As real estate prices have risen dramatically in recent years, home sellers are making record profits. According to Bankrate, the median home price across the U.S. is about $486,000. The national median price of a home in Canada was C$657,145 as of December 2023, according to WOWA, a Canadian personal finance resource.
While home flipping was popular even before the rise in real estate prices, rising prices have prompted some novice home flippers to take the business more seriously. Sure, the potential for big profits is high in a market where high prices are the norm, but anyone considering flipping might find it helpful to get an overview of how it works before deciding whether it's something they want to do.
What is flipping?
Flipping works when an investor purchases a property with the intent of selling the home (or business) for a profit, without actually using it. The basic premise of flipping is to find a property at a low price and then sell it for a much higher price, usually after renovating the home. According to Investopedia, it's important to complete this transaction as quickly as possible to maximize your return on your investment.
Don't underestimate the investment of time and money
Many novice flippers overestimate their skills and knowledge and end up losing money in the process. A common mistake is thinking the project will cost less or that the house will be renovated quickly. It can take months to find the right property, and then time to renovate. The costs involved include the initial sale, renovations, holding costs, and capital gains taxes when the sale is completed. All of this can eat into profits.
Limited inventory makes things tough
With everyone wanting to get into real estate these days, it can be hard to find a good deal. Fierce competition in a market with low inventory makes reselling like searching for a needle in a haystack.
Understand tax benefits and risks
According to Tressa Todd, founder of the Women Real Estate Investors Network, in the U.S., flipping real estate can be less tax efficient than investing in investment properties. Flippers pay short-term capital gains instead of long-term capital gains. Capital gains tax is paid when you sell an asset for a profit, according to NerdWallet. Capital gains tax rates depend on whether you hold the asset for less than a year or more than a year. Long-term capital gains tax rates are generally lower than short-term capital gains tax rates.
Follow the 70 percent rule
Most home flippers follow the 70 percent rule, which says you should never pay more than 70 percent of the home's estimated ARV (after repairs value) minus the cost of repairs needed to renovate the home, says Rocket Mortgage. The ARV is calculated by taking the current property value and adding value from renovations. The formula is ARV x 0.70 – estimated repairs = maximum purchase price.
Flipping a home may seem like a good idea, but anyone considering flipping a home in the future should make sure they fully understand the process, including the financial commitments involved, before making a purchase.
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