Buying an investment property in order to flip and resell is not for the faint of heart but it’s also not something to be too scared of. As long as you do your research on your homework and have a real estate agent that understands your needs, buying and flipping is a great way to expand your real estate portfolio and make some extra money. Here are some things to know if you’re planning on flipping a house.
#1. Understand closing costs and capital gains tax.
Unless you’re selling the home yourself, you need to take into account closing costs with real estate commissions and capital gains tax. If you make a profit on the flip, which is the whole idea, and have on the house for a year or less, you will be taxed on short-term capital gains. These are taxed at your ordinary income tax rate so it’s important to factor that into the sale.
#2. Additional cost for borrowing money.
If you are planning on taking out a loan to buy the investment property, you need to make sure you understand what it costs to borrow money. Not only will you have costs for improving the house, but you will need to be paying a mortgage and property taxes on it until it sells.
#3. The money is made when you buy, not sell the house.
I know that might not make sense, but you don’t want to overpay for a house. This also means in your mortgage payment as well. Lenders will want a higher deposit than for the residential markets. You might need to put at least 25% down and ask the lender if they’re willing to give you a short term mortgage to buy and flip the house based on the value of the asset. You may need to shop around for a loan that will give you the best rate of return now and when you plan on selling. A typical bank may not be the most lucrative or economical place to get a loan for a rehab property.
#4. Don’t just buy a foreclosure or short sale.
Most foreclosures or short sales are sold by the bank and they may be price below market value because they’ve been neglected. Rehabbing could be extremely expensive so don’t just limit your property search to foreclosures. You might find a great deal that just needs a little bit of cosmetic repair.
#5. Never neglect the inspection.
You might even consider an inspection before making an offer. There’s no point to make an offer if you know that the home will need thousands of dollars in the structural repair or corrections to plumbing or electricity, some of the most expensive repairs out there.
#6. Don’t over improve.
You want to buy the cheapest house in the best neighborhood, not the other way around. You want to rapidly increase the value of the house so don’t over improve the property past the maximum sales in that neighborhood.
#7. Market timing.
Timing the market is critical to understanding and getting the best deal. Of course, you want to buy a home at the lowest price possible and sell it for a higher amount, but make sure that the timing is right and a good real estate agent that understands the market and individual neighborhoods can help you make a more informed decision.
If you’re planning on rehabbing your property give us a call. We’d love to send you a list of properties that might work for your situation and your budget throughout Brunswick County and Sunset Beach.