About House Flipping
In the last few years, the idea of buying a house for a low price and then selling it at a high price has created quite the trend in the real estate market. However, as home prices start to stabilize the risk of house flipping becomes greater than the potential profit.
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Types
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There are a couple of different ways that an investor can profit from flipping a house. The one most popularized on television shows such as "Flip that House" are when investors purchase a house that is in need of renovation. The investor renovates the house and then sells it for a profit. However, the type of house flipping that's more common, but less well-known, is when an investor purchases a distressed property in foreclosure, or at an estate sale selling below market value. Without doing any renovation the buyer will immediately turn around and put the house for sale at market price.
Misconceptions
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Some people believe that since a person is not charged taxes on profit from selling her personal residence then the same rule applies to house flipping. In fact, a profit from a house that's been flipped is subject to capital gains tax. There are two tax brackets for this tax. If the investor sells the house in less than a year, they will be charged as much as 35% in taxes. If they sell after a year of owning the property the investor will only have to pay a maximum of 15% in taxes.
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Considerations
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It's easy to think about all the profit in house flipping without taking into account all the taxes and fees involved. These taxes and fees include capital gains tax, pre-sale taxes, property transfer taxes, legal fees plus any fees that the lender may charge. According to Best House Flip, for an investor to see any profit, the house must sell for at least 10% more than it was bought for to see a profit. There is also a great deal of risk in house flipping as with any investment, that the house won't sell in a timely fashion, and any profits are eaten up by mortgage payments.
Benefits
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Obviously the major benefit of house flipping is the potential to make thousands of dollars in a short amount of time. It can also be done in someone's spare time, so it doesn't have to interfere with a full time job. Additionally, house flipping which involves renovation can potentially help to renovate a neighborhood by creating jobs for contractors in the area and helping to create a safer neighborhood under the theory that a house that is looks rundown will attract criminal activity. Plus a house that sells for higher will help to bring up the average sales prices of the rest of the neighborhood.
Potential
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Before the housing bubble burst the potential for house flipping and real estate investing had no limit. As the real estate market continues to bottom out however there is less and less interest in real estate investing. With interest rates at record lows and foreclosures on the rise there is still the potential for an investor to make money flipping houses, however, with houses staying on the market longer, mortgage payments and taxes will result in much lower profits than once seen.
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