Real Estate Investor Tips
The True Cost Of Flipping Real Estate
Approximate Reading Time: 5 Minutes
When it comes to flipping, new investors often get burned by their mistakes. In this article you’ll learn about the most common mistakes newbies make, and how to avoid them.
FHA “anti-flipping” Rule
Since the housing market crash of 2007, the government has tried to protect consumers from buying homes at inflated prices. One policy that was quickly enforced was the FHA “anti-flipping” rule: no FHA financing on properties that had been bought, renovated and marketed at a higher price within a 90 day period.
Unfortunately, what the government didn’t understand is that not all “flippers” are ripping people off. In fact, many of the investors brave enough to buy dilapidated properties with cash in order to fix them up and resell them are actually helping to clean up the housing mess.
Vacant, foreclosed homes attract vagrants and vandalism, adding further stress to struggling neighborhoods. Banks won’t lend on vandalized homes, and few buyers can pay cash both for the purchase and rehab of a dilapidated property. Investors are the only ones who will take that risk so it makes no sense to limit their ability to do so.
The FHA finally caught on, and temporarily reversed the “anti-flipping” rule last year, and voted to do so again in January. This is great news for the U.S. housing market, since investors accounted for one third of real estate purchases in 2011.
Is Flipping the Right Investment Strategy For You?
Everyone wants to make a quick buck, and in theory, flipping could be a way to do that. But please heed this warning: flipping is not for everyone! Here are some tips to help you decide if it’s for you.
The Fine Print on FHA regulations
- 1. Certain conditions need to be met to qualify for FHA’s “anti-flipping” waiver.
- 2. The transaction must be at “arms length” – meaning there is no personal relationship between seller and buyer.
- 3. If the selling price is higher by 20% or more than the original purchase price, the lender has to keep record and justify the increase.
- 4. The home must also be inspected when the price increases by more than 20%. That adds the cost of the appraiser to the list of expenses.
The Real Costs of Flipping Property
There are other real costs that many new investors fail to calculate at the outset:
- The cost of borrowed money to purchase and/or renovate the property
- The cost to sell: agent fees and closing costs can add up to 10%
- 3. Holding costs – on-going property taxes, interest charges, and insurance
- Unexpected costs – leave a 10% cushion at a minimum.
- Potential dip in sales price – 10% at a minimum.
- Estimated profit – 10% at a minimum (and if this is all you’re expecting, there are much lower risk investments out there!)
- Short-term capital gains taxes if you sell within a year’s time frame (approximately 35% of your profit). Always talk to your CPA before making any investment!
So, you’ll need to calculate all repair expenses and still be at less than 60% of market value. Is it possible? Yes. Is it easy? No.
Flipping vs. Buy & Hold
At Real Wealth Network, we advocate buy & hold investing for the following reasons:
- Flipping requires hands on involvement and most working people don’t have the time.
- The flipper would need to only invest where they physically live. We do not advise managing a rehab from a distance.
- A buy-to-hold investor can invest anywhere, wherever they can find the best opportunities, have many investments working at the same time, and still make money doing other things.
- A cash flow rental property can yield over 10% return after all expenses, without the risk of fixing & flipping.
- Rental income is much more favorably taxed, and capital gains can be avoided upon sale if a replacement property is purchased according to IRS 1031 Exchange Rules.
- Growth over time, for both rental income and capital growth, works the same as compound interest; it’s one of the most powerful tools in an investor’s arsenal.
30 years ago you would have had to put down $13,000 to buy real estate. Today that property would be completely paid off, and have tripled in value. What’s more: you’ll be earning at least $13,000 rental income per year!
The same power of multiplied growth is available today – real estate bought today will be worth three times its value 20 to 30 years from now. There is no other investment that delivers cash flow and capital growth like long term real estate investments do.