While we’re most pro fix & flip here, there are certainly some reasons people wouldn’t want to get started—or at least be aware of the potential downside.
Fix & flip businesses are my favorite types of real estate investments and our client’s primary bread and butter here at Do Hard Money. If you’ve ever seen any sort of reality show that centers around some cute married couple installing beadboard walls in a home they’re going to sell, you’ve most likely seen a fix & flip. But is it really that easy, or is there a catch? What are the pros and cons of fix & flip investments?
The biggest pros when it comes to house flipping include the high potential for profits, the ease at increasing your equity, the unlimited inventory, and the ability to improve the appeal of your town. The cons involve the volatility of the market conditions, the high level of risk, and the extended amount of time you’ll have to hold onto a property before listing it on the MLS.
But that is such a quick run-over that there’s a lot of nuance missing for each of these points. So let’s get into this more and talk about what a fix & flip is, how much money you can make, and the positives that come along with running a house flipping business. Plus, I’ll also give you the biggest considerations you need to be aware of before jumping into your first fix & flip so that you’re able to understand what it’ll take to become successful. Let’s dive in.
What is a “Fix & Flip?”
First, let’s clearly define what I mean by “fix & flip” as a real estate venture since there are multiple ways you can build a real estate investment business that doesn’t necessarily involve flipping.
Fix & flip is the term used for real estate investors who buy a property for less than it’s worth, spend money and time to renovate it, and then sell it for an increased price due to the rise in value (“flipping it”). If you’ve seen HGTV, then you’ve probably seen a fix & flip business.
Fix & flips are not rental properties and are typically residential properties, though it’s possible to flip commercial spaces; however, you’ve got to know the different expectations exclusive to commercial real estate.
Essentially to successfully fix and then flip a property, you’ve got to “buy low, sell high.”
What Are the Other Types of Real Estate Investments?
If you’re curious what the other ways you can become a real estate investor are, they include:
- Wholesaling – Getting a property under contract and selling the contract to another investor.
- Renting Properties – Either investing in single-family or multi-family properties for the purpose of keeping ownership while renting them to tenants. I’ve been renting properties since I was 20 and have a great system for keeping tenants 5+ years which keeps my revenue stable and lets me grow my business quickly.
- Commercial Real Estate Investing – Both flipping and renting, but I consider commercial property investing its own category solely because of the expectations you’ll need to have in commercial real estate and how different it is from residential.
The Pros of Fix & Flips
Okay, now that that’s out of the way, let’s talk about the good side of having a fix & flip business. Granted, your mileage may vary, and none of these are guaranteed, but overall it’s safe to expect that you’ll have these perks:
- The High Potential for Profit – Needless to say, the possibilities for profit with fixing and flipping homes are endless, and that’s precisely what attracts so many to this type of investment. Rehabbing and reselling homes really does open the doors to financial freedom, providing you with a cash flow that is much larger than the average 9-5 office job can yield.
- Immediate Equity – When you purchase a fixer-upper, you build immediate equity, also known as “forced appreciation.” Both your equity and your investment can skyrocket in value because:
- You will be investing your money in an item that historically appreciates in value.
- The more the property appreciates due to both the nature of real estate and the amount invested for renovations done, the faster your equity grows.
- Less Competition – Depending on where you go to find properties, there is significantly less competition for fix & flip homes than for “retail” move-in-ready homes on the market. While the majority of buyers want their rehab costs to stop at the cost of a few gallons of paint, you can slip in and purchase that neighborhood eyesore for a steal.
- Essentially Endless Opportunity – The beauty of investing in the real estate market is that inventory is constantly being replenished with new opportunities. If you feel like you’ve missed “the” investment opportunity of the year, chances are there’s an even better deal right behind it.
- There’s a Feel-Good Factor About It – This might be more of a “soft” positive for house flipping, but it’s worth mentioning. While it’s true that you’re earning an income selling homes for an increased profit, that doesn’t mean it’s unethical to be a house flipper. In fact, I’d argue that flipping properties is one of the better local businesses to have since you’re contributing to the improvement of your town and restoring once-loved properties by giving them a new life.
How Much Can I Make Flipping Houses?
