In a buyer’s market and when home sales are down, flipping may not be the most profitable investment. In this type of market, you may be able to purchase a home at a low price, but you will have problems when selling the home for an amount that covers your expenses, your time, and gives you a profit.
Rehab experts say that the rehab process usually takes three times as long and costs three times as much as most people originally plan for. You will need to set aside sufficient funds for materials that cost more than expected, licensed workers, and local permits. In a housing market where homeowners are not selling but are rehabbing their own property, you may have a problem hiring a work crew.
Some towns are cracking down on rehabbing that does not follow current building codes. You may be required to purchase costly permits, allow inspections, have work done by licensed professionals, and be required to put a sum of money in an escrow account with the town to cover any damage to public areas such as roads, sidewalks, and trees.
You may have problems obtaining funding for your purchase if your goal is flipping the property. In the current market, much of the creative financing has dried up. This is because the government is now getting involved in cleaning up the home financing industry. Because of problems with rehabbers who abandoned jobs half finished and those who did not follow the local building code, many local area banks will not provide funding for flipping in their town.
In addition, you need to keep current with the IRS rules regarding capital gains tax for a flipped property. The IRS may charge you with a capital gains tax if you do not hold the property for a sufficient length of time or if you do not use the property as your primary residence.
Six rules for those who want to flip a property
1. Know your local real estate market.
2. Know how much the rehab will cost and then add an extra buffer for price increases.
3. Know how long this job will take and then add extra time to that number.
4. Know and follow the building codes and legal requirements of the town, county, and state where the property sits.
5. Do as much work as possible yourself and hire trustworthy, licensed workers to assist you.
6. Keep control of the property at all times. Do not let workers waste time, money, or ignore local codes.