Many people want to invest in real estate because there is money to be made in the housing market. When prices are going up it is time to grab it before it goes higher, and when prices are going down it is on sale.
There are two kinds of real estate people:
- Investors
- Traders
The Difference Between Investors and Traders
An investor wants to purchase a piece of property for the long haul. Not only does he want to make money from the investment, but he wants to do so forever.
A trader wants to get as much money as possible out of a piece of property within the same year he buys it. This is where flipping a piece of real estate comes in. While an investor buys something with long-term potential, a trader looks to see what can be turned over immediately.
Flipping Houses Should be Done With Cash
When traders buy homes with a mortgage, they incur extra expenses, such as closing costs. When this is done the profits on the trade are cut down significantly and the only one that wins out in the end is the bank that facilitated the loan.
For this reason, flipping a house should be done with cash. While an investor can make money over the years through good renting and then make a significant profit from the sale of the property, traders do not have this luxury. They need to maximize profits in every way.
Traders who use Cash to Flip Homes Make More Money
A $100,000 loan can cost $5,000 to close on. If the trader puts up $25,000 of his own money plus the closing costs, he will have to sell the home for $130,000 just to break even. Plus, he'll have to pay for home owner's insurance.
While home owner's insurance is a smart thing to have, a person flipping a home within 30-60 days may feel confident to live without the expense, but this will not be a possibility if the home is not owned outright.
Many homes that are bought to flip are in need of repairs and updates. If $10,000 was put into the home to fix it up and it was sold for $150,000, then there would be a profit of $10,000 made on this deal. This profit is nice, but it could have been $15,000 if the property was bought with cash.
By using cash to buy a home to flip, traders can increase their profits substantially. In this case, the difference was 50%. If there were 10 deals like this made that 50% would equal $50,000 that went to banks instead of the profit of the person structuring the deals.
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