Real estate investing can be an expensive proposition. Many would-be early adopter investors rushed into the “flipping” business without the overall big picture knowledge of a “hold” potential.
They ended up not being prepared when the flip did not quite go as planned.
There are 5 factors that need to be taken in account when considering the “flipping” business.
Upfront Costs — The first expense is obviously the acquisition cost. Those that are able to do so with cash are in a better position and can avoid paying interest on financing. There are holding costs such as property taxes and utilities and potentially general contractor and renovation expense. Think also about your time and how valuable it is. If it takes you 6 months to find, renovate and sell a property for a profit of $5,000 that might equate to a very low hourly income rate. All of these costs need to be factored in from the beginning with a significant enough “padding” to make it realistic.
Understanding Rehab limitations — If you can trust yourself in the renovation process to not OVER renovate for the market your home is in, you have some self-restraint and are a good match to flip. If you know that you can’t resist the upgraded tile and the granite counter tops then you either need to put a realist in charge of the renovations or consider a different side business OR consider holding that property and filling it with a quality tenant willing to pay extra for those amenities.
Market Variables — Be knowledgeable of the market in the area you are buying. How is it functioning and is there a surplus of homes being sold or are other investors trying to unload properties? You might be in for months or years in waiting to sell if so. When you hold a property you are not at all dependent on the whims of the market and you have the option to sell only when it is financially advantageous for you to do so.
Risks — When you decide to fix & flip you will have monthly costs that you will carry until the house sells. You might have a loan payment, taxes, insurance and utilities. There can be other unforeseen costs if there are repairs, if a pipe breaks or if there is vandalism. This can easily blow your budget wide open and prevent you from making a profit. When you hold a property you can balance out your risks over the long term of the property and can maximize the probability of making a profit. This is why it’s crucial to buy right.
Tax consequences — Many experienced investors know they can flip for a profit and how this directly impacts their bottom line, but many others don’t understand the tax implications on the other side of that deal can significantly reduce the profit that they actually make. Residual income versus Capital Gain taxes needs to be thought out in the beginning. Long-term investors actually pay a lower tax rate and only pay long-term capital gains if they sell their property (or not if using a 1031 Tax Exchange). Flippers are often subjected to higher taxes because they are classified as “dealers” of real estate.
In conclusion consider these factors when deciding “To Flip or Not to Flip” so you don’t end up FLOPPING.