33 Guidelines for investing in real estate................

Guideline #27:  Flipping is speculating, not investing..................

One of Webster's New World College Dictionary's definitions of "speculate":  To buy or sell stocks, commodities, land, etc., usually in the face of higher than normal risk, hoping to take advantage of an expected rise or fall in price; also, to take part in any risky venture on the chance of making huge profits.

One important word that Webster left out of their definition is "quickly."  In my world, the willingness to hold on to whatever it is that you are buying is what separates investment from speculation.

Way back in the 2002-2006 era, "flipping" real estate was widespread and common.  Flipping is buying a property with the intent of almost immediate re-sale for a significant profit.  A flipper has no intention of either holding or using the property, nor of adding significant value (See Guideline #26) to it.  Two situations make flipping possible.  The first is a bubbly hot real estate market.  The second is where the flipper knows something of significance the the person who sells to him does not know.

At a gathering of old college friends in 2004, I had a long discussion with a friend who was currently the owner of four condominium units in Florida.  Said friend worked as a produce broker in Cincinnati, Ohio.  He and his wife planned to retire to Florida and so invested in a condo project under construction in 2001.  They were able to, almost immediately,  re-sell that unit for a considerable gain.  Thinking they were on to a good thing, they repeated the process again, and again, and again.  When I got back to the office, I told my business partner that problems were coming.  If a Cincinnati produce broker owns four condos in Florida, for the sole purpose of re-selling for a gain, you might imagine that a lot of other people were playing the same game.  Sounded suspiciously like a house of cards to me.  If flippers are doing all the buying, are there truly enough end users available to take the flippers out?  Or, are the flippers going to get stuck owning multiple units for which there are no other buyers?  The story ended well for my old college friend.  They got out of the game in time.  The story did not end well for several whole industries.

If you believe you are reading a bias against "flipping" here, well, yes and no.  There is a time and place for it.  We have occasionally done it.  The important thing is to remember that flipping is NOT investing.   It is speculating.  The difference between the two, if you remember Webster, is higher than normal risk.  Just be careful out there.