Television shows have made house flipping look like a super easy way to get rich quick. Every market is flooded with newbies who are sure that they have the knowledge and skills to make it big as a flipper. But what a real seasoned real estate investor can tell you is that these flips are not really where the money is waiting. And in a lot of cases, the flippers are getting in way over their heads and are losing so much on their first deal that they quit the business after the first purchase.
Any real estate investor will tell you that the numbers that you see on TV are far from the real financial facts. The latest reports on home flipping show that investors are making less than a 10% profit and not the 25% or more that you see from behind the camera. And they never tell you that a full 8% of flips are actually sold for a loss. And that is not just on the total investment but below what the purchase price of the home was originally.
Taxes are another aspect of flipping that most investors don’t know about. The government takes as much as 40% of the profit from a flipped property. So if you are trying to grow your business and reinvest all of your profit on the next property, then somewhere you need to find that 40% when it comes time to pay your taxes next year.
The smarter business model for real estate investors is looking at a buy and long term hold on properties. This lets you invest in renovations and then enjoy the benefit of a quality tenant who not only pays rent on time but also takes good care of your property as it appreciates. In addition, the tax rate on a long-term rental is far below that of a flip and you can take advantage of 1031 exchanges or self-directed IRAs to defer more tax liability.
And the final benefit from maintaining long-term ownership is the passive income that continues long after the research, purchase, and renovation are completed. There is no security like that offered from house flipping as you are always working to meet a deadline and then rushing to find the next great deal.