Forrest’s Blog

Who would be considered a real estate investor?  What is a real estate investment? According to Wikipedia; “In real estate, investment is money used to purchase property for the sole purpose of holding or leasing for income and where there is an element of capital risk. Unlike other economic or financial investment, real estate is purchased.”

Investors will generally fall into one of two categories; they will tend to be either long-term or short-term investors.  Long-term investors are willing to hold investments for at least seven or more years, while a short-term investor may be looking for as little as a one-day turn around time on their investment capital.  I would consider the long-term investor to be a true investor whereas the short-term investor is really a speculator or gambler.  Simply, the shorter the time horizon associated with the investment . . . the greater the risk!

What about “flippers”?  Flippers may or may not be investors at all, depending upon how they do their flipping.  Some property flippers are actually set up as a business whose primary purpose is to buy, rehab, and sell homes.  In this case, this would be considered their business and not an investment!  They want to get in, get out, and go home with each flip.  Trust me when I assert that their motivations and goals are far different from the “casual” flipper that may only ever complete one or two or so flips as a part-time hobby.  You will quickly learn that the professional flipper relies on a very structured approach to locating and negotiating the purchase of a potential “flip” property.  This business depends upon good systems and business network to identify the timeline and calculate the investment capital that will be spent on each flip.  It is imperative to develop a project management approach that keeps the entire team on-time and within budget.

The casual flipper often has a spotty track record when attempting to imitate the professional flipper.  They are often run long on both the rehab time and budget.  It is impossible to anticipate every possible hidden cost, but this is one are where experience counts in a big way.  The common project “killers” are plumbing, electrical, and insects.  These “investors” may even compound their time and budget problems by over-pricing the rehab property or even missing the market altogether.  Take the flipper who purchases a property for $455,000 and spends $50,000 and five weeks on the rehab job.  They now list the property for $589,000 and anticipate that it will be sold and closed within 30 days.  However, this property actually took five months to sell while closing at $530,000.  The “flipper” ended up before taxes with a $7,000 net gain after closing costs and expenses.   This investor would have earned about the same amount of money by investing the $505,000 capital in a simple interest bearing account at 3% for five months! 

The bottom line is that the flipper wants to Buy Low and Sell High in the shortest amount of time with the least amount of expenses.  Neither cash flow nor long-term appreciation factor in the flipper’s goals or strategies.  This results in higher overall risks which can quickly erode or even eliminate any and all potential profits to the investor.

Part 2 of this series looks more closely at the short-term real estate investor.