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a little background about us,
My wife and I own 2 sfhs, one is occupied by tenants, the one that we are living in is a 4bed2.5bath house. To make some extra cash, my wife and i live in the master, rents out other 3 bedrooms. We both have white collar jobs。
Landlording is nice and im sure it can be profitable in the long run, but we only get to collect rent once a month, I want something thats profitable in the short term! so i have been seriously considering flipping houses in the past few months, it is more risky, but i can also get my return faster.
things that i have done so far
1. I am in the process of getting my real estate license. After buying 2 houses, i am getting sick of RE agents taking a commission from me for doing pretty much nothing, even a commission with rebate.
By getting my own license, i will be able to access the local MLS myself, buy and sell houses without letting RE agents to take a cut from the sale of the house. Also, i want to study my local real estate market a bit more thoroughly before actually buy a house to flip.
I understand in doing so, i will be opening up myself for liability, but thats also the reason why i will be able to take the 3% commission.
2. If you want your flip to be a profitable one, you typically have to know how to do the work, or at least some of the work yourself. I installed light fixture, blinds, repaired drywall in the past, but never installed hardwood, countertop by myself. My brother in law lives in Toronto, he has been working for a contractor in the past couple years, it gets pretty cold in the winter there, so he is also interested in coming to Texas(where we live) to flip house in the winter time.
3. Financially, together, we(me, my wife, my brother in law and his family) probably should be able to come up with $150k cash by the end of this year. If we absolutely need more cash to complete the job, we can probably borrow another $50k from relatives.
Ideally, we want to buy a house for around $250k, the house has no structural problems, we put 25% down(roughly $70k), borrow the other 75% from the lender, spend another $50k to fix it up, and have $30k in emergency fund. As much as i hate to say it, when it comes to flipping house, things will go wrong, and we will have to deal with the unexpected.
can you take some time and explain better what you mean by this?
Quote:
Landlording is nice and im sure it can be profitable in the long run, but we only get to collect rent once a month, I want something thats profitable in the short term! so i have been seriously considering flipping houses in the past few months, it is more risky, but i can also get my return faster.
can you take some time and explain better what you mean by this?
For the house thats currently occupied by tenant, when we bought the house, we put $60k as the down payment of the house, and we get about $1.7k/month in rent. After doing some calculations, over a 20 year period, we get roughly 6.7% ROI, which isn't bad, but when it comes to flipping houses, if i really want to and the opportunities really present themselves, i can do it multiple times a year.
Say i put 25% down on a $250k house, and borrow the rest from a lender, i invest another $50k to upgrade the property, sell it for $320k 3 months later. Roughly speaking, my expense will be $112.5k + cost to carry the property, my profit will be $320k-$250k-$62.5k=$7.5k-cost to carry the property, my ROI on the house will be ($7.5k-cost to carry the property)/100k. The thing is if i do this 3 times a year, invest 120k on each house and make roughly $10k on each one. My annual ROI will be much higher.
Also, when it comes to landlording, all the money that we are getting from the rent, we are using it to pay for the mortgage and property tax, so the cash flow on the house is roughly 0. I am sure over time, the cash flow on the house will slowly increase, but i don't like to wait, i want money and i want it now.
Last edited by some1livesinamerica; 01-18-2018 at 09:09 PM..
1) The best flippable properties are cash only properties. You sound like you want to take a basic cosmetic fixer and get a much higher price for it. Maybe your market can support that, but that sounds like a stretch to me.
2) You need to add in all of the loan costs and the closing costs associated with buying and selling a property. Title insurance, escrow fees, etc.
3) You aren't factoring in capital gains tax.
4) You aren't factoring your carrying costs for being a real estate licensee.
5) You are nuts if you plan to flip a house with a $10k profit margin. That is insanely risk and make no business sense whatsoever. We have had flippers here try that and when they didn't get their asking price. They just did all that work for no profit.
For the record...I don't flip but I buy houses for cash, fix them up, and rent them. Your business plan as outlined here is risky and unrealistic. You can expect to lose money if this is your plan.
1) The best flippable properties are cash only properties. You sound like you want to take a basic cosmetic fixer and get a much higher price for it. Maybe your market can support that, but that sounds like a stretch to me.
2) You need to add in all of the loan costs and the closing costs associated with buying and selling a property. Title insurance, escrow fees, etc.
3) You aren't factoring in capital gains tax.
4) You aren't factoring your carrying costs for being a real estate licensee.
