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Flipping Properties and the Magical Disappearing Equity

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This is one topic that has made me a tinge disagreeable; the rampant popularity of television, radio, and the print media’s fascination with investment property.

For all of the concern about mortgage lending issues, sub-prime loan defaults, the declining dollar, and national and local economic woes, you would think the mass promotion of a complicated and challenging investment strategy would be tempered.

Unfortunately, this is not the case and now we are facing legions of potential investors willing to fork over outrageous sums for dilapidated or otherwise faulted properties in an attempt to make the big bucks.

I’ll give it to you straight and easy… Virtually no one makes profits greater than 5-15% on flipping properties no matter what you are led to believe. Furthermore, this profit is based upon the investment in the property, not the sales price. In other words, if you secure control over an investment property and invest $25, 000 of your capital into the project, you should only expect to reasonably profit ~$1, 500-4, 000 after all expenses are paid.

Very quickly you should see that except for that rare property that scores a fantastic return, you need to buy, fix, and sell a large number of properties to realize the returns promised on TV. This takes careful planning, lots of time, resources, and specialized knowledge, plus the willingness to deal with all of the ‘entertainment’ one finds in the real estate business. Frankly, not many of us have the internal fortitude, access to capital, and earned skills necessary to be successful as a property ‘flipper’.

In my opinion, the number one reason people are unsuccessful as investors is they do not start with their exit strategy. That’s right friends, your exit strategy dictates to you your maximum purchase price, the amount of money to be allocated to repairs and improvements, holding costs such as mortgage interest and electric bills, plus a reasonable buffer. Oh, it also should include a profit! If you are not calculating all of these expenses, and more, before you even consider making an offer on a property, then you are taking a tremendous risk.

Let’s touch on the subject of competition for these investment properties, and let’s agree that it is very fierce. There are highly sophisticated operations in every major market that tend to dominate the acquisition of prime properties. You have to be prepared to bid against operations that can lower their profit expectations on individual properties without harming their overall strategy. This means you will make even less profit until you can better compete with the pros.

In addition, you will be subject buying investment property with partners to the same market fluctuations that affect every seller and buyer in your community. You need to remember that as the number of decent investment properties that become available increases, it is a sign of potential trouble in the market and it will lower your profit expectations. You have to pay close attention to location and consider your target buyer carefully.

As you can see, flipping properties is multi-faceted and potentially extremely risky as an investment platform. Of course, there are those who do it for fun as opposed to profit and others with enough capital to absorb significant losses, but for the average investor it is mandatory you carefully evaluate your goals, your financial situation, the market, and seek competent guidance before taking control of your first investment property.

I hope you find this information useful and take the media’s assault on your financial health seriously. It’s worth repeating… virtually no one ‘gets rich quick’ with property investing. As with any legitimate investment, it takes time to build capital and the resources necessary to make it a sound investment vehicle. Please do your own research and make sure you seek professional guidance to help prevent any costly mistakes. Good luck…

Joe Hayden is a real estate Realtor based in Louisville, KY. He loves helping people achieve their dreams and goals, and especially loves tackling the complexity of real estate transactions. He can be contacted through his website, Louisville, Kentucky Real Estate. Please visit his real estate blogs here and here.

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