Archives: house flipping
It’s a common question these days. Is it really possible to make a ton of money flipping houses and quit your regular full time job? With all of the house flipping shows on TV they make it seem easy to pocket anywhere between 40k and 100k just flipping one house in just a couple of months. That’s more than a lot of people make in a year, so it seems very appealing. But are they really making that much money? What are the other costs?
Agents And Closing Costs
I often wonder if in that final projection of their profit are they taking out for the realtor fees and closing costs? It’s not uncommon for agents commissions and closing costs to take up as much as 9% of your selling price. That’s a big chunk of change. Now you might be able to do some searching and find a brokerage that will list the house for only 1%, but still more than likely the buyer will have an agent that will require at least 3%.
An important thing to remember from what I have seen is that the lower your commission the less agents will take notice of your listing. Think about it, if you were an agent and could possibly sell a house that has a full 3 or 4% commission or one that has only 1%, which property are you going to show to a qualified buyer? So sure you might save a few bucks in commissions, but on the flip side you might sit on the property longer only paying more in finance charges for the property as well as insurance and utilities.
Just like every other business, good ole Uncle Sam is going to want his share, and in the case of flipping houses, he wants a big share. Sterling White has this to say about Uncle Sam and his share –
One big flaw in the house flipping model is taxes. Uncle Sam takes a huge chunk of the profits in tax on flipped properties. It’s extreme. Most overlook the fact that they are going to have to give up 20% to 40% of their profits in taxes. If flippers have already spent the money by the time they get their tax bill, a vicious cash crunch cycle can kick in. Most won’t enjoy being chased down by the IRS for $50,000 or $500,00 in past taxes.
20% to 40% – that’s another big hunk of change out of your pocket!
So now we are looking at almost half of your projected profits gone between agents, closing costs and taxes.
This is often overlooked when it comes to flipping properties. Your time is extremely valuable! On your first flip you may have to miss time from work and at least spend evenings and weekends at the property. If you are having to miss time from your regular job, this is something you will most definitely have to factor in.
Even if you are able to quickly make the repairs and updates to the property, you still will have holding costs. What are these?
Holding costs before, during, and after renovations can stack up, which is why it’s always best to flip and sell as quickly as possible. Unfortunately, this isn’t always possible; a crash in the economy can turn buyers off or the location you’ve chosen may not be desirable enough; and these are just 2 of many other reasons why your house might not sell as quickly as you’d like. All the time you’re holding onto it, you’re paying the mortgage (if necessary), taxes, utilities, insurance, and maintenance, costs that will eat into your profit margin.
Holding costs can add up really fast, especially if you used a hard money loan to purchase the property. Learn more about hard money loans and what they are in our previous article.
Yes, you can make money flipping houses. However it’s not for the faint of heart, and for sure don’t think it’s going to be as easy as what you see on TV.
Probably the best bit of advice I can give you is to find a local, reputable investor that has done a lot of flips to teach you the ropes and help avoid the pitfalls. Sure their knowledge is going to come at a price, but in the end it could mean the difference between actually making a profit and losing your shirt.