House Flipping Rules To Avoid The Pitfalls
With low mortgage rates and house values rebounding, house flip is on the rise. House flipping means buying an undervalued home, renovate, and sell it for a profit, soon. The key is to find suitable rehab house that is undervalued despite its prime location, fix it, and resell for more.
Hard rules of house flip not to ignore
Know your risk
You may be tempted to take more debt, which is risky. These are fixed obligations that need to be paid, no matter what. Borrowing money is a time consuming procedure and in turn needs money. This makes it hard to contend with buyers having cash on hand.
You can wind up with less appealing deals, which cash buyers are not interested in. Therefore, no mortgages or equity lines but flip house for cash only. You can take a dormant partner, who has the cash and is ready to split the profits.
Understand profitable conditions
Success in house flipping business is ‘quick moves’. You will need to purchase quickly, sell rapidly in short time. You may sell under-market but if you hold it for attaining top dollar value, then it can take time and add to the risk that market may move in the opposite direction.
You will lose time, which could be applied in flipping other houses. However, if you desire to earn profit selling home at under market value, then buy it inexpensively. For example, buy foreclosed property and seek out good realtors to collaborate with.
Be prepared to hold it for sometime
Market environment fluctuates. Everyone desires to flip houses in appreciating market. In case the area you desire to invest is currently not appreciating, then make sure that you will be capable to hold it as rental property for some time. You cannot predict when market turns.
You must be well aware of the rehab work needed along with the approximate cost. Thus you can get the renovation work done, set stage and sell house under market value and earn profit. For this look for a house, which needs cosmetic task and this is inexpensive to perform but will make the residence more appealing to buyers. Ignore buying homes, which need kitchen or bathrooms renovated, unless they are very cheap. It is a costly and time consuming renovation, so seek out simple deals.
Taxes play a vital role in overall transaction. Tax treatment differs depending on dealer, investor, or homeowner.
Understand tax treatment
Real estate dealer – A dealer generally pays huge taxes on profits than investors. Alternative, if the house flips results in loss, then the dealer can deduct total loss reducing their tax rates
Investor – Capital gains rates for long term holding is maximum 20% and for short term it is 10% – 39.6%. Investor does not benefit from self-employment tax but can be liable to pay 3.8% surtax on total investment income. Alternatively, deductible losses are limited to $3,000 only and excess losses are carried over to next year.
Homeowner – If he occupies this owned property for 2 years without using home owner gain exclusion before sale closure, then he can leave out gain up to $250,000. If there is loss, then he will be unable to deduct the loss or offset gains from the other sales. Some of the fix-up will be thought as repairs instead of improvements. You can visit houseflipmentor.com to find out, which repairs are deductible.
This Guest Post has been written by Dennis Beard. Take training first on houseflipmentor.com to understand real estate market & property rehab. You will get to learn how to rehab, negotiate, and leverage other people’s cash and credit. Please visit the website HouseFlipMentor.