Evaluating Pros and Cons Is Flipping Houses a Bad Idea?

If you’re considering entering the real estate investing world, you might wonder: Is flipping houses a bad idea or a profitable one?

There are many ways to invest in the real estate market. Buying under-valued homes to renovate and sell for profit soon after is just one strategy. There are many benefits to this type of project, but—like any financial venture—risks are always involved.

Depending on how your business is handled or approached, house flipping can become a lucrative full-time occupation, an occasional money-making hobby, or a financial burden.

Let’s look at the pros and cons of house flipping to help you toward making an informed decision.

Benefits of flipping houses

Aside from the obvious—profit—let’s go over the positives of flipping houses.

Potentially quite lucrative

Not surprisingly, one of the main attractions of house flipping is the potential for significant profits. But exactly how much profit?

An analysis done by the Center for New York City Neighborhoods between 2003-2015 found that flipped properties produced a median resale profit of almost a quarter million—a 75% gross return.

They also quoted another study of nationwide home flips for the same year, which saw an average of $55,000 in resale profits—a 46% gross return.

The key to success is accurately estimating the costs involved and understanding the local real estate market where you want to buy.

Develop valuable skills

Flipping houses can help you develop a wide range of valuable skills, including:

• Project management
• Budgeting
• Negotiation
• A keener understanding of the real estate market

These skills can be beneficial not only for your house-flipping endeavors but also for other aspects of your personal and professional life.

Can evolve into full-time work

Many investors may start flipping houses on the side—but with continued experience and a (hopefully) growing list of successes, it might eventually become a full-time career.

With each bit of knowledge gained from flipping properties, many investors find that it provides more flexibility and a potentially more lucrative alternative to their traditional 9-to-5 jobs.

Help develop more available housing in your community

Buying and renovating distressed properties means you are contributing to the improvement of your local community.

Flipping existing properties has the potential to help increase the availability of quality housing, boost property values, and revitalize neighborhoods.

Diversify your investment portfolio

Adding real estate/income properties to your investment portfolio can provide diversification and balance risk—avoiding the famous adage about grouping all your eggs in one basket.

Diversification involves spreading your investments both among and within different asset classes.

A similar concept of “rebalancing” entails making periodic adjustments to maintain your desired allocation over time. These strategies play a crucial role in managing investment risk.

The core concept behind these approaches is variety. When executed effectively, asset allocation, diversification, and rebalancing can contribute to a balanced mix of performance and risk protection throughout your financial journey.

House flipping can serve as a valuable addition to your investment strategy, offering the potential for high returns while spreading risk across different asset classes.

Drawbacks of house flipping

Just because you’ve seen flipping work for other people doesn’t automatically mean it will work for you.

Possible losses

Underestimating the various costs of renovation or overestimating the potential selling price of a property means you might end up losing a significant amount of money.

Like pretty much every other type of real estate investment, flipping houses carries an inherent financial risk. It’s essential to carefully assess each project before committing to it.

Financing is expensive

Financing a house flipping project will almost always be relatively expensive, particularly if you don’t have access to traditional mortgage options. Traditional lenders are not generally open to such short-term lending proposals. 

Many flipping investors rely on hard money loans or private lenders, which often come with higher interest rates and fees than conventional loans. Some private lenders will also prefer to work with experienced flippers, counting you out if this is your first project.

First flips may not be profitable

As a new investor, you may lack the experience necessary to accurately assess the potential of a particular property or manage the renovation process efficiently.

Learning curves can be steep—leading to costly mistakes and setbacks in your house-flipping journey.

Tax implications

The profits from flipping houses are generally considered short-term capital gains—something that is taxed at a higher rate than long-term capital gains.

This distinction can significantly impact your overall return on investment and should be factored into your decision-making process.

Time-consuming and distracting

If house flipping is a side gig for you, it can quickly turn into a time-consuming endeavor that distracts you from your primary source of income.

Managing renovations, dealing with contractors, and navigating the real estate market can take up considerable time and energy, potentially impacting your work-life balance.

Market volatility

After the events of the last few years, it’s easy to see how real estate markets can be unpredictable. House prices can fluctuate rapidly and sometimes without warning.

If the market takes a downturn after you’ve purchased a property, you may struggle to sell it at a profit, leaving you with a loss on your investment.

Flipping houses vs. buying and holding

Some people may be more cut out to buy a near-turn-key home to rent out.

That’s okay too. While you won’t experience a potential windfall after a few months as you would with flipping, the counterbalance is that a lot of the risks are removed.

Buying and holding can pay dividends for many years to come as you collect rent.

Lower Risk

Buying and holding properties generally involve less risk than flipping houses, as you’re not relying on a quick turnaround for profit. Instead, you can benefit from long-term rental income and potential property appreciation over time.

Steady Cash Flow

When you buy and hold rental property, you can enjoy a steady cash flow from rental income, providing a more predictable long-term investment strategy.

Tax Benefits

Owning rental properties can offer several tax benefits, such as:

• Deductions for mortgage interest
• Property taxes
• Depreciation

These tax advantages can help offset the higher tax rates associated with short-term capital gains from house flipping.

So is flipping houses a bad idea?

The answer depends on your individual goals, risk tolerance, and financial situation.

House flipping can be a lucrative investment strategy with the potential for significant profits in the short term, but it also comes with inherent risks and challenges.

On the other hand, buying and holding properties may provide a more stable source of income with lower risk—for the long term.

No matter which path you choose, it’s smart to find a lender to finance your goals.