By Charles Sells
If you want to see a really beautiful array of pictures of fix-and-flip projects by A-lister Hollywood stars, then you should start with power couple Ellen DeGeneres and Portia de Rossi. The couple have been buying and selling real estate since 2003, and, well, because they are Ellen and Portia, those “deals” tend to end up in publications like Architectural Digest with descriptions like this: “a lavish property” and “sold to Tinder founder Sean Rad less than a year later.”
Why would you want to look at such a portfolio? Because the power couple is known for successfully flipping lots of houses and making lots of money and, of course, because the properties are incredibly beautiful to look at! Of course, there is another reason: After you read this article, you will know the truth about certain myths that success stories like this engender among real estate investors. You will also know how to turn these myths and the truths behind them to your advantage in your own investing.
It’s easy to hear about successful “flippers” like Ellen and think that big-star connections and her excess income make the fix-and-flip process easier for her than it might be for you. In fact, you might be tempted to think that DeGeneres and de Rossi do not even do their own flips; they probably just provide the capital and some lucky investor does them instead.
As a matter of fact, however, the duo not only manage a lot of the flipping process themselves; they actually leverage a time-honored real estate investor strategy of living in many of the properties while they renovate them. However, this unusual couple’s preference for inhabiting their expensive Hollywood homes while updating them just demonstrates one of the many myths about flipping that far too many investors buy into as “truth” when they are really more conventional wisdom that has gone awry.
Here, you can learn more about three myths that even experienced investors fall for when it comes to fix-and-flip deals.
MYTH #1: Living in the flip will improve your profit margins.
TRUTH: Living in the flip can cost you a bundle.
Many new real estate investors think that if they live in their real estate project, they will automatically make more money when they sell because they can dedicate all of their capital to improving the property. Unfortunately, what usually happens is that the investors start making less-than-objective decisions about said improvements and justifying the decisions by telling themselves that they will enjoy the improvements while they live in the home as well. Ultimately, the property becomes a primary residence instead of an investment property and the investors often over-improve and stay too long.
Hollywood Flip Star Example: Ellen’s Beverly Hills Compound
Loss: at least $11 million
In 2007, DeGeneres and de Rossi bought a 9,200-square-foot property in Beverly Hills, then ultimately decided to live in the property for the next five years. During that time period, they purchased three more homes and expected to double the value of the property. Instead, however, they fell prey to plummeting housing prices in Los Angeles in the wake of the housing crash and ultimately took an $11 million (or more) loss nearly five years later.
Lesson Learned: Living in a property is not a guarantee you will make more profits – or any profits at all!
MYTH #2: Flipping is for active investors only.
TRUTH: Active and passive investors can invest successfully in flips as long as they work with knowledgeable professionals while doing so.
There are dozens of real estate professionals out there telling investors who want to invest in flipping deals using passive income strategies that it cannot be done. They cite a number of reasons for this, including alleging:
- You cannot flip with capital in a retirement account;
- You have to be on-site every day if you want to flip successfully, and
- You have to have enough capital to buy the entire flip deal outright if you want to be a passive investor in a deal.
What these “experts” do not tend to mention is that it is in their best interests to convince passive investors that investing in fix-and-flip deals is not an option because then those passive investors will buy turnkey rental properties instead. Guess who is selling the turnkey rentals? The “experts” saying you cannot flip passively.
The truth is that all three of the statements above are incorrect.
- First of all, you can flip in a retirement account, although you might have to pay some taxes on the profits from that flip. It is not prohibited, however, and paying those taxes is just part of the price of using that capital to run an active business. Talk to your tax professional to find out how this applies specifically to you!
- Second of all, most successful, large-scale flippers are not on-site every day. They have trusted vendors and service providers who manage their projects and keep them informed about the progress.
- Third of all, passive investors can buy into flipping deals using a variety of strategies or use leverage to purchase a flipping property even if that deal is being done using retirement account capital. You just have to work with your financial advisors to make sure you are paying the taxes you do owe on the project and that you are adhering to the IRS rules on investing using a self-directed retirement account.
Often the people who are giving you “expert advice” on how to passively invest in deals are neither expert in the field nor objective on the topic.
MYTH #3: Passive flipping only works with high-dollar projects.
TRUTH: Passive flippers make the same returns as other flippers with the same degree of success or slightly better.
Another common myth about passive investing in flip deals is that you can only make money if you are investing in really high-dollar homes. It is easy to think that if you watch reality real estate television or get most of your real estate investing news from entertainment-based news platforms that have a vested interest in showing you only the shiniest objects available for your viewing pleasure. However, the fact of the matter is that many flips are not high-dollar relative to, say, the Santa Barbara estate that DeGeneres and Portia bought in 2017 for just over $7 million and sold to Sean Rad, founder of Tinder, for a $4-million profit a year later.
In fact, most flips are much, much smaller in scale, but that smaller scale means that successful investors can do a lot more of them. For example, six of PIP Group’s best passive profits flip deals from 2019 were single-story, low-square-footage properties that were held for a year (on the outside) and that netted double-digit returns in every single case. Many passive investors had interest in some or all of those deals, and they enjoyed cash-on-cash returns as high as 26 percent. Even better, they did not have to come up with millions and millions of dollars to invest in just one property, but were able to diversify their portfolios instead by getting involved in projects all over the Southeast.
High-dollar projects can come with huge rewards, but lower-budget deals can also snag double-digit returns and offer risk insulation, thanks to portfolio diversification.
Don’t Make Your Myths a Reality
If the truth about these common real estate myths surprised you, then you are certainly not alone. Most real estate investors who have not consulted with financial advisors who are well-versed in real estate and flipping investments have no idea that this “wisdom” is really just based on repetition instead of cold, hard facts. Before you believe myths about fix-and-flip as an opportunity for your real estate investment capital, make sure you know the truth. Otherwise, these myths could become your reality while you lose the chance to generate big returns in one of the most lucrative sectors of real estate investing today.
Learn more about fix-and-flip real estate, strong markets for this strategy, and passive flipping tactics from Charles Sells, founder and president of the PIP Group, a push-button, turnkey service provider that allows passive investors to retain 100-percent control and ownership of their investments with full transparency, by going to PIPGroup.com