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.