Flipping in real estate is an investment strategy where you buy a property, add value to it (or lock up the rights to it), and sell within a short window for a profit, usually three to nine months from purchase to closing. The profit lives in the gap between what you pay and what a later buyer pays, minus renovation costs, loan interest, taxes, insurance, and commissions. Two things separate profitable flippers from unprofitable ones: buying well enough that the numbers survive surprises, and understanding that the IRS will likely treat your gains as ordinary business income rather than investment returns.
The Two Main Ways People Flip
Fix and Flip
This is the version most people picture. You buy a distressed property at a discount, renovate it, and sell the improved home at a higher price. The discount exists because the property needs work typical homebuyers don’t want to take on: outdated kitchens, failing roofs, damaged plumbing, or cosmetic neglect. Foreclosures, estate sales, and stale listings are common hunting grounds.
Your margin is the gap between total cost (purchase price plus renovation plus every carrying expense) and the sale price. The real skill sits in the buy. Overpaying by even 5% on acquisition can wipe out profitability once you account for closing costs on both ends, agent commissions, and interest accumulating every month you hold the property. Renovation scope varies from cosmetic refreshes to structural rebuilds; wider work means wider potential margin and higher risk of cost overruns.
Wholesaling
Wholesaling flips the contract, not the property. You secure a purchase agreement with a seller, then assign that contract to another buyer for a fee. You never close on the property or take ownership. The assignment clause in your agreement gives you the legal right to transfer the deal, and your profit is the difference between your contract price and what the end buyer pays for the assignment. Fees commonly land between $5,000 and $20,000 per transaction.
The appeal is that wholesaling requires very little capital. Your main investment is time spent finding undervalued properties and building a buyer list, and fix-and-flip investors are usually the buyers. One caution: the line between wholesaling and acting as an unlicensed real estate broker is blurry in many states and getting more regulatory attention. If you market properties you don’t own to the general public, some states treat that as brokerage activity requiring a license. Marketing the contract to a private buyer list is safer than open advertising, and several states have passed legislation specifically defining wholesaling activity, so check your state’s current rules first.
How Flippers Evaluate a Deal
The After Repair Value (ARV) is the estimated market price of the property once renovations are complete. Getting ARV right is the single most important analytical step in a flip. You estimate it by studying recent comparable sales of similar renovated homes in the same neighborhood, ideally properties sold in the last three to six months with similar square footage, bedroom count, and finishes. A professional appraisal gives you a more reliable baseline than your own research, and most lenders will require one anyway.1Rocket Mortgage. ARV: Everything You Need to Know About After-Repair Value
Many investors use the 70% rule as a quick screen: never pay more than 70% of ARV minus estimated repair costs. If a home’s ARV is $300,000 and it needs $50,000 in work, the maximum purchase price is $160,000 (70% of $300,000 is $210,000, minus the $50,000 in repairs). The 30% buffer absorbs closing costs, commissions, holding costs, and surprises while still leaving profit. In competitive markets, experienced investors sometimes stretch to 75% or 80% of ARV when they have high confidence in their numbers. Beginners have less room for error.
What It Actually Costs to Fund a Flip
Hard Money Loans
Most flippers don’t use conventional mortgages. The timelines are too slow, and the underwriting focuses on your personal income instead of the deal. Hard money loans are the workhorse: short-term, asset-based loans where the property serves as collateral, and the lender cares more about the property’s value and the deal’s numbers than your W-2.
Interest rates typically run between 8% and 13%. On top of the rate, expect to pay origination points at closing. First-time borrowers commonly pay 2 to 4 points (each point equals 1% of the loan amount), while experienced flippers with a track record can negotiate to 1 to 2 points. Most hard money lenders will fund 80% to 95% of the purchase price and up to 100% of renovation costs, though total financing usually caps at 70% to 80% of ARV. You’ll need a proof of funds letter or pre-approval when submitting offers, because sellers want to know you can actually close.
Private Money and Partnerships
Some investors fund deals through private lenders (a friend, family member, or acquaintance lending at an agreed interest rate, secured by the property) or through equity partners who contribute capital in exchange for a share of profits. Both need clear written agreements covering contributions, profit splits, and decision-making authority.
Holding Costs
Every month you own the property, you pay for it whether or not any work is happening. Monthly holding costs include loan interest, property taxes, insurance, and utilities. On a $300,000 property with a hard money loan, they can easily reach $3,000 to $5,000 per month. A renovation that runs two months over schedule doesn’t just delay your payday; it actively eats profit. Budget at least two months of holding costs beyond your expected timeline as a safety net.
