Flip That Channel

With television shows such as A&E's Flip This House, TLC's knock-off, Flip That House, and the lamest one of all, Flippin' Out, it's no wonder so many people became overnight real estate investors. These programs show investors from all around the country making $25k, $50k, and even $200k per real estate flip. It mades home renovation and real estate investing look as easy as going to your local grocery store, buying a cake and baking it. The Hollywood version of flipping houses, while entertaining, does not paint a full picture of buying and selling for a short-term profit. Here are five things you should know that Hollywood doesn't tell you...

1.) I've been in real estate for nearly a decade and have been involved in hundreds of transactions. Throughout this time I have never seen a four line balance sheet. On the flipping shows, you see four items: Purchase Price, Budget (Repairs), Total Investment, and Sales Price. The investor buys a house, gets an repair budget, makes improvements, and sale sit for a profit. This gives the false impression that real estate investing takes no financial planning, just simple adding and subtracting. When in fact, there are hundreds of cost expenses you need to take into consideration prior to making a real estate investment. Buying real estate short-term makes the deal that much more speculative and every expense should be looked at with a microscope.

2.) You make your money when you buy! If you pay too much for a house, it doesn't matter how many improvements you make, you will be lucky to break even. The glorified T.V. programs never mentions the investor bought the property for 30-50% below market value and how he went about acquiring it. Few people have the resources or knowledge to find such deals. Many first time investors from all over the country have made the mistake of buying property at or just below market value with no profit margin. They already lost!

3.) On the four line profit and loss statement on these shows they never mentioned short-term capital gains (or any capital gains for that matter). When you purchase real estate as an investment and hold it less than one year, you will have to pay a short-term gain on your profit. The short-term capital gain will be taxed as personal income. The tax rate will depend on which tax bracket you fall. Say goodbye to 28% to 44% of that profit on your line 4 of the A&E P&L!

4.) The Cost of Borrowed Money: Many real estate flippers take out what is known in the mortgage industry as a hard money loan. These are short-term loans in which the property is used to qualify more so than the borrowers credit/income. Hard money lenders usually only lend up to 70% of the after repaired value. For example, let's say you buy a property for $50k and after you make your improvements the home will be worth $100k. You can get a hard money loan for up to $70k, giving you $20k for your improvements. While easy to obtain, they are high-risk, high-interest loans. Investors pay up to 18% interest and up to 3 points for origination. It's very expensive, but sometimes cheaper than bringing on a 50/50 partner. The cost of money is never associated with expenses in any of the house flipping shows.

5.) Closing Costs: When you buy a home you typical pay between 2-3% of the purchase price in closing costs. Fees including loan origination, property taxes, escrow fees, recording fees, etc. When you sell a house you pay real estate commissions (up to 7%), title insurance (approx. 1%), prorated taxes, escrow fees, recording fees, and other miscellaneous expenses. I guess there is no time in the programs to mention these either. Maybe A&E picks up the tab for the featured investors. Who knows?

Investing in real estate is not for amateurs, but it's far from rocket science. T.V. show exists for one purpose: To Sell Advertising! Real estate investing is not glamorous, but the producers of these shows have done a fantastic job with their theme music and lack of financial information. If you want to get on the road to investing in real estate, continue reading articles online and buy books written by experts. These are the true real estate gurus and your time will be better spent learning real estate investment skills instead of hammering away on a bum real estate investment because you listened to real estate advice from Sam Leccima.