Risks and Rewards of Flipping a Property

You should always know the risks and rewards of flipping a property. It is a riskier type of investment and the rewards can be great if everything goes according to plan, or it can become a horrible mistake if the plan goes south. Here are some things to consider.

Advantages

1. Quick Profit

The main reason people enter into a real estate flip is with the hope of making money quickly. If done correctly, a real estate flip can provide very large profits. These returns can be achieved in a very short period of time.

2. Gain Experience

Through repairing, renovating or remodeling a property, you will gain insight into aspects of construction. You will start to understand the costs of materials and various plumbing and electrical repairs. You will learn how to spot big issues such as structural problems and environmental hazards like mold and asbestos. This construction experience will help you make more money on future projects because you’ll know how to best budget a deal.

You should always do your market research before actually purchasing the property. You should talk to Realtors in the area, browse ‘for sale’ ads and look at houses that have recently sold. This should give you a good idea of what people are looking for in the area. A modern design may be popular in one part of the country, while a traditional design is the winner in another. This is why you must always do your research and target your renovation to your local market.

Once you put your first flipped property up for sale, you will gain even greater insight into what buyers in the area are looking for. Take notes on what they like and don’t like so you can make the necessary adjustments in your next, and hopefully even more successful, flip.
You will learn to budget for unexpected costs such as building permits, construction delays, delays in delivery of materials, contractor disputes, and holding costs when you are unable to sell the property as quickly as you had hoped.

Flipping a property will help increase your knowledge of the real estate industry in general. If you are buying your first short sale or power of sale, you will learn the ins and outs of the process as well as various financing and refinancing options available to you.

Disadvantages

1. Losing Money

The main problem with flipping a property is when a flip becomes a flop and you lose money. There are many factors which can contribute to this loss including:

2. Unanticipated Expenses

This includes everything from building permits, contractor delays, material delays, permit delays, and renovations and materials you had not budgeted for. These expenses quickly add up and eat into any potential profit.

3. Higher Taxes

Once you have completed renovations on the property, the city may increase your property taxes. This will affect you if you have difficulty finding a buyer and have to pay the taxes yourself, or it can impact buyers who may rethink purchasing the property because of the higher tax bill.

4. Losing Your Profit to Taxes

Any profit that you make on an investment property may be subject to capital gains taxes, and depending on whether you owned the property for less than or more than one year, your capital gains rate will vary.

5. Holding Costs

Even after renovations are completed on the property, you will have to pay the mortgage (assuming you have a mortgage on the property), taxes and insurance on the property for as long as you own it. These costs take a large chunk out of the budget, and the longer you own the property, the more money you are losing. You will also have additional maintenance costs as the yard will still need to be cleaned, the grass will need to be cut, and depending on where you live, the snow may need to be plowed.

6. Difficulty Selling

You are losing money every day you are unable to find a buyer for your property. Because you must pay the holding costs on the property, the longer it takes to find a buyer, the more money you are losing. In addition, the longer the property sits on the market, the greater the likelihood that you will have to reduce the price, which will eat into any anticipated profit.

7. Stress

Stress is also a main drawback of a real estate flip. From finding the right property, properly anticipating the costs involved, dealing with contractors, Realtors and the town, trying to meet your deadlines and finding a potential buyer, stress is your constant companion when flipping a property.