House flipping is not for the faint of heart
By Louise Bolger
sun staff writer
I was having a conversation recently with a college age nephew about his future. Among other noble ambitions, he told me he wants to flip houses in his spare time. Aware that with the possible exception of myself, no one in his family was in the business of selling real estate or buying investment properties, I wondered where this particular interest came from. He told me that he watches "Flip That House." on the TLC channel. Well, that was enough to get me to tune in so I could see what I was missing.
"Flip That House" profiles individuals who purchase less than desirable properties, spend time, money and elbow grease to fix them up and resell at a profit. One of the properties highlighted was purchased for $90,000 in Columbia, S. C. The owner planned on flipping it in three weeks with a budget of $45,000.
They showed how the kitchen and bathroom were renovated, an interior wall removed and a new bathroom added. There was also a fireplace renovation, interior and exterior painting and floor refinishing. The show was interesting if a little broad in scope relative to how all this got accomplished in three weeks on a $45,000 budget.
When the renovation was complete, the house was listed for $214,500, an impressive number for three week’s worth of work. However, what they never talked about, which would have been helpful to my young nephew and future flipper, was where did the purchase and renovation money come from? They left the impression that there is money to be made in flipping, and there is, but not easily for the novice flipper.
Flipping is not for the faint of heart and definitely not for anyone who doesn’t want to spend his leisure time getting his hands dirty. Everything takes twice as long and costs twice as much as you first anticipated, and if you’re doing your flipping in a down market, you’re profits will be considerably less.
That being said, first time buyers who want to get in the game have some very attractive first time buyer financing available with little or no money down. If you live in the house for two years, fix it up and sell at a profit, there are no capital gains, as long as your profit is below $250,000 for an individual and $500,000 for a married couple. This is the best way for a young person to get started in real estate, make the initial purchase and sell for a profit without paying capital gains tax, then move on.
Savvy flippers and investors know to look for the real estate "orphans," the worst houses in the best neighborhoods. They also know how much return they will get on renovations and which renovations get the best bang for the buck. For example, kitchen renovations can have as much as a 102 percent return on cost. They also calculate having professional help in order to move the project along. The longer you hold a property and pay the mortgage, taxes, electric and other carrying costs, the less profit you receive in the end. And profits on non-owner occupied investment properties are taxed as a capital gain, cutting into the money in your pocket.
Don’t get me wrong, I enjoyed the show and will probably keep watching. But it makes the assumption that you are already an investor and understand all about flipping houses, which could be misleading to neophyte investors like my nephew. Like all things in life, if it sounds too easy, it is. Too bad you can’t know this when you’re 19.