Hi, it’s Peter Aquart from American Wealth Builders.
I’m about to write something that I KNOW make some people upset. But I’m going to share this “hard truth” with you because there are too many people who believe a lie instead.
It’s a lie that is perpetrated by the media and by so-called “real estate investing gurus” who make more money selling seats at their events than they do from real estate investing.
It’s a lie that our team hears from people VERY frequently.
The lie goes something like this… “I’ve been thinking about investing in real estate for a while but then I know someone who flipped a house and they nearly went broke, so it kind of scared me off.”
To the newbie investor who is learning from their observation of the experience of friends and family… I get it. It SEEMS like real estate investing. (After all: it has to do with houses and money… isn’t that real estate investing?)
It’s not. I don’t believe flipping is true real estate investing.
There’s a difference between INVESTING and SPECULATION. I believe that investing is acquiring an asset that you can control, which creates a predictable return. I believe that speculation is acquiring an asset that has an unpredictable return, which you try to control as much as you can but you don’t really control it.
Here’s why flipping is speculation…
Property flippers don’t know when they’ll sell or how much they’ll sell for – and that’s what makes it speculation. Let’s say you buy at $40,000, add $10,000, and plan to sell for $65,000. So you’re in for $50,000 and you’re ideally out at $65,000, a profit of $15,000.
BUT… That’s only true if you sell for $65,000 right away. What if you can’t sell for a few months? Or what if you can’t sell for the full price? Or both?
$15,000 profit can become $10,000 profit (or less) very, very, very easily.
I’ve heard of many horror stories where that $15,000 anticipated profit became a LOSS after all the carrying costs of property taxes, mortgage payments, insurance, etc.
The other part that makes it speculation is when you get the returns. With an investment, the time you get your returns varies. But with speculation, you lock up your capital to acquire the asset then you’re almost always stuck with your tied-up capital until you can sell. (Yes, there are exceptions but I’d say this is true for nearly all the speculative investments out there – real estate, stocks, funds, art, wine, collectibles, etc.)
Granted, the one aspect that makes flipping more like investing than, say, owning a piece of art, is that you can “force the appreciation” (increase the resale value) through strategic choices. And it often looks like BIG money.
Problem is: what do you have to do to get that money? Well, unless you have a team working for you (most don’t), you’re doing the work yourself. Which means: blood, sweat, tears, and time. You’re taking on a job.
Let’s get down to some real details here to dig in and illustrate. (I’ll use some example numbers, so the exact numbers in each situation might differ but you’ll get the idea)…
Let’s say you have $50,000 and you want to invest it in real estate.
Here are 2 options for you:
Flipping: you spend months trying to find a property that you can buy at a discount. Finally, you acquire a property for $40,000, you add $10,000 to it to force the appreciation, and then you try to sell for $90,000 (let’s get really aggressive to make some money, right? To get there, you’ve tied up your capital and have to wait for a return and, meanwhile any additional expense from the property is eating away at that anticipated profit of ($90,000 – $60,000) $30,000 anticipated profit. Plus, you have to find the money somewhere, since you invested it all up-front. Finally, you get an offer and by the time the offer closes, minus the carrying costs and such, you’ve made $20,000. Seems like a big chunk of money, right?
Oh, and to get all of that, you had to work your butt off: demolition, shopping, installation, problem solving, dealing with contractors, etc. Probably doing all of this on evenings and weekends so you don’t disrupt your job.
In total, it took you 6-8 months of effort, from acquisition to renovation to sale.
Turnkey rental: you call us and ask to invest $50,000 into a turnkey property. Within a week, you could own that property in your portfolio. A month later, you could get your first check — $650. A month after that, you get your second rental check in your account — $650. About two and a half years in, you pass the $20,000 mark.
Sure it took basically 2 years to get to the same amount, but now let’s compare the differences:
- With turnkey investing you start getting your returns right away.
- With turnkey investing there is no demo, renovations, shopping, installation, or dealing with contractors.
- With turnkey investing the returns are predictable – they’re not a big unpredictable hit all at once but they’re predictable month after month (or quarter after quarter, depending on what you have set up).
- With turnkey investing you’ll reach and surpass the equivalent ROI you’d get from flipping… but then you’ll keep going. In the example above: 5 years later, you’ll have doubled your returns. And it just keeps going and going.
- With turnkey investing you don’t have to devote hours upon hours of effort to get the return – this is a hands-off investment that funds your lifestyle rather than requires you to sacrifice your lifestyle to get it.
Is flipping “investing”? Some would say yes but I’d say no.
I’d much rather have controllable, predictable, ongoing cash flow that gives me the time to do what I want.
If you’re thinking about flipping, or if you’ve tried flipping (or know someone who has) and you don’t want to deal with that nonsense, give our team a call before you do anything. Let us do a side-by-side comparison to see what makes sense for you.
Chief Operating Officer
American Wealth Builders
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