By Peter Mastrantuono
Home prices are near record highs. The median existing home sales price jumped 13.3% in September year-over-year. This very hot real estate market has excited the imagination of many Americans to consider buying homes and flipping them for a quick profit.
While flipping homes for fun and profit is tempting, there are a number of advantages and drawbacks that individuals need to weigh before diving in.
The Allure of House Flipping
Flipping a property offers a number of potential benefits, including:
- The Opportunity for a Quick Profit. The ideal scenario is that a buyer closes on a property, makes some small to moderate improvements and resells the house months later for a higher price. These profits can be outsized, depending upon the amount of the initial capital investment and the degree to which a home’s curb appeal and interior features have been improved.
- A Learning Experience. House flippers need to understand the local real estate market, as well as various aspects of repairing or renovating a property. This education will have lasting value, helping individuals to become smarter about future investments and in buying their own home.
- A Sense of Accomplishment. Few things feel better and do more for self-confidence than taking a proactive step to becoming more financially secure, overcoming challenges and succeeding.
The Potential Pitfalls of Flipping
Flipping property is a high-risk business. Chief among these risks are:
- Risk of Financial Loss. There are plenty of ways that house flippers can lose money. House prices do not go up forever, as we all learned in 2008. Conditions on the ground may change that alter the attractiveness of a neighborhood. There may be unanticipated expenses that could eat into expected profits, while capital gain taxes may also reduce the net gain of any transaction.
- Holding Costs Can Mount. During the period of ownership house flippers face an array of expenses, like a mortgage, property taxes and maintenance costs. And perhaps the biggest holding cost is the sale price reductions that may become necessary the longer a property remains on the market.
- Requires Physical Labor. To preserve potential profits there are many improvements that house flippers will choose to do themselves. Painting, cleaning gutters, tearing down an old shed, etc. require hard manual labor.
- It Can Be Stressful. Flipping a house is not a TV show that has a beginning, middle and happy ending, all in one hour. Deciding on the right house, dealing with contractors, obtaining financing and finding a buyer can all be stressful experiences.
- It Can Be Time Consuming. Many individuals view house flipping as a sideline activity. In fact, it may require a considerable amount of an individual’s time—time that may not be available to most people.
Before Taking the Leap
If you are considering house flipping to improve your financial security, talk to an experienced real estate agent to get a better understanding of current market conditions, and do your research about buyer preferences in your area. Then speak with your financial advisor to find out what worst case scenarios may do to your long-term financial goals.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.