No, we are not talking about sweet, intelligent, trained TV dolphins – for those of you old enough to remember the show …

… we are talking about people who buy a piece of real-estate, merely to (perhaps clean it up a little or even do a ‘gut rehab’ then) resell it at a (hopefully) decent profit.

On a larger scale, ‘flippers’ are called ‘developers’ or ‘property speculators’.

In all cases, we are not talking about a Making Money 101 – or even a Making Money 301 – INVESTMENT strategy, we are talking about a Making Money 201 INCOME strategy a.k.a. a true BUSINESS.

Dustbusterz says:

i was just watching your video on what it takes to earn 1 million in 20 years and how time can be the determining factor. in that video, you mentioned flipping real estate. you said you could build up to where your flipping more and more properties(using this as a business). your warning said watch out because the market could crash leaving you high and dry. but i believe( and correct me if i am wrong here) those who are smart( read educated) in real estate should never have to worry about such things as crashing real estate, because they would know exactly where to buy and when to buy and how to buy to avoid this situation. you see, even when the market is crashing ( such as is happening now) you can still find deals areas that are appreciating not crashing.that might take you out of one stater or even out of the country. but you can always find property that is going up in value. that will make you money.

It’s funny, if we had read my previous article – or even this one – a year or two ago, we would be in one of two camps:

1. I like the idea of flipping: in which case, we would be nodding “yeah, yeah … be careful … yadayadayada” all the while looking for our first/next flipping deal, or

2. I don’t like the idea of flipping: we would be reading with the idea of confirming our already ‘set in concrete’ idea that flipping is bad.

But, sitting in the current market, we’re all nodding and saying “how could those idiots not see the crash … they deserve what they got …”

The reality is that those who DO flip put themselves at risk of loss …

… but, so do those who DON’T: they run the risk of loss of missed opportunity.

My point being that there is nothing inherently wrong with developing, or even flipping; they both serve a purpose, they both generate chunks of cash where none existed before; they are both legitimate businesses for those who are so inclined.

That just doesn’t happen to be me …

Just to remind you, the problem with developing/flipping is not one of lack of market knowledge – although, you HAVE to understand exactly what you are getting into to have any chance of success – it’s getting caught out by sudden market changes.

In essence, you are timing the market – hoping that the market stays on a flat-to-upwards trajectory for the whole time that it takes to:

– Close your acquisition

– Make whatever developments or improvements you deem necessary

– Re-market the property / properties

– Close your sales

This takes weeks to months to years depending upon the scale of the project … which leads to another point; the larger the project, the more risk because time is elongated. Markets can change dramatically in just months and certainly years (weeks is another matter, entirely).

The motivator for any flipper/developer is profit – in many cases, this is their INCOME, remember? And, they usually roll one closed deal into the next bigger open deal in a rising market …

… but, we know what eventually happens to rising markets.

However, eventually even the down cycles run their cathartic course … including the current real-estate crash.

Sooner or later, the time will be ripe in most US markets – and, is certainly ripe already in some – for the flippers/developers to come back out of hibernation … or bankruptcy.

Here’s how to do better next time:

1. If you are working on single deals – this one is easy: make sure that you can rent out the property and HOLD for as long as it takes, in case you aren’t able to flip it quickly. Your only risk then is lost opportunity: while you are holding this deal, you may not be able to get onto the next one.

2. If you are working on larger/multi-property deals – develop/rehab with the idea of retaining a proportion of the units for yourself (as long term, buy/hold rentals). Obviously, you are ‘buying’ these from yourself at ‘cost’, so a profit margin should be built in.

If you plan your largest deals correctly, you shouldn’t need to worry about the market ‘going south’ on your most recent deal … you should be protected (e.g. put each ‘deal’ in a separate LLC and offer no personal guarantees, if at all possible) … this may be possible or may not.

Assuming that you can protect yourself from catastrophic loss on your latest deal, then retaining some equity for yourself (i.e. by buying a few properties out of this deal and all previous deals) ensures your long-term wealth, so that you aren’t simply rolling up all of your profits each time …

… it’s like taking some money OFF the craps table each time, because you know you won’t be able to roll the same number over and over before a 7 or 11 eventually hits, wiping you out completely.

I like to think about it this way:

– Imagine that you start with $150

– Through your first deal, you double that to $300

– Instead of buying two new $150 deals and trying to score big again i.e. to make $600 ($300 x 2),

– You split your $300 into three piles: invest one pile outside of your next deal, and buy two new $100 deals

– You split the $400 profit from these two new deals into three piles … and, so on

The next time you try anything that is speculative, try the Double-Then-Divide-Into-Three Rule … let me know how it works for you!