What is a Flipper?

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Definition:

A flipper is someone who buys something such as stock or real estate with the intention of selling it shortly thereafter for more money.

🤔 Understanding flippers

Flipping is common in both stock trading and real estate. In the case of the stock market, investors buy stock with the expectation that the price will increase in a short amount of time. Stock flippers are also known as day traders — They speculate on which stocks they believe will increase in price and buy them so they can sell later for a profit. A real estate flipper is someone who buys a property to sell later for a profit. Some flippers buy properties in markets where prices are increasing quickly. They believe that soon after they buy the property, it will be worth more than they paid for it. Other flippers buy properties in need of improvements. They renovate the property, which increases the value and allows them to sell it for more.

Example

Suppose John wants to get into the real estate market and decides to try his hand at flipping. John buys a house in town that’s older and a bit rundown. The selling price for the house is far lower than the market in general. John spends the next six months renovating the house, making major improvements. By the time John is done, the house is worth significantly more than when he bought it. Even when you account for the money John spent on the renovations, he still walks away with a healthy profit.

Takeaway

A flipper is like a painter…

A painter takes a blank canvas and increases its value by painting something on it. Real estate flippers aren’t exactly the same, in that they don’t start with a blank canvas. But they do usually buy an investment property and increase its value before selling it for a higher price.

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Tell me more…

What is a flipper?

A flipper is someone who buys an asset with the intention of selling it later at a higher price. Flippers often buy in the hopes that the asset’s value will increase while they own it. They may also proactively take steps to increase the value before selling.

The most common type of flipper is a real estate flipper. These individuals often buy homes in need of improvements. They renovate to increase the home’s value and then sell for a profit. Another type of flipper is a stock flipper, who buys stock when they believe the price will increase so they can sell it shortly thereafter.

What is stock flipping?

Stock flipping is when an investor buys stock with the intention of selling it for a profit shortly thereafter. In some cases, flipping occurs as day trading. This is when investors buy and sell stocks throughout the day, hoping to lock in the returns of any price increases.

The other type of stock flipping occurs in the case of initial public offerings (IPOs). An IPO is when a company sells public shares for the first time. When an investor participates in an IPO, they’re buying shares directly from the corporation, rather than from another shareholder on a secondary market. Some investors engage in stock flipping where they buy shares through an IPO and then quickly turn around to sell them in the open market for a profit.

Many companies don’t want stock flippers participating in an IPO, only to turn around and immediately sell the shares to another investor. To cut down on this practice, underwriters (the investment banks that construct the IPOs) typically limit the number of shares that can be sold in the public market in the days or weeks after the IPO. They may also refuse to sell shares to individuals who have engaged in IPO flipping in the past.

What is a flip trade?

A flip trade (also known as a day trade) is when an investor buys stock in the hopes that it will climb in value the same day. If and when the stock price increases, the stock trader will turn around and sell for a profit. Flip trades often include the following characteristics:

  • The traders aren’t investing in companies for the long-term, they are just speculating that prices will shift so they can buy the stock and resell it for a quick profit.
  • Flip trades (aka day trades) are often done with borrowed money — This is known as borrowing on margin. As a result, many day traders find themselves in debt.
  • Day trades include a high level of risk. Traders who engage in this type of buying know they might make money, but they also run the risk of seeing their investment decline in value. And if they borrow, they may end up owing more than they invested if the trade goes bad.

How do you flip stocks for profit?

Flipping stocks for profit requires buying shares and then waiting for the price to increase before selling. In the case of flipping stocks from an initial public offering (IPO), buyers are sometimes able to make a profit on these shares because of the scarcity. Investors should be aware that while flipping IPOs isn’t against the law, it is often frowned upon by underwriters and issuing companies.

In the case of day trading, there’s a lot more than goes into it. Day trading involves significant risk and a huge time commitment. In most cases, investors treat day trading stocks as their full-time job. It requires a lot of research to make the most educated decisions. This type of trading also carries the risk of significant financial loss.

