Understanding The Difference Between Flipping And Being A Real Estate Investor

This is a real simple one people. Flippers with at least 2-3 years experience will see themselves here, and nod their heads. They know exactly what’s what when it comes to what they do and what their real estate investor buddies do.

Ya see, even if the flipper does well, he’s paying ordinary income tax rates on his profits. And if not? He’ll get caught soon enough. Seen it too many times. Most flippers though, earn their profits fairly, pay their taxes, then move on to the next one.

‘Course they gotta take out money for themselves before the movin’ on part actually, you know, moves on. After ’bout the third or fourth one, it becomes fairly clear exactly what’s what.

Here’s the dirty little secret flippers won’t bring up while chowin’ down on the BBQ this weekend.

They very rarely retire well at all. They hit 50 or so, then realize the sun is setting quickly their chances for a stellar retirement. It’s not a good feeling. I’ve consulted with several 50-something flippers in the last couple years. It ain’t been pretty.

They’ve discovered all flippin’s got ‘em is a bigger paycheck, higher taxes, harder work, and more liabilities. And they can’t stop, or it’s back to whatever job they hated before they started flippin’ real estate. They’ve built themselves a prison with no doors.

Please don’t misunderstand me — I think flippin’ properties is a great way to get a real estate investor started — given the right skill set and a solid Purposeful Plan. What happens though, is they get hooked on the relatively easy money. Before you know it, they have more and better cars, toys, houses, house payments, boat payments, etc. Now they’re flippin’ ‘cuz they have to — just to underwrite the lifestyle. Then this silly little market correction comes along and Boom! they’re upside down or fightin’ for their financial lives. Nobody told ‘em about corrections. Ah, that’s when the chart’s arrows are pointing down, and not eternally up.

We’ve seen this in San Diego and every other town we’ve been to. You think the market’s location matters? Not to flippers. Why? ‘Cuz it’s all about buyin’ low, sellin’ high, then getting the next one up and going before the cash runs out. No steady paycheck now. Nope, Uncle Murphy took care of that pipe dream. I’ve seen folks work six months from start to finish, end up with enough to take their family to Sizzler’s, then get up early the next morning to find the next one — all in the hope that next one will turn out better. Note: I speak with empathy, ‘cuz I’ve been there lived that. Could only afford In ‘n Out Burgers though, not Sizzler’s. :)

In 'n Out Burgers

It has to.

Meanwhile their slow thinkin’ long term investment type friends, have been muddlin’ along, taking their gains slowly but surely. Exchanging up when appropriate, sheltering their day job income — or in the alternative their capital gains taxes — all the while watching their capital growth rate move their net worth into the thin air category.

Is there a strategy for the flipper to get off his deadly treadmill? Can he find a way to escape the cage he’s built for himself? Will Wally finish mowing the lawn before Dad gets home from work? Can the Beaver fix Mom’s favorite coffee cup — the one he broke gettin’ away from Lumpy?

The answers to all those questions and more this weekend.

To all the military veterans out there, and those presently serving our country — please accept my heartfelt thanks. I realize my freedom has been, is, and always will be preserved because of your efforts and sacrifice — sometimes the ultimate sacrifice. This weekend we think of you with pride, thanks, and our prayers for your continued safety.

Happy Independence Day.

This entry was posted in Capital Growth, Purposeful Planning, Real Estate Investing on by .

About BawldGuy

I'm second generation real estate, first licensed in fall of 1969. Having been mentored by several iconic brokers, I'm also CCIM trained, having completed all 200 hours back in 1980. Have successfully executed well over 200 tax deferred exchanges, many of which have been multi-state in nature. Strong points are analysis and the creation and real world application of Purposeful Plans employing several strategies synergistically. The idea is to arrive at retirement with the most after tax income possible, backed by the largest net worth.

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7 thoughts on “Understanding The Difference Between Flipping And Being A Real Estate Investor

  1. Robert Coté

    Most flippers though, earn their profits fairly, pay their taxes, then move on to the next one.

    Most professional flippers though, earn their profits fairly, pay their taxes, then move on to the next one. The last few years have been awash with amateurs who have worse than no clue but very wrong ideas. They weren’t the same animal and some of them haven’t been burned yet. They are still out there with a successful last deal looking for that flip that will break them. The market rose so much so fast even the incompetent made money giving them a false sense of mastery of a difficult business.

    There’s nothing wrong with selling to a flipper as long as that’s what you are doing. Taking back a note is not selling, it is a partnership with you as first loss target and deep pocket liable. And the other things, don’t participate in any convoluted transactions that could make you an accomplice to tax fraud. And it should go without saying never, never, never give a flipper access to the property before the check clears.

    I’m beginning to feel like the little contrarian elf that sits on Jeff’s shoulder and whispers negative things in his ear. :-(

    Reply
  2. BawldGuy Post author

    Robert — Thanks for the visual. LOL

    As anyone who reads our frequent give and take comments, we probably agree 80% or more of the time. We just couch it differently.

    Your pithy observation about the boom years flippers is on point. But my point remains the same: Whether the market is good, bad, or ‘normal’, the flipper can’t easily exit the treadmill they’ve hopped on.

    Selling to flippers? A whole different post altogether.

    Reply
  3. Joshua

    I was waiting for a post like this. Flipping is a job; simply put. Those “easy” profits should have been used the same as anyone working a corporate 9-5 by investing a portion in their long term purposeful plan.

    Reply
  4. Cher

    ‘The market rose so much so fast even the incompetent made money giving them a false sense of mastery of a difficult business.’
    I have to say a truer sentence was never uttered!, Robert.
    This is a market that makes many of us (including myself) very humble.
    A big thump from the “School of Hard Knocks” is not especially a fun way to get an education!

    Reply
  5. Michael Cook

    What about market timing. There are times when its great to flip and when its great to buy and hold. Now is a great buy and hold time, but five years ago would have been a great time to flip. Anyone who is simple enough to believe the same strategy works in all markets and is also simple enough not to take Josh’s advice above is stupid. While buy-low sell high is rarely as easy as it sounds, some times it is.

    Reply
  6. BawldGuy Post author

    Hey Michael — Long time no see. Good to hear from you.

    Yer spoiling my follow up post. :) There ARE times when flipping works very well. This post was pointing out what happens to folks who treat it as the be all end all. They end up on a treadmill off of which they can’t jump. Retirement hits, and they have little or nothing.

    Your points are excellent.

    Reply

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