Is house flipping actually profitable?
I thought about flipping houses as a side hustle for a while now, with the ambition of accelerating it to a real real estate investment company one day. However, I though about it, and I been calculating on it, and how much I tweak and twist, it don't seem profitable unless I expect an unrealistic ROI.
Expenses that I will have;
1. The cost of buying the property
2. Material costs
3. Labour costs (I'm including my opportunity costs)
4. Eventual costs when selling the property
After all of these costs I still need to end up with at least 10% ROI to make it as profitable as the stock exchange (investing in an index fund). So, how is this even profitable?
Is this business worth it for someone that understands the stock exchange or is it for people that want to stay out of it?
Imo it’s not worth the effort most of the time. My dads a GC and has flipped two houses in his life and made a couple hundred k on each flip but even then he admits that it’s not worth the effort and risk. The main problem you’re gonna face is working with contractors. Especially on the residential side, I would say 90% of contractors have no idea what they’re doing and will screw you over for a quick buck. They’re gonna fuck you sideways and are gonna take long af to get the work done. Now if you have a good contractor you can trust then this isn’t as big of an issue but finding a good contractor is easier said than done. Also unless you have a construction background I don’t think you’ll be able to accurately get a sense of what issues a house has. I’ve seen homes where everyone thought the foundation was fucked but in reality it was a small issue and I’ve seen other houses where everything looks fine until they start checking out what’s inside the walls. There’s always a level of uncertainty buying residential real estate which can really destroy returns. Lastly, good luck trying to find a property that you could snag up for the right price. Anyone with some cash and decent credit can buy a fixer upper so you have a lot of competition for good deals. This also isn’t to mention that most people trying to flip houses aren’t the most savvy finance wise so they will happily overpay. The residential market is very emotion driven compared to CRE which leads to valuations being super subjective when trying to exit. You might be able to exit with great returns or might get fucked and have to sell at 100k less than you thought you would. It’s definitely possible to make money but not worth it for most people.
Ah, the age-old question of house flipping! It's a bit like asking if bananas are better than apples - it really depends on your taste, or in this case, your investment strategy and risk tolerance.
House flipping can indeed be profitable, but it's not a guaranteed win. It requires a good understanding of the real estate market, a knack for finding undervalued properties, and the ability to manage renovations effectively.
The costs you've listed are spot on. Buying the property, material and labor costs, and selling costs are all part of the equation. But remember, the goal is to add more value through renovations than what you're spending, so you can sell the property at a profit.
As for the ROI, it's true that you might be able to achieve a similar return with less effort by investing in an index fund. But with house flipping, there's also the potential for a much higher return if you play your cards right.
Whether house flipping is worth it for someone who understands the stock market is a personal decision. Some people enjoy the hands-on nature of real estate and the potential for higher returns, while others prefer the more passive nature of stock investing.
Lastly, remember that diversification is key in any investment strategy. Having both real estate and stocks in your portfolio can help spread risk.
So, is house flipping profitable? It can be, but it's not without its risks and challenges. Like any investment, it requires research, planning, and a bit of luck. But if you're willing to put in the work, it can be a rewarding venture. Just remember, don't put all your bananas in one basket!
Sources: Why invest in real estate rather than the stock market?, From Real Estate Finance to Founder of Development Company - Q&A, Real Estate Side Hustles
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