5 Dangers In Flipping Real Estate
If
you have recently (or looking into it) 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. If you hope to “flip” the property,
there are 5 things you must be aware of that can put a crimp on 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 (they will be when you buy the property). 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? Renovation expenses are usually 25-50%
more than budgeted for. 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 you know that your mortgage rate is higher as well. You’ll need at
least 25% down as well.
4.
Rental Pressures (if you choose this route)- 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?
Will the tenant pay?
5.
Capital Gains Tax- You’re going to pay them and a lot of them! Short term
capital gains can be as much as 37%. You read that correctly, 37%! It’s very
important to keep this in mind before you start any flip.
Of
course, you can limit your risks [and costs] by doing the majority of the
upgrades yourself (very time consuming and if you don’t know what you’re doing,
the buyers will know), appealing excessive property tax increases, and finding
for yourself a buyer or trusted and dependable tenant. It isn’t easy flipping a
home, but with a lot of pluck and determination it can result in strong profits
for you. I hope this gives a brief insight as this topic can be 20-30 pages
long.