In most transactions, one side gets a financial payoff whereas the other side gets a psychological payoff. Why does this happen? Why does the rehab lose money, i.e., why does it add less value than it costs? I think the answer comes down to the concept of financial vs. It's the same way a bar makes money: They buy whiskey by the barrel and sell it by the shot. The other way builders create value is through economies of scale: They buy land by the acre and sell it by the lot. The answer is that they buy the lots at steep discounts and in some cases, they sit on the land for long periods of time and allow it to appreciate. He asked me how builders made any money if new construction was not profitable. If you didn’t get a discount at the time of the purchase, it will be much harder to make money on the flip.Įven though Gary understood the concept once I explained it, he still had some doubts. In almost every case, the reason profits are made is because the property is purchased at a discount that is steeper than the cost needed to fix it up. He showed me one of the listings and started to describe what he felt needed to be done.ĭiscounts create profits.

He had even made notes on the estimated costs of rehabbing each property. He had gone through every photo of every home. He had researched various properties in his neighborhood that were on the market and advertised as fixer-uppers. Here was a guy who knew exactly what he wanted. In my experience, most investors don’t really know what they want. I just want flips.” I appreciated his clarity of purpose. During our meeting, he told me, “All I want to do is flip houses. He had read some articles about flips and seen several flipping shows on TV. He was thinking of ways to grow his retirement portfolio and zoned in on flips. Here is a story to illustrate: Gary was a new investor who worked as a business analyst and had recently received a six-figure inheritance. Many investors and entrepreneurs have misperceptions when it comes to flipping houses.

House flipper salary