The reality of flipping investment properties

I had the opportunity to chat with a potential new investor recently and he was discussing the possibility of flipping investment properties. He likes the idea of creating something, or just improving it, and profiting from that.

I confirmed with him that people can build wealth through buying, renovating and selling that property for a profit. However, you need to watch your costs and hope that the market doesn’t go through a downturn while you own it.

If you do decide to start flipping investment properties, it is vital to find a property that can be easily sold after the renovations are completed. I’ve seen contractors over-renovate a single family home and they get stuck with it as they are trying to set a new price in the market.

It may surprise you to learn that for any of the flippers I have worked with, I still recommend buying that 60’s bungalow. Why? The renovated 60’s bungalow with a legal basement suite has multiple options with multiple potential buyers.

What makes the 1960’s bungalow special?

1 – Property in Demand

If you decide to sell it, another investor will be happy to pick up a finished product if the numbers make sense.

2 – Legal Suites Increase Property Value

With the new mortgage rules, younger home buyers are struggling to qualify for a property. Having a legal second suite actually will not only help them qualify for that home but will seriously contribute to the monthly mortgage through rental income in the one unit.

3 – Renewal of Multi-Generational Family Homes

Multi-generational families living together are becoming far more common in this country. A legal 2-unit home allows family members to occupy the entire home, but family members can be separated each with their own dwelling unit.

So, with a renovated legal 2-unit, even in a slower market, there will always be a demand for it.

I did also share with the investor in training, that although you can make a good income with flipping investment properties, the real wealth in this industry is “in the hold”. You could do a full reno, and make your profit. I can pay market value for that property and simply rent it out and hold onto that property. Within 2 years, based on decent market conditions, I will likely build more wealth than the flipper that took on the risk and spend months of his efforts, creating the second suite.

When building a portfolio, I realize that many people don’t have the funds to constantly add properties, and flips allow investors to get those funds. But if you are in the flip model of building wealth, I offer you two bits of advice.
(1) Remember to hold onto some of the properties, refinance them and rent them out. Mixing revenue for flips, with the long-term wealth of holding onto quality assets is an excellent formula.
(2) Come year end, remember that flipping properties is a business. As a business, come tax time, you need to record this profit as EARNED INCOME. It is not a capital gain. One day you will be audited doing this strategy and the penalty will be large.