Flipping is the most basic of real estate strategies. It involves simply buying a property, fixing it up, waiting for a short time, and then re-selling it for a fast profit. This is called "rehabbing." A variation is to "wholesale" the property. In other words, you buy only the contract and then immediately sell it to another investor without getting involved in any rehabbing.

At its heart, flipping is a speculative strategy. Investors bet that the market value of a property will rise to the point at which they can make a quick profit before they close on the deal.

There's the potential for big profits, but there's also the potential for big losses. Let's look at the pros and cons in turn so you have both sides of the picture.

The Pros of Flipping

The first—and main--advantage is investing a very small amount of money for great gains. Here's a rehabbing example to illustrate this point:

Let's assume you put down $12,500 (5%) on a $250,000 house.

Then, you spend $5,000 and 60 days fixing it up and another $3,500 in payments.

So, your cash investment equals $21,000.

If you then sell the house for an $80,000 profit, the return on your investment is a great one. For that investment and two months' worth of time and money, you've made $59,000.

A second advantage of this approach is that you can do flipping full-time or part time. The part-time option can be a good way to work your way into real estate investment because you learn the rules as you go.

As I mentioned earlier, flipping is the most basic of all real estate strategies, and that means it's the easiest to learn. This leads to the third advantage: You don't have to be a real estate "genius" to get started in the field. Flipping is the simplest strategy to master.

The Cons of Flipping

To be blunt, the risks of flipping can be considerable. First, if you don't stay on top of things, the cost of renovations, mortgages and time can exceed your profit margin. You can lose money instead of making it!

Second, there's the possibility that too many speculators can get into the market. If that happens, prices can drop very quickly, and there goes your profit!

Third, if you fail to do proper due diligence, it can cost you a lot of money. Hidden property problems can turn what appeared to be a good deal into a nightmare. Bad plumbing, faulty wiring, roof problems, termite damage, etc.—they're all expensive to take care of.

Fourth, if you don't flip a property fast enough, a tax audit may result By that, I mean that if the money made off the flip doesn't immediately roll into a similar investment (another house flip), then the profit may be subject to a capital gains tax.

Finally, in some cases, you may have to pay a realtor's commission.

Types of Flippers

There are three basic types of flippers.

Scouts or "bird dogs"

This is often a route novice investors take to get into the real estate business. As the name indicates, the bird dog's job is to scout out potential deals and then sell information on those deals to investors. Investors pay scouts a fee for each deal that's closed. These fees can range from $250 to $1,000 or more, depending on the property price and its potential. The downside of being a scout is that you make the least amount of money in comparison to dealers and retailers.

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