If you have recently purchased some real estate for investment purposes, you are in good company. Recent reports suggest that as many as 25% of these purchases are made by those who plan on using the property for investment purposes only.
What is “Flipping” Real Estate?
There are two ways to “flip” real estate. The first is by buying low (at a time when real estate prices are low) and waiting until the market gets hot and prices go up. You can then “flip” the property and make a nice profit on the increase. The other is to buy a property that needs some work, put a little elbow grease into making the repairs, spend some money sprucing up the property, and then selling it for a profit. Many contractors and handymen do quite well using this method.
However, it isn’t as easy as it sounds. If you hope to “flip” a property, there are 4 things you must be aware of that can put a crimp in your profits.
1. Property Taxes: Keep the property for a few years and you may experience a surge in property taxes, especially if your taxes are reevaluated during that time. Some hot real estate markets have seen taxes nearly double in just 5 or 6 years.
2. Renovation Expenses: You may have purchased a “fixer upper” at a bargain rate. Once your project is complete will you be able to recover the expenses and make a profit, especially if the value of your renovated property is above those in your neighborhood? In addition, can you withstand a correction in real estate values?
3. Insurance and Mortgage Costs: You will pay more for homeowners insurance if you do not occupy the residence and you have tenants. If you are financing the property your mortgage rate will be higher as well.
4. Rental Pressures: A market saturated with rentals will mean that the rents you can charge will be less than what you had hoped to receive. In some markets you are required to get special licensing in order to be a landlord. In other markets the legal rights of tenants mean you could have a lengthy and expensive battle in ridding yourself of a bad tenant. Will the lower income levels coupled with the added expenses drag your investment down?
Of course, you can limit your risks (and costs) by doing the majority of the upgrades yourself, appealing excessive property tax increases, and finding yourself a trusted and dependable tenant. It isn’t easy flipping a home, but with a lot of luck and determination it can result in strong profits for you.
Feel free to give me a call if you need some help.