Back in the summer I started a four part series The Four Horsemen of the BYOB Apocalypse, where “BYOB” means “Be Your Own Boss”. Briefly, the four horseman of self-employment doom are:

1. Daytrading
2. Real Estate Flipping
3. Forex
4. Blogging

Today is part II of the series, “Real Estate Flipping” and why, to paraphrase AC/DC “It’s harder than it looks…It’s a long way to the top if you wanna rock n roll…”

There has been an explosion of television shows over the past couple years centered around the phenomenon of making easy money flipping houses. This is a symptom of the largely US-led real estate bubble, where housing values were driven by artificially low interest rates and excess liquidity in the money system.

For awhile, it looked easy to buy a house with little or no money down, do some fixups, and then turn around and sell it at a grossly inflated price into a rising market.

Shows like “Flip That House” made it look so easy, even the so-called “problems” these first-time flippers encountered over the course of an episode seemed surmountable and more entertaining than detrimental. At the end of each episode the happy flipper would announce how much they bought the house for, how much they paid for it, and there listing price, gleefully punctuating it with large, impressive sounding number of their projected profit.

“Projected” is a key word here. The first few seasons of “Flip That House” they only announced the projected profits, which always makes for a happy ending. I can list my house at three times what I bought it for, giving me a projected profit in the stratosphere, but I can’t put projections in the bank. It isn’t until the house actually sells that profits, if any, become a reality.

For starters, unless you have in-depth knowledge of contracting and the various construction trades, including the various housing codes, doing any renovation work on a house is harder than it looks, much harder.

If you plan on outsourcing all or most of the work, you need to find and retain honest, competent, reliable and affordable contractors and laborers, which in itself is an art. Horror stories about contractors and renovations are not cliches for no reason. They are ubiquitous because finding key personnel who fit these criterion are exceptions, not the norm. Especially during a screaming white hot housing boom, the good labour is booked solid. Finding a “contractor” in this climate who is actually available is almost a red flag in itself (if they’re any good, why aren’t they booked solid?)

There is also a rule of thumb from the IT industry which applies to all areas of life and it is this: all projects take longer than planned and go over budget. There are scant few exceptions to this rule. Read it again: all projects take longer and go over budget.

A more realistic “flipping show” is “Property Ladder” which follows newbie flippers who probably watched a few too many episodes of “Flip That House”. On this show you get a more realistic depiction of the stress and they follow it to the logical conclusion: what the house actually sells for, if it sells at all. In many instances the house is still sitting on the market months later at a reduced price. Even the always bullish Flip That House has done some follow-up shows and many of them ended without a sale at all, the flipper ended up moving into it himself or ended up trying to rent it out.

The mistake many people make trying to flip real estate is they count on an ever increasing housing market, despite that this year with its subprime woes and credit crunch has all but signalled the end of the housing boom.

Professionals in any field amass wealth by buying below market and then selling at market or even having enough margin to profitably undercut the market slightly.

Amateurs rush in and buy at market, hoping for a rising market, and planning to sell into a higher market.

What makes the latter method attractive is that during bubble booms in any sector, it tends to work for awhile, at least on TV. In reality it doesn’t always work that way and after the bubble starts to unwind it’s a recipe for disaster.

Another unforeseen “gotcha” specific to flipping real estate are the tax consequences of selling property that is not your principal residence. Most people are used to selling the house they actually live in and moving to another. For the most part, your profits on selling your principal residence are exempt from capital gains taxes. This is not the case for other properties which are not your principal residence. If you do manage to eek out a profit on that first flip, you’re going to have taxable income or capital gains, it’s yet another aspect you need to plan for in advance.

Mark Jeftovic has been a self-employed internet professional since 1994, currently he is the founder and president of easyDNS Technologies Inc., the DNS hosting company and domain registrar. His personal blog is at http://mark.jeftovic.net