If real estate investment has a wild side, this would be it!
Like the day traders who are leagues away from the buy and hold investor, real estate traders are an entirely different breed from the buy and rent landlords. Real estate traders buy properties with the intention of holding them for a short period of time, often no more than three to four months, whereupon they hope to sell them at a profit. This technique is also called flipping properties and is based on buying properties that are either significantly undervalued or are in a very hot market.Profits from flipping real estate come from either buying low and selling high (often in a rapidly rising market), or buying a house that needs repair and fixing it up before reselling it for a profit (“fix and flip”).
Pure property flippers will not put any money into a house for improvements; the investment has to have the innate value to turn a profit without alteration or they will not consider it. Flipping in this manner is a short term cash investment.
If a property flipper gets caught in a situation where he or she cannot offload a property, it can be devastating because these investors generally do not keep enough cash ready to pay the mortgage on a property for the long term. This can lead to continued losses for a real estate trader who is unable to offload the property in a bad market.
Under the “fix and flip” scenario, an investor or flipper will purchase a property at a discounted price. The discount may be due to:
- The property’s condition (e.g., the house needs major renovations and/or repairs which the owner either does not want, or cannot afford, to do), OR
- The owner(s) need to sell the property quickly (e.g., relocation, divorce, pending foreclosure).
These investors make their money by buying reasonably priced properties and adding value by renovating them and attempt to make a profit by selling the house quickly at a higher price. This can be a longer term investment depending on the extent of the improvements.The “fix and flip” scenario is profitable to investors because the average home buyer lacks the time and funds for repairs and renovations, so they look for a property that is ready to be moved into. The limiting feature of this investment is that it is time intensive and often only allows investors to take on one property at a time.