(This is the first in a multi-part series over the next few weeks.)

I recommend you stop while you’re monetarily ahead if your attitude about real estate investing is similar to how you felt tumbling down the stairs Christmas morning. Get out now before you blow serious money and time. Like any form of investing, success is contingent on a studious and disciplined approach. I don’t want to begin this series with a negative vibe talking down to you; I merely hope to discourage the dreamers. The Housing Bubble is full of stories of folks who watched a late night infomercial, decided a fortune awaited and ran out the door seeking riches with no-money-down “strategies”. About the only people who made out in those deals were the producers and performers on the infomercials.

So I’ll begin this series about real estate “flipping” by explaining what it is NOT. Flipping is NOT buying a home, holding it and hoping to sell for profit in the future. That’s called speculation or gambling and it’s how a lot of so-called investors lost their shirts during the boom. For those who did actually succeed in making money by “buying low, selling high” banking a net profit as a result of market value appreciation, that’s called good fortune or luck. And many times those same “investors” didn’t actually make as much money as they thought because they didn’t account properly for taxes and holding costs, which is a mistake even seasoned, bona fide real estate investors occasionally make when local market dynamics throw them a curve. (I’ll cover a down market in later posts.)

So let’s define Flipping and I’ll give you a home work assignment as I begin this series. My mission is to give you a solid foundation to determine for yourself whether this form of real estate investing might be a viable part of your diversified portfolio. I am not a licensed investment or tax advisor or real estate attorney. I am a licensed real estate agent in Virginia and co-owner of BuilderFish, a Class-A contractor in Virginia. We help flip investors by performing the work and also coaching about which improvements would be suitable for a given project (i.e. we help you avoid blowing your budget). I encourage you to seek the counsel of other professionals before deciding to take the plunge. Ok, enough of the lawyer stuff.

Simply, flipping is:

• buying a home at a discount
• repairing/modernizing the property
• accounting accurately for all of your acquisition, holding and construction costs
• and selling at FAIR MARKET VALUE for a profit, generally around 20 percent depending on the local market, subject property and other variables.

The successful flip investor buys low (often with cash for a quick close), improves the home relative to the neighborhood/area and sells for a fair net gain after ALL expenses including taxes. (Don’t forget to talk to your CPA before committing.) If the numbers don’t work beforehand, you walk (before making an offer on the property!)

If you only remember one thing, flipping is market appreciation neutral. That means your profit isn’t contingent on a market price increase. If you realize a property value gain, great! But that’s the cherry atop the cake. In a down market, you must strategize based on a falling market value while you hold the property. Regardless, a disciplined (you’ll see me use that word a lot) flip investor runs numbers and considers the sanity of the deal based on ZERO value appreciation.

I’ll stop here because I truly hope you remember that main point, that your net profit is not determined by increasing market value.

Here’s your homework if you choose to accept it. There are many books about real estate investing and flipping. Jonathan and I recommend two in particular because each covers fundamentals from each step of the entire process: Flipping Houses for Dummies and Flip: How to Find, Fix, and Sell Houses for Profit. Both are highly rated by reviewers on Amazon and you can purchase each used for under $10. If you’re just dipping your toe in, either choice is a clear, quick read and I recommend you get both. The only complaint I saw on Amazon is by some seasoned investors who feel the books are too basic but I disagree and am unclear what information they sought. Read the reviews yourself.

I haven’t decided what my next post will cover, probably holding costs because understanding those is critical to a profitable flip, but I’ll soon write about construction considerations. Another mistake flip investors make is over-improving a home for a given neighborhood or trying to revive a dump from the dead. (Some homes are better off bulldozed although we’re obviously missionaries for recycling houses!)