Insurance
Standard homeowners insurance won’t cover a property you’re renovating to resell. Insurers classify these differently because they’re vacant, under construction, or both. Two policy types cover the phases:
- Builder’s risk insurance covers fire, theft, vandalism, and weather damage during active construction.
- Vacant property insurance covers similar risks for properties sitting empty before or after renovation. Standard policies often exclude or limit coverage once a home has been vacant for 30 to 60 days.
A burst pipe or electrical fire in an uninsured renovation can turn a profitable deal into a total loss.
Why the Tax Bill Is Bigger Than You Think
Taxes are where flipping quietly gets expensive. How the IRS classifies your activity determines your rate, and the classification is rarely favorable.
Dealer vs. Investor
The IRS draws a hard line between a real estate investor and a real estate dealer. If you buy a property, hold it, and sell at a gain, that’s an investment. If you regularly buy properties intending to renovate and resell, the IRS is likely to classify you as a dealer. Federal tax law specifically excludes “property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business” from the definition of a capital asset.2Office of the Law Revision Counsel. 26 US Code 1221 – Capital Asset Defined
The classification controls the rate on your profits. Investors holding property more than a year pay long-term capital gains rates, which top out at 20%. Dealers pay ordinary income tax rates on every dollar of profit, regardless of holding period. For tax year 2026, ordinary rates range from 10% to 37% depending on total income.3Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
The IRS weighs several factors: how often you flip, whether flipping is your primary business, how long you hold properties, how much you advertise, and whether the properties were ever used for investment or personal purposes. No single factor is decisive. Someone flipping three or four homes a year with a systematic renovation process is hard to argue is anything other than a dealer.
Self-Employment Tax
Dealer status brings a second cost that catches people off guard. When flipping is your trade or business, profits are subject to the 12.4% Social Security tax (on income up to $184,500 in 2026) plus the 2.9% Medicare tax, for a combined 15.3%.4Office of the Law Revision Counsel. 26 USC 1401 – Rate of Tax That’s on top of ordinary income tax. A flipper in the 24% bracket who also owes self-employment tax is paying close to 39% in combined federal taxes on profit, before state income tax.
No 1031 Exchange
Many flippers assume they can defer taxes by rolling profits into another property through a like-kind exchange under Section 1031. They can’t. The statute explicitly excludes “stock in trade or other property held primarily for sale” from 1031 treatment.5Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Property Held for Productive Use or Investment Dealer properties are inventory by definition, so the most popular tax deferral tool in real estate is off the table for active flippers.
The 90-Day FHA Restriction on Reselling
Timing matters if you plan to sell to a buyer using an FHA loan. FHA mortgage insurance is not available for properties resold within 90 days of the seller’s acquisition date. Close on a property January 1 and flip it by March 15, and a buyer using FHA financing cannot purchase it. Since FHA loans account for a significant share of first-time buyer transactions, this can meaningfully shrink your buyer pool on lower-priced flips.6HUD. FHA Single Family Housing Policy Handbook
Properties resold between 91 and 180 days after acquisition face additional scrutiny. If the resale price is 100% or more above what the seller paid, the lender must order a second appraisal from a different appraiser. If that second appraisal comes in more than 5% below the first, the lower value is used, which can reduce the buyer’s loan amount and potentially derail the sale. The cost of the second appraisal cannot be passed to the buyer.6HUD. FHA Single Family Housing Policy Handbook
Exceptions apply to inherited properties, homes sold by government agencies, properties in presidentially declared disaster areas, and new construction. For a typical flip, the practical rule is: don’t plan on selling to an FHA buyer in the first 90 days, and budget extra time for appraisals if you’re selling between 91 and 180 days at a significant markup.
When a Flip Becomes a Rental Instead
Not every flip needs to end in a sale. The BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat) uses the same front-end process but pivots at the exit. Instead of selling, you rent the renovated property, refinance based on the improved appraised value to pull out most or all of your invested capital, and use that capital to fund the next deal.
BRRRR works when the area has strong rental demand, the post-renovation appraisal supports a refinance that recovers your investment, and rental income covers the new mortgage plus expenses. It builds a portfolio of income-producing properties over time rather than generating one-time profits, and it avoids dealer tax treatment because you’re holding long-term. The tradeoff is that capital stays tied up longer and you take on landlord responsibilities. Some investors run both strategies at once, flipping in neighborhoods with strong resale prices and converting to rentals when the numbers favor holding. Having both exit options available before you buy gives you flexibility if market conditions shift during renovation.