This is why I'll NEVER flip houses...

Lots of you guys, it's Graham here. So, as many of you know, I've been working full-time in real estate since 2008 as a real estate agent, which means I'm kind of getting old now. Now, if you're doing that, I've helped my own clients flip properties for a profit, and I've even invested in six properties myself and then gone to fix them up. But I have never sold any property that I had bought for myself, even though I've had the opportunity to go and flip several of them for a six-figure profit within a relatively short amount of time.

So, here are my thoughts when it comes to this: why I don't like flipping real estate and how I believe that buying and then not selling can actually make you more money in the long run. If you just hear this out. But really quick, for those who've either watched my channel, you know that I pretty much never agree to do sponsorships. I just turn them all down unless it's the rare occurrence where a company reaches out to me with a product that I use myself, that I like, that I believe in, that I believe could help other people. And it's with that said that this video is sponsored by SimplySafe.

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So here's the first reason why I don't flip properties, and that's because it's a lot of continuous work. And keep in mind, I'm talking about investing in real estate from the perspective of an investor, not a wholesaler; that is entirely different. I'm actually going in and buying the property for myself with my own money and then fixing it up. And that is not without a lot of work. For example, it'll usually take me about three to six months just to find one property that's worth buying.

And I'm a lot more cautious and conservative than most investors, because when I buy something, I make sure, a hundred percent, I'm making money from it. I build up a large enough buffer and room for error that even if the market goes down in value, I'm still gonna make money. I'm still gonna come out ahead, no matter pretty much what happens. And finding that type of deal, by the way, is very, very hard. I have to know every single property on the market. I have to see them all firsthand. I then have to evaluate each deal individually, make offers at what I think it's worth to me, get a lot of noes, and then keep doing that until I hear yes.

And that one single yes takes a lot of time to get. And sure, if I can find a lot more yes deals, then I would absolutely be a lot more likely to want to flip them. But here in Los Angeles, where I invest my money, finding a good deal is just so hard to get that when I do actually find one, I’m so drained. And the last thing I want to do is just sell that deal. And if I did this as a flipper, it would require me to be on the lookout non-stop for the next property, just so I can have something else lined up by the time the first one is done.

Now, in addition to finding the deal, you also need to fix it up, and that presents its own set of challenges. Now, I don't mind doing one project every 12 to 18 months; that's fine. But doing anything more often than that would just drive me crazy. Any time I'm doing a renovation, I go to the job site every single day and often twice a day to make sure everything is going as planned. And just fun fact: it's pretty much never going as planned! There's always something that's being done incorrectly; there's always something that needs to be changed; and there's always something that needs some adjustment.

So, any time I do one of these, by the time I'm actually done with this, I'm so relieved that I'm just like, "You know what? I'm done. I'm just gonna keep it and this is it."

Now, secondly, if I was to flip a property, what a lot of people don't realize is that that profit is taxed as ordinary income and not long-term capital gains. And this is where it gets a little bit more nuanced, because the IRS classifies that anyone who buys a property with the intention of reselling it for a profit is seen and classified as what's called a dealer. And that means that even if you do hold the property for longer than a year and then sell it, you could still be paying taxes as though that's ordinary income.

So here's a very simple example: let's say I go and buy a property for $100,000. I then spend $50,000 fixing it up. This means my total investment in the property is $150,000. Now let's say I go and sell that home for $250,000, and that would give me $100,000 worth of profit. Now, if that profit was classified as long-term capital gains, this means I would pay about fifteen percent in federal income tax, which would work out to be $15,000.

Which really isn't that bad. But, if that income is taxed as ordinary income—and assuming that's my only income for the entire year—this means I would be taxed at an average federal income tax rate of 18.2%, plus I would pay an additional 15.3% in self-employment taxes. This means that I'm being taxed thirty-three percent as a flipper versus being taxed fifteen percent as a long-term investor. That is $15,000 less per flip.

Now here's where it gets even more interesting: let's say you bought that same property, but instead of flipping it and selling it, you moved into the property as a primary residence for two years. This means, according to the IRS, you can get up to $250,000 completely tax-free in profit as a primary residence if you're single or $500,000 if you're married, completely tax-free.

So this means, in that example, I could still go and flip that property as long as I just go and live there for two years, and that way my $100,000 is completely tax-free. You know what? The more you know.

But also, in addition to that, any time you go and sell a property, you have what's called closing costs, which will then eat into the profit that you have at the end of the day. Now, consider the last example where I'm flipping the property for $250,000. Now, anytime I do that, I'm gonna have to pay about 6% in closing costs. That includes escrow, title insurance, and realtor commissions.

So this means that even if I'm selling my home for $250,000, subtract 6% from that, and now I'm left with $235,000. Then that remaining $85,000 gets taxed at an average rate of 15.2% federally, just assuming that's my only income, plus an additional 15.3% in self-employment tax. This means that I'm now paying over thirty percent in federal income tax, which brings down my $85,000 profit to more like $59,500 after taxes.

