In contrast to buy-and-hold real estate investment, flipping offers a chance for profit without long-term commitment. Yet, fraudulent investors exploiting naive buyers have given the practice a bad name, and even resulted in prosecution. Legal methods of flipping include "fix 'n flip" or selling "as is," refinancing and leasing, buying property wholesale or in the project stage and selling your services as a "scout." See the following article from REIClub for more on this.
"Flipping" is the buzzword in real estate - flipping books, flipping articles in the newspaper, and even flipping shows on TV! What is flipping, how does it work and how you can profit? Flipping simply means buying a property and reselling it quickly, as opposed to holding on to a property long term as a rental. Flipping comes in several varieties, most of which are legal and profitable, some of which are not.
Flip Strategy 1: Buy, Fix and Flip
Let's start with the most common form - the good, old "fix and flip". This process involves buying a property that needs work, fixing it up, then selling on the "retail" market, that is, to a person who will live in the property. This method is tried and true, and works very well. You can easily make $15 - $50k on one deal, depending on your market and how good you are at finding bargains. The danger in fix and flips is either paying too much or underestimating repairs. Be very conservative in your fix-up costs and length of time it may take to resell. Also, make sure you include in your analysis the cost of paying a real estate agent to sell the property.
Flip Strategy 2: Buy, Refinance & Lease/Option
Rather than sell the fixed up property for all cash, sell for terms. Once you have completed the rehab, refinance the property at its new appraised value. If you did the math correctly, you should have little or no money in the deal. Sell the property on a lease with option to buy. The rent payment from your tenant/buyer should cover your mortgage payment (if not, consider an interest-only or adjustable rate loan that is fixed for 3 years). When your tenant exercises his option to purchase, you reap a larger profit, since you don't have to pay a broker's fee. If the tenant exercises his option after 12 months, you benefit from a lower capital gains tax rate.
Flip Strategy 3: Buy & Flip "As Is"
Don't like to do fix-up work? Consider selling the property "as is" as a light fixer upper. If the local real estate market is hot, you should be able to sell the property in poor condition just a little below market. This is especially the case with houses in "transitioning" neighborhoods. Make sure, of course, that you acquire the property sufficiently cheap enough that you can sell it below market quickly and still profit.
Flip Strategy 4: Wholesale
Strategy 1, the fix and flip, is very ...