What it means
In real estate, a flip usually means buying a run-down or undervalued property, renovating it and selling it within months. The profit comes from the gap between the total cost of buying and improving the property and the price it finally sells for.
In the share market, a flip describes buying shares in an initial public offering (IPO, when a company first sells shares to the public) and selling them soon after trading begins. The attraction is speed.
A successful flip returns capital quickly, which can then be reused on the next project, so a small amount of money can produce a large annual return if each deal goes well. The risk is that the return is easily wiped out by delays, cost overruns or a drop in market prices.
The calculation looks simple but hides many costs. Besides the purchase price and renovation spend, a flipper pays for financing, insurance, utilities, taxes, agents' commissions and legal fees.
Holding costs build up every month the asset remains unsold, so a delay of even a few weeks can reduce profit sharply. Tax treatment matters too.
In many countries, profit from a quick resale is taxed as ordinary business or trading income rather than as a lower-taxed long-term gain. The rules depend on the country and change over time, so anyone flipping assets should take advice on how the profit will be treated.
Lenders and regulators sometimes take a close interest in flipping. Rapid resales at inflated prices have been linked to property bubbles, and some issuers of shares restrict flipping to protect long-term investors.
These rules vary, so check the terms of any offering or loan before relying on a quick exit. For a business owner, the principle applies beyond property.
Buying stock, equipment or a domain name purely to resell quickly is a flip, and the same discipline applies: know all the costs, set a realistic exit price and have a plan for what happens if it does not sell.
In practice
Real-world examples.
Example
A property investor buys a dated apartment for $220,000, refits the kitchen and bathroom, and sells it four months later for $285,000. After renovation, financing and selling costs, she keeps a profit of around $25,000.
Example
A retail investor receives an allocation of shares in a popular IPO at $20 each. The shares open at $26 on the first day, and he sells them immediately, locking in a $6 gain per share.
Example
A small import business buys a container of seasonal garden furniture at a heavy discount from a bankrupt wholesaler. It resells the stock to retailers within six weeks, treating the deal as a one-off flip.
Formula
Calculation
Flip profit = Sale price - Purchase price - Renovation costs - Holding costs - Selling costs
Suppose an investor buys a house for $300,000, spends $40,000 on renovation and pays $9,000 in holding costs such as loan interest, insurance and utilities. The house sells for $400,000, and selling costs (agent and legal fees) are 6% of the sale price, which is 400,000 x 0.06 = $24,000. Profit = 400,000 - 300,000 - 40,000 - 9,000 - 24,000 = $27,000. Total money spent was 300,000 + 40,000 + 9,000 + 24,000 = $373,000, so the return on cost is 27,000 / 373,000 = 7.2%.Case study
Seen in the real world.
Oakridge Renovations is an illustrative, fictional company run by two friends who flipped houses part time. Their first project looked profitable on paper, with an expected profit of $40,000, but they had counted only the purchase price and the building work.
Once the house stayed unsold for three months, loan interest, insurance and council charges added up to $12,000. Agents' fees then took another large slice, and the final profit was just under $15,000.
The illustrative lesson is that the partners now build a full cost schedule before every deal, including a buffer for delays. They walk away from any project that does not show an acceptable profit after allowing for a slower sale than expected.
Watch out
Common mistakes.
- Ignoring holding and selling costs, which can turn an apparently strong profit into a thin one.
- Assuming prices will keep rising, when a flip depends on the market holding up until the sale completes.
- Overspending on renovation, so that the improvements cost more than the price they add.
Questions
People also ask.
Is flipping the same as investing?
Not exactly, because flipping aims for a quick profit from price change, while investing usually aims for income or growth over a longer period.
How long is a typical flip?
A property flip often takes several months from purchase to sale, while a share flip can be over within hours or days.
Is flipping legal?
In general yes, but tax rules, lender conditions and certain offering restrictions can apply, so check the rules where you operate.
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