Of course, even with research, no one can predict the future movements of stock prices. All investment carries risk.

How do people choose which stocks to flip?

If an investor plans to get involved with flipping stocks, whether it be through day trading or flipping stocks in an initial public offering (IPO), there are a few things they typically keep in mind when picking stocks.

First, as with any other type of investing, flippers need to have an account with a broker or brokerage firm that’s registered with the Securities and Exchange Commission (SEC).

Next, stock flippers should be prepared to do their own research into stocks to flip. There’s plenty of so-called expert advice and supposed hot-tips online, as well as seminars and classes that claim to be educational. It’s important to remember that these sources aren’t likely to be objective and generally make money by encouraging people to engage in stock flipping.

What is real estate flipping?

Real estate flipping is generally defined as buying a house, and reselling it within one year. Real estate flippers buy homes with the hopes of increasing the value and selling later for a profit.

How do you make money flipping houses?

House flippers generally make money in one of two ways. First, flippers can make money in times of rapidly-increasing home prices. This type of business model was popular during the housing bubble of the mid-2000s. During that period, the housing market saw prices increasing quickly. Many investors discovered they could buy real estate and sell it for a significant profit within a year. In fact, homes in some areas increased in value by 50%–100%. This type of flipping requires a certain type of housing market, as it’s generally only profitable if housing prices are on the rise.

The other type of real estate flipping is when investors buy a home that’s in need of improvements (aka a fixer-upper) at a low purchase price. They spend money renovating the home and then turn around and sell it for more money. Successful flippers are able to make a profit on these homes, even after they account for the renovation costs.

Is flipping real estate still profitable?

Home prices were increasing rapidly during the mid-2000s housing bubble. Investors were able to buy homes and quickly sell them at a higher price, often without making any improvements to them. In the decade-plus since the bubble burst, the housing market has stabilized. Even as housing prices increase in some areas, they aren’t rising at such a rate that would make this type of flipping as profitable as it was during the housing bubble.

But that doesn’t mean investors can’t make money flipping houses anymore. To be more successful, flipping houses today, investors generally have to add value to the homes after buying them. They’re still often able to make money. After all, most buyers want a move-in ready home without doing the work themselves. Flippers help to increase the availability of those homes.

One downside to this type of flipping is the stiff competition in the flippers market. TV shows about house flipping have popularized the practice, meaning there are more people trying their hand at it.

Another risk is buying a house that has unexpected issues, causing you to sink more money into improving it than you previously expected. This can make it difficult to sell the house for enough money to make a profit.

What are the risks of real estate flipping?

Flipping houses for profit can be a lucrative business model, but it’s certainly not without its risk. Most real estate flips are leveraged by debt, meaning the investor takes out a mortgage on the home, which they’ll pay back when they sell. This can be problematic, as there’s no guarantee of a profit.

First, the investor runs the risk of the housing market going down after they buy the property. This could create a situation where they owe more on the mortgage than the property is actually worth. The other possibility is that the investor buys and renovates the home and then can’t sell it — or at least can’t sell it at a price that would make them a profit. The other risk is that the flipper runs into an unexpected problem with the building that causes overspending and thus reduced profits or even losses

Real estate flipping can also have an effect on the economy as a whole. During the housing bubble of the mid-2000s, flipping was at an all-time high. In fact, according to NPR, 8.2% of all single-family homes sold were flipped. Not only did the flipping activity help to grow the bubble and create volatility in the housing market, but it also contributed to the rise of foreclosures that came when the bubble burst.

Real estate investors who had mortgages on multiple properties defaulted at historically high rates. These defaults helped to contribute to the economic downturn that followed.

Ready to start investing?
Sign up for Robinhood and get your first stock on us.Certain limitations apply

The free stock offer is available to new users only, subject to the terms and conditions at rbnhd.co/freestock. Free stock chosen randomly from the program’s inventory. Securities trading is offered through Robinhood Financial LLC.

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