During the height of the real estate crisis, fix and flips proved extremely lucrative. As sub-prime mortgages defaulted and homeowners foreclosed on properties, investors seized the opportunity to buy properties at a fraction of their value, made some repairs, and quickly sold for huge profits.
In the years since the housing crisis, as the market stabilized, prices increased, and foreclosures became harder to find. Despite the surge in reality TV shows depicting fix and flips in recent years, data suggests that profits for flippers are declining.
Real estate fix and flips can be an enormous financial risk. Properties could end up costing more time and money than investors expect, causing profit margins to shrink or disappear altogether. Homes may take months to sell, slowly cutting into expected returns. And once the property does sell, there’s the issue of taxes: some flippers unexpectedly face upwards of a 40% tax rate on their earnings.
Steps for Successful Fix and Flips
Even in a declining fix and flip market, there’s money to be made in renovations if investors are smart. Financial guru Dave Ramsey says, “Done the right way, a house flip can be a great investment.” However, to lessen the risk of devastating setbacks, you’ve got to do your research and go into a flip with realistic expectations.
Put down the remote – it’s nothing like HGTV. Here’s what you really need to know about fixing and flipping homes.
1. Be Handy
If you don’t have any idea how to install a sink, paint a bathroom, or remove existing cabinets, you might want to step back and reassess. Flipping homes might not be a profitable venture for you. While most flippers will hire contractors for the big stuff (plumbing, HVAC, and electrical), you should be able to perform much of the other work on your own. If you hire a contractor for every project on the job, you’re going to end up with pitiful profits.
2. Purchase Smartly
First, do your research and find a home that is priced well below market value (auction homes and foreclosure properties typically yield the best profits). Estimate all renovation costs, closing costs, and other fees. Then, ask a trusted real estate agent to perform a price comparison and determine the probable selling cost. These figures should give you a realistic expectation of your final profit. If possible, pay cash for your investment. The less interest you pay, the more money you’ll pocket after the sale.
3. Have Proper Permits
Even if you’re doing renovations yourself, you’ll likely need building permits. Each municipality is different, so check with your local permit office before beginning your flip. Failing to secure proper permits could lead to countless headaches and could even delay or prohibit the sale of the home. Depending on your location, you could have to wait several weeks for approved building permits, so plan ahead and apply for permits as soon as possible.
4. Stage for Success
Once you’ve finished the project, it’s time to get your flip sold. Don’t cut corners on the selling process! The more you invest in details that help the home shine, the more likely you are to sell your home at or above asking price. Staging can help your home stand out to potential buyers. Professional staging companies are usually a worthwhile investment. Don’t skimp on details like curb appeal, either.
5. Know the Tax Laws
It should come as no surprise that the IRS wants a portion of your profits. Typically, the IRS considers profits from a fix and flip “active income,” meaning your earnings are subject to standard income taxes. Before you invest in a fix and flip, know exactly how much you’ll be paying in taxes. Unless you’re holding a property for a year or more (not likely in the fix and flip business), you won’t be eligible for capital gains taxes (more favorable tax rates) on the sale of your property. There are exemptions that allow investors to pay fewer taxes on investment properties. Check with a real estate tax specialist for more information.
Real estate flipping can be profitable if done well. Take the time to research, plan, and understand the upfront costs and your potential gains before jumping into a renovation project.