So this means from a $100,000 total profit after paying closing costs and taxes, I'm left with $59,502. And as that isn't your only income, you're going to be paying a lot more in taxes. And also, I'm not including state income tax, as well, which means that you're going to be taxed even more depending on where you live.

So again, for me personally, taxes is a major consideration as to why I'm not flipping real estate. Now, the third reason is that when flipping property, market timing plays a huge factor in how much money you make. When the market is just constantly going up, of course it's a great time to flip real estate. And the last six years were a prime example of this. You could buy a property, and by the time you went to sell it six months later, it was already worth ten percent more than you expected.

There you go, awesome. But given the nature of flipping real estate, how time-intensive it is, and how much work goes into it, most of the time you can't afford for anything to go wrong. Often, if the market just goes down during the time that you buy it, you'll be working just to break even on your investment and just to be able to sell it without losing anything.

This is what I noticed happening to a lot of flippers lately; they overspent on a property just to buy something expecting the market just to continue moving upwards. But then the market maybe starts softening or going down, and by the time the investor actually finishes, their goal is literally just to break even and not lose any money. I've seen people work on these projects every single day for over a year just to take a 10% loss on it by the time they're ready to sell.

To me, speculating on how the real estate market is going to be doing in the short term is not something that I'm interested in doing because that is something that's totally outside of my control. I can't control what the Fed does to interest rates; I have no idea how government regulation will impact my money, and I don't want to rely on any of these external factors to determine how much money I'll make.

On the other hand, rents tend to be a lot more stable. Even if the market goes down in price, rents tend to stay about the same. This means that on a rental property, I can much more easily estimate what my monthly profit would be over the next few years than I could estimate what the home's value would be by the time I wanted to sell it.

So now, the fourth reason why I don't flip real estate is that it would take my time away from my main focus, which is working as a real estate agent and making these YouTube videos. And honestly, chances are right now my time is just better spent doing something other than flipping real estate. With that same amount of time, I can put that into my real estate agent career and just work a few extra clients.

And even if I sell an extra home or two in West Hollywood, I would make a considerable amount of money without any financial risk on my end besides just putting in my time. Or I could use that same time just to make more YouTube videos, which is something I just really enjoy doing. And this is just me personally, but I am the type of person who really loves to avoid stress or obligation. I don't want any more work on my plate. I don't want anything more to think about. I don't want anything more I have to do.

I just really love the "set it and forget it" mentality, that I can pick up and go wherever I want, then I don't have to worry about contractors. I'm not going to be obligated to go and find the next deal or work really hard to be there every single day to make sure everything goes as planned. I like just not having stress, and not having stress in my life is worth so much more than making extra money.

And again, that's just me. Some people love the extra hustle; they love making every dollar they possibly can. I don't. I prioritize just living stress-free, and that makes me happy.

Finally, when you do find a property like that that you can fix up and that has that much equity left over for you to be able to flip it for a profit, then chances are you could just rent it for a higher amount than you could before. That's been my mentality for every single property that I purchased. Maybe I go and buy a property that I can rent for $2,000 a month, but if I went and spent $50,000 fixing it up, all of a sudden I can get $2,300 a month.

To me, I would rather just take the extra $300 a month than continue saving up so eventually I can go and buy another one to do the exact same thing on. And best of all, because you could appreciate the value of the rental property and then write off all of your expenses on your tax return, most of the time, you won't even be paying any income tax on the rental income that you receive, which to me is worth a lot of money.

Not only that, but anytime you do need the money, you can do what's called a cash-out refinance. This means that you could borrow money against the value of the property completely tax-free, and then you have all of this extra money for you to do whatever you want with. Let’s go back to the previous example where you buy a $100,000 property, spend $50,000 fixing it up; it's now worth $250,000.

This means you have a profit of $100,000. If that property is being used as a rental, most banks will allow you to pull out about 75% of the home's value as a loan. So on a $250,000 property, you can get a loan for about $175,000. And when you really start running the numbers on this, depending on your tax bracket, sometimes you'll end up making more money doing a cash-out refinance and keeping the property than you would actually selling the property and then paying taxes on it as though it's ordinary income.

So, in those situations, you would actually make more money just keeping the property than you would by selling it. Which is a crazy thought! So ultimately, that's why I never flipped a property before and why I have no intention of doing that. The time, the risk, and the taxes just take away too much for it to be worth it to me.

Now, that isn't to say that flipping is not profitable because it absolutely can be. But for me, in my own situation, I just personally don't see the point. If I was to do anything even remotely similar to this, what I would be doing instead is going and finding a property under market value, fixing it up, then moving into it for about two years or so, so I can sell it and get $250,000 completely tax-free, then go and move that into something else and continually do that.

To me, that is so much more preferable than flipping. So with that said, you guys, thank you so much for watching! I really appreciate it. If you haven't already, smash that like button. Make sure to destroy the like button, destroy the subscribe button, destroy the notification bells so it notifies you anytime I post a video. Also, feel free to add me on Instagram; I post there pretty much daily. So if you want to be a part of it there, feel free to add me there.

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Thank you guys again for watching, and until next time!