factors.
For instance, there was a sudden increase in demand for home offices and exterior amenities following the COVID-19 pandemic. Moreover, buyers were willing to pay more for features that eliminated dead spaces and added utility, even as they tightened their belts.
4. You Get Opportunities to Network
When flipping houses you get the chance to connect with many real estate industry professionals, including contractors, lenders, and real estate attorneys. This can be a great way to get exclusive off-the-market deals to sweeten the pot.
You can also connect with potential investors to partner with in your future projects. This can help you take on larger, more challenging projects that require more capital.
While you may have to share your profits when partnering with an investor, you will also share related risks and responsibilities.
You can also meet motivated sellers who want to unload their properties at real estate seminars, auctions, and other real estate investor events.
5. Flipping Is a Safer Investment Option
Flipping can be a safe investment option as your investment is secured by the asset. Even if the property value lowers in a down market, it will be for a short period of time. Moreover, the real estate market is more predictable, and an abrupt crash is unlikely.
For instance, despite the slow and grim condition of the real estate market in 2022, home flippers generated an ROI of 26.9%.
The risk is further reduced by the short duration of the investment when flipping. The idea is to repair and sell the house as soon as possible for maximum profit.
6. You Can Turn It Into a Full-Time Career
Consistent efforts and networking can help you make house flipping a full-time career. The average annual pay of a full-time house flipper in the US is $78,000 and can go as high as $127,000. However, there is no ceiling to how much you can earn on successful flips.
When flipping houses as a career, you can be as involved as you wish. Moreover, with more time in hand, you can take up more projects and pay more attention to detail.
❌ Cons of Flipping Houses
1. Unforeseen Expenses May Eat Away at Your Profits
A house flip is bound to have additional expenses. However, it can quickly become a money pit if money if you don’t budget the expenses.
One of the rookie mistakes you must avoid is not inspecting the house thoroughly before buying the property or planning a flip. Biting more than you can chew can be financially draining.
Unexpected repairs will not be heavy on your pocket but also increase the time and effort required to complete the flip.
» Home Inspections: Click to know why home inspections are a must for investor buyers!
2. You May Have to Pay High Holding Costs
Holding costs include property taxes, insurance, maintenance and utility costs, and Home Owner’s Association fees. Every homeowner, including house flippers, has to pay these to hold onto the property. So, the longer you take to complete the flip, the higher will be your holding costs.
Holding costs can add to the financial burden when faced with unexpected repairs that delay the sale.
3. You May Have to Pay Higher Taxes
The repairs and renovations will increase the market value of your flipped property. The downside is that it may boost your property tax bill, increasing your holding costs.
In addition to this, you will also have to pay capital gains tax on any profits you make from the flip. The tax rate will depend on the duration of property ownership.
Is It Better to Rent or Flip Houses?
It is better to flip houses than to rent houses because it generates an active income. It can help you reap higher profits in less time if done right.
Nonetheless, it is labor-intensive and bears steep taxes.
Flipping might be your cup of tea if:
- You are looking for a quick turnaround on investment
- You want to profit from the sway in the real estate market
Renting a property generates a monthly passive income which has tax benefits. The rental income is taxed at a lower rate. You can also write off repair and maintenance expenses.
However, it comes with the risk of vacancy, the hassle of finding tenants, property management, and a bundle of legal responsibilities. Renting might be the better option for you if:
- You are looking to make a permanent investment
- Real estate form a major part of your investment portfolio
Do I Need a Real Estate License to Flip Houses?
No. You don’t legally need a real estate license to flip houses. However, it may prove beneficial if you plan to turn flipping into a full-time career.
A real estate license will give you direct and immediate access to distressed properties for sale on the MLS. In addition to this, you will also save on Realtor commission when you eventually sell the house. Agent commission amounts to 5-6% of the sale price and is the biggest seller closing cost.
To get the license, you will have to attend 90 hours of Approved Pre-License Education. This will give you a good understanding of property laws and make working with them a breeze in the future.
Is Flipping Houses a Good Idea?
Yes, it is a good idea if you are thorough.
On average, home flippers make a profit of 10%-20% of the after-repair value of the property. This makes real estate flipping a good investment and a lucrative business.
But, it is important to know the advantages and disadvantages of flipping to ensure a successful flip.
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Frequently Asked Questions
Is house flipping a good career?
Yes, house flipping is a good career. To make a career in it, you must learn multiple skills to flip a house correctly.
» How to Become a House Flipper? 5 tips that will make you a pro flipper!
How do you insure a home you are going to flip?
You need three policies to insure a home you are going to flip. These are the dwelling policy, builder's risk policy, and general liability umbrella policy. These flipping insurance policies cover any physical and structural damage to the property and bodily injury that may occur while flipping houses.
Does 1031 exchange apply to flipping house?
No. 1031 exchange does not apply to flipping houses. This is because it does not involve swapping the property for investment.
