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July 6th, 2016 by Mark Evans
When I tell people that I am a real estate investor, or that I work at a real estate investing firm, one of the first questions they ask me is: “oh, do you flip houses?”
The question gets a little annoying after a while but I understand why people ask it – it’s because most people’s knowledge of real estate investing comes from what you see on television, and flipping shows are everywhere on TV.
So when I tell people what kind of investing I really do, I get a lot of blank stares as they try to fit what I do into their paradigm of “real estate investing”.
In my opinion, flipping sucks. I think it’s much better to buy turnkey real estate than to flip… and my plan for building my net worth does NOT include flipping.
Let me give you 5 reasons why I think flipping sucks…
REASON #1: Flipping is speculative, and that makes it no better than stock market investing. You see, any time that you buy an asset with the intention of making money when you sell that asset, you are not really investing – you’re speculating.
Investing should be thought of as acquiring an asset that produces cash flow, such as a rental property or a well-run business. Speculating is when you acquire an asset with the hope that you bought it low and you plan to sell high, such as flipping, stock market investing, and buying art or other collectibles.
For that reason, flipping is a gamble because you don’t really know IF you can sell high. I know of real estate flippers who have bought because they thought the market was going up… when it actually went down. After all was said and done, they said they broke even (but I think they lost money).
REASON #2: Flipping is VERY time and work intensive. I’ve said that flipping is like stock market investing because it’s really just speculation (buying low and selling high) but it has one advantage over stock market investing and that is: you can influence the price of the investment by making improvements to the asset.
So you knock down walls, or install new cabinets, or splash a coat of paint on. Problem is: if you want to make improvements, you have to either spend your own time doing this, or spend your hard-earned money to hire someone else to do this. Whether you do it or someone else, there is a cost to you.
REASON #3: Flipping is extremely price sensitive. First you have to buy the property low enough. The low purchase price is really the secret weapon of flipping, yet very few do this effectively – many usually just buy cheap houses that they found on the MLS. Then it’s just one expense after another until you sell: permits, contractors, raw materials, and so on.
So if an aggressive termite infestation devastated a forest in Brazil a year ago, suddenly your raw material prices skyrocket; or if the market begins heating up then contractors start costing more and spreading themselves too thin. Before long, you’ll find your costs out of control and your tight margins already tighter.
REASON #4: Flipping is a surprisingly emotional business. It’s an emotional business because at some point you will forget that you are running a business and instead you will start making decisions based on what YOU want to see in a house.
You’ll discover this when you go into Home Depot to buy counter-tops… you’ll walk past the ones that are affordable and decent-looking – you instead gravitate toward the ones that you like (hint: they’ll cost more). And you’ll battle this every step of the way – from cabinets to fixtures to paint colors to appliances.
REASON #5: Flipping is unpredictable. As soon as you buy a property, you’ll start discovering problems that you didn’t know existed before: mold or termites or wood rot. Or maybe you peel off the old carpet and wallpaper only to discover that the house is a historical artifact and now the city wants you to spend more to restore it to its original condition.
And once you’ve done all the work and sold your flip… well, you start over from scratch with an entirely NEW set of problems.
Look, there’s a reason why flipping shows are on TV: it’s because there’s a ton of risk. You can make huge sums of money… but you can also lose huge sums. It’s unpredictable, it’s emotional, it’s hard… but it makes for great television.
But that’s where it should stay – on television.
Smart investors should not seek out investments that are work intensive, time intensive, emotional, unpredictable, and costly gambles. In fact, if you get such an “opportunity” you should RUN in the other direction.
The truth is: turnkey real estate investing is BORING and wouldn’t make for very interesting television. But guess what: that’s exactly the kind of investment you should have. Something that is simple, predictable, cash flowing, and deposits money into your bank account regularly with little-to-no effort from you.
You get the investment returns and the income-replacing cash flow… and instead of swinging a hammer and sweating through a demolition, you can do whatever you want with your time – spend it on the beach or at your kid’s piano recital or sitting on the front porch with your spouse.
Flipping is a work-intensive gamble. Turnkey real estate investing is a true “lifestyle investment” that allows you the money, time, and freedom to do whatever you want.
Which would you rather have?
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