Flipping Out: Why HGTV is Not Real Life

A house flip is when a home is purchased, renovated, and then sold again for a profit.  Television shows (we’re looking at you, HGTV) showcase both the buying and selling process, which are often set in up-and-coming neighborhoods.  From the comfort of your living room couch, flipping homes looks like a relatively easy process.  If they can do it within a 30- or 60-minute run time, why can’t you?  

But just like any reality TV show, this portrayal is highly sensationalized and far from accurate.  There are aspects of house flipping that aren’t shown, and the risks are heavily downplayed.  Why?  Because mitigating risk and hashing it out with contractors doesn’t make for good television.  So, what aren’t they telling you when it comes to flipping homes?  In short, all that glitters is not gold. 

Numbers are Rigged

If only it were as simple as knocking down a few walls, revealing carpet-covered hardwoods, slapping on a fresh coat of paint, and pocketing tens of thousands of dollars.  The cost of flipping homes can add up, and fast.  These additional costs are often not calculated or presented to the audience, so they are misled into thinking the difference between the purchase price and the listing price is the profit acquired. 

In reality, the flippers would have had to shell out more than they disclose—and a lot of that money is paid by the studio.  These costs could include adding central air, fixing electrical issues, zoning requirements, labor fees, and raw materials.  Even on top of these costs, they would absolutely have to pay for appraisers, lawyers, and inspectors, shrinking the profit margin considerably. Some of these costs may be accounted for; some not.

Risks are Downplayed

The process of purchasing a home is not an easy task, especially in today’s market.  It requires considerable negotiation skills, detailed paperwork, and a thorough assessment of the property. One key detail that is left out of almost every house-flipping show is the amount of risk associated with both buying and selling. 

Flipper or not, all homebuyers take a gamble on whether or not they will be able to eventually sell that home for more than what they originally paid.  Many factors can influence the answer to that question, including the housing market, undercover costs, and potential issues that arise within the home.  Everything can be fixed, but at what cost?

Download our free e-book packed with valuable tips to help you diversify your portfolio with private real estate.  You’ll learn why diversification is so important to achieving stellar returns, how real estate can help diversify your traditional portfolio, the options available in both public and private real estate investing, and much more.  Get your copy now.

Timelines are Condensed

For the sake of maintaining the proper length of an episode, the time everything takes is almost comically condensed.  There are instances where the entire demolition is showcased within a day.  Proper demolition can require a large team over many weeks, not to mention extra time spent if your team runs into any hiccups along the way.  In the grand scheme of things, renovating one property could slash your profit margin significantly just by factoring in labor, interest, insurance, and other holding costs within a realistic timeline. 

As such, flipping homes is not a weekend “side hustle,” nor can it be considered passive income. You will need to be involved from start to finish, and it is going to take a considerable amount of time before you can resell it—even if this project is your full-time job.

Professionals are Running the Show

Many of these shows tell the story of a person who loves their neighborhood and wants to revive it.  Maybe they have a bit of experience in woodworking or took a few design classes back in college.  A lot of us can relate to that.  But what the average person does not have is an entire team of highly skilled professionals at their beck and call. 

While knowing a little about a lot can save you some headaches, going into this business with minimal knowledge of construction, contracts, the market, or design could eventually spell disaster.  But keeping a top-dollar team on retainer would sink your project before you ever even start.

The Reality

Finally, and most importantly, this is not real estate investing.  It’s running a business (a very expensive, highly leveraged business). When you buy a house as a flipper, you’re buying inventory.  When you renovate the home, you’re adding to the inventory’s value.  When you finally sell the inventory, hopefully at a gain, you have business income, not capital gains income.  And with that, you will be paying much higher taxes on your income.  

If you are spending Saturday night in, binging house-flipping shows is a great way to pass the time.  Just remember to take it with a grain of salt.  All of those single-day demos, high profit margins, and zero risk assessment are just for show. 

At Cira Capital Group, we help busy professionals passively invest in lucrative real estate assets by creating private real estate funds, pooling investors’ capital with our own, and investing with a world-class team of professionals.

Interested in learning more about our investments?