Flipping Houses 101: Important Basics

Flipping Houses 101:

Important Basics

Despite the fact that HGTV has once again converted its entire line-up to rehabbing and home buying shows, we’ve found there is some confusion regarding what flipping houses really involves. Since our blog focuses on investing in real estate in general and flipping houses in particular, we want to eliminate the confusion.  The purpose of this article is to tell you about the 2 types of flips and why one is better for you and for society.

What is Flipping?–The Book Definition

 ‘A type of real estate investment strategy in which an investor purchases properties with the goal of reselling them for a profit. Profit is generated either through the price appreciation that occurs as a result of a hot housing market and/or from renovations and capital improvements.’

—Investopedia

Speculating

One of the practices that gives real estate investors a bad name is that of flipping houses based solely on market appreciation.  This was prevalent in the early 2000’s in California, Florida, Las Vegas and many other areas of the country.  An ‘investor’ would buy a house on Monday and sell it on Friday for a higher price without adding any value to the transaction.  Speculators are the reason the government introduced the FHA 90-day rule.  Investing in real estate in this manner is no different than buying gold, silver, or pork belly futures for that matter.

Rehabbing

As a real investor you are looking to make profit based on forced appreciation.  This type of flipping houses involves buying a property below market value, completing repairs, remodeling, and/or upgrading the home, and ultimately selling the improved product to a new owner. Foreclosures, Short Sales, and Estate Sales are ideal for this strategy because you can often acquire these properties fairly cheap.  The more distressed the property, the better the deal you can get.

This investment strategy can be done a few ways. First, you can do the rehab work yourself.  This often leads to delays, causes additional stress, and is generally a poor approach especially if you are a part-time real estate investor.  Painting a room is not investing, it is working a second job.  Thus, the second and more recommended approach; hiring professional contractors.  Regardless, market appreciation is a bonus not a requirement.

Haters Win Too

Even if you despise humanity and take no pleasure in revitalizing neighborhoods, helping distressed homeowners, and providing quality homes to buyers; rehabbing is a better method of investing in real estate than speculating.  As a rehabber, you control most aspects of the transaction and aren’t dependent on the market conditions to make a profit.  Thus, you can have predictable and repeatable financial results.

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Erik Hitzelberger has been Real Estate Investor since 2007. While learning the ropes in the market down-cycle, he now teaches others how to use his systems and leverage other people’s expertise to achieve their own goals.

Erik Hitzelberger – who has written 194 posts on Part Time REI.

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