The buy-and-flip strategy can also work with existing homes that the investor can purchase from a motivated seller at a wholesale price that is below the market value. The investor may not even have to close escrow before finding a buyer willing to pay a retail price. There may be some minor cosmetic work or simple improvements needed before reselling, but typically, buy-and-flip investors really make their money when they buy at a discount and then locate a buyer at full market value. This approach is risky, but investing in rental property can also be rewarding.
This high-risk strategy requires a rapidly rising real estate market with higher than normal appreciation rates to allow for profits on short term investments. Not only do you have to have excessive demand driving up the prices of real estate, but you also have to cover all of the costs of real estate. With online stock trading firms, you can buy shares of your favorite company in minutes with relatively low transaction costs. But with real estate, the costs of buying, holding, and selling a property are much higher and unknown, and generally include
- Acquisition costs: Due diligence and inspection fees plus loan fees/costs and points
- Transaction costs: Closing and escrow fees
- Repair or upgrade costs: Costs to renovate or fix property to make it more desirable and generate the highest resale price (unless the property is brand-new)
- Holding costs: Property taxes, insurance, and any negative cash flow while the property sits vacant or if the rental income doesn’t cover the carrying costs
- Sales costs: Commissions and title insurance from the sale of the property
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