These two terms are often confused in real estate where investors think they’re investing when in actuality they’re trading.
That’s what “flipping” houses is–it is the “day trading” of real estate. The goal of flipping is to purchase a property, make improvements, then sell it at a higher price for a quick return.
Flipping can be a great way to make a lot of money in a short period of time. But like day trading it is the most risky form of investing money into real estate. Flipping can also cause an investor to “lose their shirt” or in other words lose the money they put into the property plus take on debt they can’t manage over the long term.
If you’re going to be in the trading business you really have to know what you’re doing otherwise the money won’t be coming in like you thought it would.
True investing has more of a long term strategy than trading. Investing involves purchasing real estate with the expectation of holding the property for a period of time while collecting cash flow. This is known as “Buy and Hold.”
The beauty of buy and hold is that the investor can build their portfolio to the point where the cash flow from their investments suddenly begins to replace their ordinary income. Now that’s fun!
However, just like flipping, investors can put themselves in a jam if they invest in locations they don’t know, pay too much for a property, or become over leveraged.
Bottom line is put your money ONLY towards what you understand and in the locations you understand, and never over spend! If the opportunity isn’t there just wait for the next pitch.
Author – Steve Gunter is the Real Estate Team Leader and Editor in Chief for Urhous Real Estate and Media Group. Steve enjoys running, eating (especially a great slab of ribs), and although he can’t swim, going to the water park with his wife and kids.