What is Flipping
Flipping refers to purchasing an asset with the intent of selling it for a quick profit rather than holding on for long-term appreciation. Flipping is used to describe short-term real estate transactions as well as the activities of some investors in initial public offerings (IPO). Although these are the most common uses in finance, flipping can be used to describe the purchase of any asset that is meant to be sold in the near term for a profit, including cars, cryptocurrencies, concert tickets and so on.
BREAKING DOWN Flipping
Flipping is most strongly associated with real estate, where it refers to a strategy of purchasing properties and selling them on a short time frame (generally less than a year) for a profit. In real estate, flipping usually falls into one of two types. The first type is where real estate investors target properties that are in a rapidly appreciating market and resell with little or no additional investment in the physical property. This is a play on the market conditions rather than the property itself. The second type is a quick fix flip where a real estate investor uses his knowledge of what buyers want to improve undervalued properties with renovations and/or cosmetic changes, known as a reno flip.
Risks of Real Estate Flipping
Flipping has made fortunes in real estate, but it does seem to spawn more infomercials than it does easily replicated results. Flipping in a hot market is the riskier of the two, as hot markets can cool unexpectedly. If market conditions change before the property can be sold, then the real estate investor is left holding a depreciating asset. Flipping after improving an undervalued property is less dependent on market timing, but market conditions still can play a role. In the reno flip, the investor makes an additional capital infusion into the investment that should increase the property value by more than the combined cost of the purchase, the renovations, the carrying costs during the reno and the closing costs. Although flipping sounds simple and straightforward in principle, it does require more than a casual understanding of real estate to be done profitably.
Flipping and Wholesaling
Depending on your perspective, real estate flipping can also encompass wholesaling. In wholesaling, a person with an eye for undervalued (and therefore flippable) real estate enters into a contract to buy a property subject to an inspection period and then sells the rights of the contract to a real estate investor for a fee or percentage. This is a more formalized relationship than with a traditional bird dog, and the property in question may or may not be flipped by the eventual buyer. A wholesaler is not limited to looking at properties solely for the purpose of flipping. Wholesalers also scout income properties and longer term appreciation plays for real estate investors.
Flipping in the IPO sense is when an investor resells shares in the first days or weeks after an IPO. These investors profit off of the IPO pop that hot issues have in their early days. IPO flipping is somewhat discouraged with lock-ups and guidelines for early investors, but a new issue needs to have some flippers to create trading volume and market buzz post IPO. IPO flipping can also make financial sense, as many stocks see their highest prices in the first weeks and months after an IPO and may struggle for some time before returning to those peaks, if ever.