The Difference Between a Flipper and Investor
July 7, 2017 |
Founder and Executive Director, Arizona Real Estate Investors Association
The common definition to a fix and flip is buy a property, renovate and sell – ideally in a short timeframe. How do you get to the “next level” of this type of flipping? Simple: stop fixing and flipping property. Fix and flipping is an income strategy which is just another word for job. This type of strategy does not have an investment side to it. The house is the product and there is some value added to it. The product is sold for more money than what was put into it to create a profit. This same process is repeated again and again and again. If the process is not repeated, the flipper goes out of business.
An investment strategy in the real estate renovation market is different. To an investor a house is not a product, but a long-term financial outlook. An investor looks at the property and determines how many ways they are going to make money from the investment. An investor also gets paid upfront for putting the deal together and determines the ongoing cash flow as well as the overall wealth building possibilities. This is more of a passive approach versus an active approach to “flipping.”
Fix and flip is a tool for a real estate investor. By that I mean an investor uses the fix and flip strategy as a source of cash to achieve their investment goals. Profit from a fix and flip is used by an investor as a down payment on a rental property or to pay down the debt service. It is a means to a better end.
Many exceptional real estate investors do not use any of their own money except for marketing to acquire deals. When they put a deal together they bring in one or a group of other investors to come up with the funds. The investor typically gets paid up front for putting the transaction together and managing the acquisition, then they share the cash flow and appreciation of the property or just provide a rate of return. Exit strategies vary with this model of business, but for most, it is a long term hold. The transaction may be structured as a rental or a seller carryback.
For fix and flippers who use the income-based strategy for a quick return, think about using all the knowledge and success you have in the front end of the fix and flip process and start your progression towards becoming an investor. Take the skill you have in finding the deal and fixing the property to set you up for a different kind of “flip.” Flip it to a rental. Flip it to a seller carryback. Both are exceptional exit strategies that offer different options to the investor. If you need the money out of the flip, then bring in a money investor or partner.
The primary differences between the rental investment and the seller carryback investment are simple, yet powerful. With a rental property there is possibly significant rehab at acquisition to get the property rent ready. Cosmetic rehabs will likely be needed at rent turns and a major rehab every ten to twelve years. There will be on-gong maintenance and repair costs and the cost of property management to keep the investment passive – or you can manage the property yourself. The benefit is the price appreciation overtime.
With a seller carryback, the rehab at acquisition should be more of the cosmetic type. Maintenance and repair costs are the owner’s responsibility. There is no property management. While you don’t receive the appreciation, you do build in some appreciation benefit from a higher than market selling price for providing the financing.
Think about it this way. Fix and flipping is half of the real estate deal – the front end deal. Who normally makes most of the money? That’s right, the bank. The common fix and flipper might make $50,000 on the flip, but why give up a few hundred thousand dollars by giving away the back end, not to mention the financing, cash flow or appreciation value.
The seasoned fix and flipper can always move to the “next level” – the real estate investor.