Learning the Difference Between Flipping and Real Estate Investing

Posted @ 8:11 pm - Filed under 1031 Exchanges, Depreciation, Flipping, Investment Lessons, RE investment strategies, San Diego Property Owners

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 at your backyard BBQ.

They very rarely retire well at all. They hit 50 years old or so, then realize the sun is setting quickly on their chances for a stellar retirement. It’s not a good feeling. I’ve consulted with several 50-something flippers in the last several 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 — often a fairly expensive prison to boot.

Please don’t misunderstand me — I think flippin’ properties is a great way to get a real estate investor started — given the right skill sets and a solid Purposeful Plan. What happens though, is they get hooked on the relatively easy money. (That chuckling in the background comes from flippers reading ‘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. Oh, but we’re buying property ‘at the bottom’ after years of downward spiraling prices.

Ask the flippers who bought stuff a year ago ‘at the bottom’ of the market. For the investor, it’s no big deal cuz they’re in for the long haul. They’re still buying at historical lows. Not you though, unless you strike oil while digging post holes, you’re up the creek without a paddle.

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.

It has to.

Note: I speak with empathy, ‘cuz I’ve been there lived that. Could only afford In ‘n Out Burgers though, not Sizzler’s.

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 — slowly but surely into two comma country.

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, soon.

Gotta situation goin’? No? Things turning out well for ya? Excellent! Have you possible held on to your income property too long? That’s a question for which the answer doesn’t always come quickly to many investors. Call me at 619 889-7100 and get an answer that makes sense for your circumstances. Have a good one.

This entry was posted on Wednesday, August 26th, 2009 at 8:11 pm and is filed under 1031 Exchanges, Depreciation, Flipping, Investment Lessons, RE investment strategies, San Diego Property Owners. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.