One of the questions I get most often is, “how much can I make doing fix & flips?” Frankly, it’s a tricky question to answer (though I get why people want to know) because there are so many variables at play. You’ve got to consider your costs, timelines, overhead, and all the other fun things that come along with being an entrepreneur.
That said, there is some data out there for what you can expect to earn in terms of your salary once you’re an established flipper. Here’s what we’ve found to be the average income of house flippers in the United States:
|State||Average Reported Yearly Salary (2020)|
Wow, Can I Really Make Six Figures Doing Fix & Flips?
Now, before you jump into this with dollar signs in your eyes, let me again emphasize that these are the incomes of experienced flippers. Your first few years will be a build-up to these numbers, so don’t fret if you’re not breaking six figures your first year.
I find the best way to hit goals like six figures is to understand what you’re going to need in terms of cold, hard numbers. Typically, our Do Hard Money clients report they make an average of $39,714 per deal. So if you’re a house flipper working in Virginia, you’ll need to buy and sell 3.05 houses every year to earn an income of $121,301.
I don’t tell you this to discourage you; far from it! Clearly, there’s good money to be made in house flipping, but it could take a few houses before that happens, so don’t get frustrated if your first few houses earn a relative trickle of money instead of a flood.
The Things You Need to Consider Before Getting into Fix & Flips
You’re probably waiting for the catch, right? Fix & flips can’t be all sunshine and puppies; what are the downsides you need to prepare yourself for?
- It’s Not Quick – Don’t quit that day job just yet. Despite what those reality shows tell you, house flipping is a long-term business, and you’ll be lucky to successfully flip more than three homes a year. A typical fix & flip takes six months to complete in the best of market conditions.
- It’s Not Cheap – Even if you’re able to find an investment property for a song, the amount of money you’ll need to invest for rehab, marketing, and your business overhead can take your breath away if you’re not prepared. You might end up needing an infusion of emergency cash quickly (which is where we can help) or have to make some tough choices to keep the lights on.
- The Market Fluctuates Constantly – Over the past few years, we’ve been in a seller’s market where the demand is higher than the supply. However, this will eventually shift back to a buyer’s market (more supply than demand) because real estate is cyclical. For the most part, you should be able to see it coming if you’re paying attention to market trends, but there are still times where the rug will get pulled out from under you.
Consider a town like Rochester, NY, which was home to both Xerox and Kodak and had a healthy housing market…until it didn’t. The market tanked pretty quickly as the companies began to move operations overseas to cut costs and stay competitive in an increasingly digital world. Imagine you were trying to flip a home right after those massive layoffs; not fun! Sadly, the city has been slow to recover even to this day.
There’s also another market you’ll be accountable to: the materials market. In the summer of 2021, you might remember the news stories about the ridiculous lumber prices, which skyrocketed 500% in some areas. What if you were installing a new deck on your investment property then? You’d need to scramble quickly just to break even or cut costs somewhere else.
- It’s Incredibly Risky – There’s no guarantee your investment property will sell for a profit…or sell at all. Luckily, since you own the home, you’ll have some options for getting your investment back, like renting it out, but then your timeline before turning a profit stretches even further.
- Flipping Has a Steep Learning Curve – There are a lot of moving parts in a house flip that you’ll need to stay on top of throughout the lifecycle of the flip. Being an entrepreneur in the real estate industry means you’ll need to know about:
- Macro and Micro Economics and how they relate to local and nationwide economies.
- Market Forecasting
- Probability and Statistics
- Business Law
- Real Estate Law
- Basic Carpentry
- Local Demographics and what they’ll be looking for in a desirable property.
Wait, don’t run away screaming yet! You don’t need to have a graduate-level education in all of this, but even scratching the surface of an education in each of these areas will help you immensely.
How Can I Find Properties to Flip?
We’ve got so many articles and resources that can help you find cheap houses that are off-market and ready for the taking. Check out how our clients use the Next Property Roadmap to consistently source deals without getting dragged into a bidding war with other investors or potential homeowners.
In my opinion, there are way more pros than cons when it comes to running a fix & flip real estate investment business. That said, it’s still critical you go into house flipping with your eyes wide open and know the risks involved.
Did I miss a pro or con you think our readers need to know? Leave a comment and tell me!