Archive for August, 2008

Flip That House

You’ve seen it on TV thousands of times. Flip this house. Flip that house and so on. It’s been all over television for the past few years. At the same time you’ve been getting postcards in the mail and seen advertisements in the newspaper to attend the seminars that will teach you how to do it. You’ve probably been to at least one of those seminars as I think half the country has.

They sure do make it sound easy don’t they. And it sure does look easy on TV. Most of the time anyway. They buy a home for pennies on the dollar. Call up a bunch of guys and a few weeks later you’ve got a brand new home worth a hundred thousand dollars more than you paid for it. Take out the fifty thousand it cost you for the work and after having one open house you’ve sold it and put fifty thousand dollars in your pocket.

Then of course there’s the couple’s, usually husband and wife who do all the work themselves. They budget twenty thousand dollars for the materials and about 3 months for the week and it ends up costing them forty thousand and taking six months. Interesting enough, they still “profit” sixty thousand. Of course, it’s never revealed whether that profit takes into account the six months of mortgage payments and the sales transaction costs. I expect their profit is closer to thirty thousand.

Still not bad right? What there not showing you is the dozens of others who were followed around by cameras and who ended up losing their shorts, or if they were lucky, got to work for free for six months and break even. What is also not shown on the programs and in the seminars is that most of the markets where the flips were successful the markets were appreciating at double digit paces, so no matter how bad your numbers, you were still destined to make a profit.

What’s not reported is that those who make a reasonable profit at the fix and flip game are very few. And, there are only certain markets that will allow for it. For instance, the opportunities in Charlotte, NC are much different than those in Colorado Springs. Those markets not in double digit appreciation have a much more difficult time profiting from flipping.

There are a number of factors you must account for when analyzing a property to flip. When looking at a property (and most likely you’re looking at a single family home) you need to start by determining what you can sell the home for when all the work is done. Take that number and subtract how much it will cost you to do the work materials and labor, even if you’re doing the work yourself. Remember, always pay yourself for whichever role you’re in. You’ll be wearing many different hats and your time is valuable and you must be paid for everything.

Then subtract your financing and carrying costs. Everything from what it cost to take out a loan to the mortgage payments you’ll make to utilities and taxes. Then subtract your sales costs. Everything from commissions to marketing expenses to title insurance. Subtract a variance of about ten percent because you’re numbers are not always precise and this is the maximum amount you can afford to pay for the property.

This is where most people fail. They either start from the bottom and work their way up. Meaning. They just pay full price for the home, add on their expenses and put the property on the market for “what they need.” This is a formula ripe for failure. And this is why we see so many of these homes still on the market. If a home isn’t priced according to market, it just won’t sell.

The point of all this is. If you’re considering jumping on the fix-n-flip bandwagon, do so with caution. Make sure you’ve included all the numbers. Pay yourself as an investor and as labor. And, solicit the advise of a real estate professional. The few thousand dollars it may cost for their help is like insurance against losing tens of thousands of dollars. If not more.

Tony Rose, MBA, is the owner/founder of Iswami.com, the user-driven web site that links to the most recommended locally owned and operated businesses throughout the US. Tony has been a successful business owner in the fields of Real Estate, Development and Web Development for over twenty years.

Flip or Hold Which One is Best

There are many ways to make money in real estate, but all the different methods boil down to two. The big decision in real estate is whether to flip a property for a fast profit or to hold on to the property for long term wealth.

The advantages of a flip are as follows:

You make a fast profit and can move on to the next deal. One of the downsides of holding a property is that you have to be a landlord. There is nothing more difficult to me than being a landlord. When I flip a property I don’t have to worry about collecting rent or fixing the property over and over. I don’t have to find someone to rent the property. There something to be said about a quick profit.

Finding a property to flip is fairly easy. Ugly properties are not hard to find, especially in the large cities. In Atlanta Georgia there are so many properties available for rehab and not enough investors.

Flipping a property is more interesting than find and hold. If you like excitement then flipping properties is your game. There are good times and bad times that come with flipping properties and it is never boring.

The disadvantages to a flip are as follows:

You will have to pay more taxes when you sell a flip. When you flip a property your profit will be taxed as ordinary income. This can be as much as forty percent of your profit.

Flipping a property means you must keep selling homes. The easy part of flipping is buying the property and then fixing it up. The hard part is selling the property.

The advantages of holding a property are as follows:

If you want long term appreciation then you need to buy and hold. There is no denying that if you buy a property at discount and then put a renter in the property for twenty years that you will have an investment that has appreciated tremendously.

Cash flow will come to the person who holds their properties for a long time. Positive cash flow usually takes time and if you are willing to wait a few years you will have a good monthly income.

The obvious problem with holding properties is being a landlord. If every renter stayed, paid on time, and never destroyed your home, then there would be no problems. Unfortunately you will have to find new tenants often. You will not collect all of the rent you are due. You will have to fix a property every once in a while.

The decision to flip or hold is a difficult one. I like to do both. If I find a home worth holding I hold it. If the property is too far away or needs too much work to be rental worthy then I will flip the property. Both have their good points and bad. The bottom line is that you need to be comfortable with your decision. Being a real estate investor should be fun first and an investment second. So do what you like most and feel best doing.

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