Buying and Selling property (flipping) can be an extremely rewarding investment strategy, but it's vital to understand the pros and cons before you begin. It is a riskier type of investment which means the rewards can be great if everything goes as planned. But it can be a horrible nightmare if the plan falls apart. Here are some things you need to consider:
Potential for Quick Profit
By and large, the number one driver of investors getting into flipping is the potential to make cash quickly. If done correctly, a flip can realize very large profits, in some cases upwards of an annual salary for a single flip. Returns like these can be had in a matter of months, and if done repetitively, provide for a sizable annual income.
In most cases, and especially during a sellers market, homes that are being targeted for flips are homes that need rehab. You'll find needed work from new lawn and landscape to gutting to the timbers and rebuilding from scratch. When the work is complete though, you'll not only have made yourself a nice profit, you will have helped to revitalize a neighborhood.
Through the act of renovating a property, you'll gain experience and insight into the processes of job costing for remodels. You'll also learn how to identify potential big ticket items like plumbing, electrical, structural and environment hazard such as mold and asbestos. Learning on the job will help you develop patterns to save money on the next job.
Through your connections with local Realtors, you'll also learn to identify the best properties with the biggest potential profit margins and understand which neighborhoods and communities you should be targeting. And as you sell your investment flips, you'll gain a greater understand of what buyers are looking for most, so you can include them in your next flip. Lastly, you'll learn to budget for unexpected costs... the construction permits, contractor delays, material shortages and holding costs that all detract from your bottom line.
Great rewards come with great risks, right? Take a look at some of the drawbacks to flipping properties that you generally don't encounter with other real estate investment strategies like buying and holding.
The Potential to Lose Money
The biggest risk in any flip project is to lose money, instead of making money. Some of the factors that may contribute to this risk are: buying too close to market value, over-improving, underestimating renovation costs, unanticipated expenses, and not understand pricing strategies for a quick sale.
Though not typically a problem during strong sellers markets, most successful flippers will reserve a line item in their budget for holding costs. Holding costs are the expenses associated with the home while it's on the market waiting for a new buyer. These costs will include mortgage payments, utility bills, insurance, taxes, and yard and/or pool maintenance. Each month your property sits on the market, your expenses increase which is why it's vital to understand market pricing.
We've seen it happen time and again - first time flippers stressing over costs, timelines, and getting the property resold before they have to watch their profits dwindle down while the home sits on the market. Fortunately, this stress usually lessens as first time flippers turn into seasoned investors.
Capital Gains Taxes
Homeowners who sell their homes only to turn around a buy another one within two years are exempt from capital gains taxes on the sale of the first home. Investors however, don't have that luxury with properties they flip. Any profit that is realized from the sale of an investment property is subject to capital gains taxes, which can vary depending on how long you owned the home. These taxes need to be accounted for when developing a flip strategy for EACH home.
If, after reading all of this, you're ready to get started flipping homes, please use the contact box at right to schedule
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