Why You Won’t Get Rich Flipping Homes

I get a wonderful feeling of accomplishment from the before and after pictures and the financial reward after a successful renovation project, but the home-flipping TV shows don’t much resemble the reality of the business, and the real estate gurus that are out in full force selling books and courses telling you how easy and risk-free it is to flip homes and become a millionaire over night are looking to monetize on your ambition.

Here’s why you need to be realistic about your home-flipping expectations:

It’s a High-Cost Business

Flipping a home is a costly endeavor. It involves the input of dozens of specialists, all of whom have to be paid. No one can do all of this alone. Even if you could, it probably wouldn’t be the best use of your time and you will feel like you are really good at writing checks as there are a lot of people between you and your final paycheck.

You have to enjoy the ups and downs of turning a vision into reality. There are monthly and upfront costs to lenders and investors for the use of their money, if you choose to go that route as it's rare that anyone uses all their own money for this stuff. Even being a licensed real estate agent, there are significant expenses. The deals need to sell fast upon completion so cooperating with local buyer agents is in your best interest as they are more likely to bring a willing and able buyer. Additionally, there are attorney, contractor, material suppliers and permit/building fees as well as taxes to be paid on those services. The main point is that there are a lot of hands out when you’re doing a home flip and in the end you might find yourself asking yourself – Is this worth it? If you don’t enjoy that process, then the answer is probably not.

In order for your product to attract buyers and make for a quick sale it will need to be superior in quality and design to the competition on the market, meaning that if you are not very knowledgable/handy or have a vision for the end result you will need to rely on a lot of professionals in the business, choosing those who do quality work is in your best interest as it affects your reputation and bottom line but results in higher costs to you. It also means a lot of your business will be managing or baby sitting, assuring that no contractor/trade messes up or cuts corners on your project or even worse - just walks away! At times it can leave you feeling pretty helpless so invest in yourself by learning and knowing your stuff so no one can take advantage of you, both financially and physically.

High Risk with Possibility of Low Margins

Yes - the margins are attractive, but the devil is in the details and you need have enough knowledge and experience to be able to turn those spreadsheet numbers into reality, which is what the "guru" courses won't teach you and where most people fail.

The biggest risks are before you even step foot into the property, that is in finding and valuing an opportunity and determining the budgets and renovations for best use and return. If you’re wrong about the value of the home or if you pay too much for it, you have already set yourself back. The profits are made in this phase of the work so spend your time doing intensive research and due diligence as all that takes is your time and effort and won't cost you financially. In the end, you will never be 100 percent sure on the resale and what can go wrong from acquisition to completion as no one can predict the future but know enough to put yourself in a position to make the best educated decision while also accounting for anything that can go wrong.

Time-Consuming and Knowledge-Intensive

Many are attracted to this industry for the chance to make "passive income". If this is something you associate this industry with, flipping homes is far from a passive business as you have to be involved from start to finish as well as be consistently up to date with the real estate market trends, both local and national. In fact, at least half of the work of flipping a house is finding the opportunity in the first place. Depending on your market, it’s harder to find a good opportunity on the multiple listing services (MLS) but it is possible and if you do, you need to be very aggressive with your due diligence, offer submittal and have very liquid financing options (cash is king!). You will find that you spend a lot of time working on finding a home before you even have a home to work on. This results in many people never finding their first deal, giving up and/or walking away from the business with nothing to show for their time and money.

The best way to find success and start on the right foot is to be well rounded about a lot of different things to be able to manage the business. In my opinion, the most important knowledge required is real estate market specifics and a good understanding of construction trades and how a home is built as every deal is different and very hard to systemize, making it a difficult business to scale.