Flipping is the business of buying a depreciated property, renovating it, and selling it on the open market. Most people think of houses when they talk about flipping but you can flip almost anything that isn’t valued on a mint-only basis. Mint-only valuation means that the highest possible valuation for a property is based on how close it is in its current state to mint condition. You may or may not be able to renovate a property that is valued this way.
For example, if you come into possession of an old, rare stamp you cannot “fix it up”. Its condition will continue to deteriorate and lose value. The only way for a property like that to increase in value is for similar properties to vanish from the marketplace forever.
You can flip houses, cars, businesses, Websites, and just about anything else that is “broken down” but “repairable”. The flip only works, though, if you buy low and sell high. A lot of people burn themselves because they buy too high and sell too low.
You need to have a keen knowledge of what the local market is like. Even if you are only flipping a Website that means you have to know what people are paying for the kind of site you want to buy. If the property in question is being offered at close to average market value you probably cannot flip it.
It’s easy, when you look at a house that is being unloaded for 1/3 its normal value, to go in and estimate what it will take to get it up to code. It’s not so easy, when you look at a business, to estimate what it will take to make it profitable. This is why people like to flip houses, cars, and motorcycles more than other properties. When you’re dealing with a property that experiences obvious deterioration it’s a simpler matter to figure out what needs to be done to get it into marketable condition.
A Website may come with search engine penalties or it may have been blacklisted by email service companies. That isn’t obvious deterioration but you still have to clean it up in order to increase the value of the Website.
A business may be deteriorating because it is selling obsolete products, because its neighborhood has gone downhill, or because it is being crushed by too much debt. You can replace the products and you may be able to pay off the debts but you cannot replace the neighborhood. You can only move the business to another neighborhood, but what if the business owns its property?
All of the decisions you make when flipping a property will cost you money. You’re choosing how to spend your money wisely. You want to spend as little money as possible while creating as much value as possible. Even with Websites you have to look at the design of the site, the content that is on the Website, and what you can do to improve them.
The basic formula for flipping looks like this:
Current Value + Renovation Costs + Market Equity = Minimum Sale Value
Market Equity is what you can expect the property to gain in value after you complete your renovations. Minimum Sale Value is the lowest sale point you can go in future negotiations when you unload that property. The Market Equity on many flips is usually relatively small so you have to take one more factor into consideration:
How long will it take to sell the renovated property?
Your Market Equity is your paycheck. You have to live on that and you have to invest some of it back into your flipping business so that you can continue to grow your wealth. Hence, you really have to know how to calculate Market Equity AND time-to-resale because if you gain too little Market Equity or take too long to sell the renovated property you’re losing money.
Flipping can be a really great way to enjoy your hobby if you love to renovate things, but if you want to make money at your hobby you have to think of it as a business and that means you have to think in terms of “how much market equity am I going to get” and “how long until I can make the sale”.
That is how you make money through flipping.