tinyurl.com/8vozk -> realestate.yahoo.com/realestate/story.html?s=inman/item-bc17bfa777932a9f3e0030a1d085c623.html
more real estate news Inman News Pros and cons of 'flipping' real estate Nov 18, 2005, 4:00 am PST Every property is a "flipper" or a "keeper." If you are not familiar with those real estate terms, a "flipper" is a property that is bought for a quick resale profit, usually in less than six months. But a "keeper" is a property held for at least a year, often for many years.
For example, if yo u buy a foreclosure property at a bargain price, it can often be "flippe d" (meaning sold) to another buyer for a handsome profit within a few da ys or weeks. Flippers are especially attractive to beginner real estate investors who want to quickly build up their "cash stash" from profits of buying low a nd reselling higher. There's nothing wrong, illegal or unethical by earn ing fast resale profits. However, sometimes a property that looks like a quick easy resale at a la rge profit turns out otherwise. To illustrate, I have an investor friend who bought a house from an elder ly seller who wanted an easy cash sale without paying a real estate sale s commission. My friend had access to cash and he closed the purchase within a few weeks. Only then did he discover the good looking house was riddled with exten sive termite damage which would cost about $25,000 to repair. Rather than being a quick "flipper" th e house turned out to be a long term "keeper" until its market value app reciated to make the resale profitable after about three years. Meanwhil e, he rented the house to tenants who eventually bought it. But my friend enjoyed several advantages of holding that house for severa l years: instead of earning a quick $40,000 resale profit he netted well over $100,000, and by holding title over 12 months his resale p rofit would be taxed as a long term capital gain at a 15 percent tax rat e rather than as ordinary income THE KING OF FLIPPERS. LeGrand r eports Kozlowski acquired 119 deeds on flipper houses in the Orlando are a within his first year of investing. Today, he teaches others how to pr ofitably flip properties. Lest you think flipping properti es is easy and simple, it isn't. But there are several secrets for findi ng these properties: Find a motivated seller who wants to sell but doesn't insist on recei ving top dollar and will sell at least 25 percent below market value. St rong seller motivations include out-of-town job transfers, unemployment, divorce, financial problems, illness, death in the family, and health p roblems. Longtime homeowners often have large home equities and are willing to sel l below market value for a quick easy sale. Look for properties in need of inexpensive cosmetic fix-up rather tha n properties needing major structural repairs. "El dumpo" properties oft en just need fresh paint (the most profitable improvement of all), new l ight fixtures, cleaning and repairs, new carpets and flooring, and fresh landscaping. Unprofitable repairs to avoid include structural changes, new roof and fo undation repairs, which are very expensive but add little or no market v alue. Sources of "fast flip" properties include local real estate agents, n ewspaper classified ads, foreclosure sales, probate sales, bankruptcies, recently expired MLS (multiple listing service) listings, vacant rental houses, absentee out-of-town owner lists, and properties with unpaid pr operty taxes. Another great way to find potential flippers is to drive around neigh borhoods looking for houses that appear to be vacant, run-down, or aband oned. By jotting down the address, taking a photo to remember the house, and then checking the owner's mailing address at the tax collector's of fice will often uncover an owner who would be willing to sell. Even the best neighborhoods have houses meeting these criteria. If you di scover the house has been owned for many years, often with a small or no mortgage and a large equity, the seller might be extremely eager to sel l at a bargain price. As with any profitable enterprise, th ere are potential disadvantages of flipping properties: Profits from the sale of investment property held less than 12 months are taxed at ordinary income tax rates. However, if you hold title over one year, then the capital gains are currently taxed at a low 15 percen t rate, plus any applicable state tax. However, if you own and occupy the property as your principal residence f or at least 24 of the 60 months before its sale, then your profit up to $250,000 (up to $500,000 for a married couple filing a joint tax return) is completely tax-free under Internal Revenue Code 121. Fix-up work is a disadvantage for some investors who don't like to up grade properties. By hiring fix-up workers, the cosmetic improvements ca n usually be accomplished within 30 days to increase the property's mark et value. A goal of most experienced "flippers" is to add at least $2 of market value for each $1 spent on fix-up. A quick profitable resale forfeits the potential for future profits f rom the property's long-term appreciation in market value. home prices currently appreciating around 10 percent annually, many investors adopt a strategy of keeping some properties and flipping other s SUMMARY: Flipping properties for quick resale profits can be a great way to get started investing in real estate. But the potential disadvantages include paying ordinary income tax rates, rather than the lower long te rm capital gain tax rates.
|
http://csua.com/feed/