5) You are nuts if you plan to flip a house with a $10k profit margin. That is insanely risk and make no business sense whatsoever. We have had flippers here try that and when they didn't get their asking price. They just did all that work for no profit.
For the record...I don't flip but I buy houses for cash, fix them up, and rent them. Your business plan as outlined here is risky and unrealistic. You can expect to lose money if this is your plan.
Thanks for your advice first of all, see my response below,
1) the problem is if we want to pay cash for a property, we will have to go to blue collar or even ghetto neighborhood. If we flip a 250k house in the area that i live, worst case, it doesn't sell at the price that we wanted, we can still rent it out and sell it later.
This is another reason why i think getting a real estate license is imperative when it comes to flipping house. I kinda want to track some of the flipping houses in my area, see how long it takes to sell a flipped house, why certain flipped houses sell faster than others, why some stays on the market for a long time.
2) Agree, thats why i kept using the phrase "rough estimation"
3) my wife is a CPA, we will figure out the tax part out once it is all set and done
4) im not factoring the 3% commission that i get from selling and buying either, it is just an estimation
5) the #s that i used are just some arbitrary #s. I am sure when we actually decide to buy a house, we will set some stricter rules on how much we should pay for a property, how much we will spend on upgrading. The point that i wanted to make is that flipping house is something that can be multiple times a year, it is active income, rent is passive.
Last edited by some1livesinamerica; 01-18-2018 at 10:39 PM..
Location: Formerly Pleasanton Ca, now in Marietta Ga
10,352 posts, read 8,578,998 times
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Hmmmm
You say Say i put 25% down on a $250k house, and borrow the rest from a lender, i invest another $50k to upgrade the property, sell it for $320k 3 months later. Roughly speaking, my expense will be $112.5k + cost to carry the property, my profit will be $320k-$250k-$62.5k=$7.5k-cost to carry the property, my ROI on the house will be ($7.5k-cost to carry the property)/100k. The thing is if i do this 3 times a year, invest 120k on each house and make roughly $10k on each one. My annual ROI will be much higher.
I'm not seeing the profitability. When you sell you will probably have to pay 3% to the buyer's agent which on a $320K house is $9.6K. What about closing costs on the first loan? Let's say $4K. Add the $50k you put into rehab and you have $63.6K into it. Add your carry costs of $7.5 k and now you are into it $71.1K. Add some closing costs when you sell and you would be into it about $72K.
Your spread from purchase price to sales price is only $70K so you lose $2k on each house.
three times a year you lose $6K a year.
AND, that's assuming you don't run into roadblocks like delays, not estimating ARV correctly.
This whole thing unless I am missing something sounds like a disaster that newbies who have $ signs in their eyes with no experience get killed on.
Most successful flippers unless they are in a really high end market ( higher than yours) and one that moves quickly want to buy and rehab at 70% selling ARV. Thus a $320K house if it needed $50K of work needs to be bought at at $174K.
That allows a profit and contingencies for work delays, slow sale, less than asking price etc.
Location: Formerly Pleasanton Ca, now in Marietta Ga
10,352 posts, read 8,578,998 times
Reputation: 16698
You should figure out the tax ramifications now, not afterwards. A lot of CPA's don't have a good grasp on real estate.
BTW you probably will not get the benefit of paying the lower Capital gains tax but instead will pay higher ordinary income tax. Since your flipping within a few months you won't hold the property long enough to get capital gains status plus as often as you flip it is a business subject to ordinary income tax.
Oh and you know you will probably be trying to get a hard money loan and anyone of them will look at your numbers and probably not do the loan.
If you try to get a conventional loan you may not get it as it may not even appraise.
You are not figuring in the cost of keeping up that real estate license. It's EXPENSIVE. The local area board of Realtors fees will kill you, alone. Never mind the initial costs for testing, schooling and licensing.
You can track homes on your own without having to get a real estate license.
If you sit down and seriously add it all up, you'll be happy paying the 3 percent commission.
OP, you live in a 4-bedroom house and rent out 3 of the bedrooms (which I would absolutely HATE, but that's just me -- no privacy whatsoever). Aren't those 3 renters paying your mortgage for you? If so, and you and your wife both have white-collar jobs, you should be saving/investing a ton of money every month ALREADY, unless your expenses are insanely high. So your post is puzzling.
What you are proposing to do is a bit nuts, as others have said. (And if your brother-in-law were to come down to help you, wouldn't you lose rent from one of the 3 bedrooms in your house, since HE would need a place to live too? SO many things you haven't considered.)
You are not figuring in the cost of keeping up that real estate license. It's EXPENSIVE. The local area board of Realtors fees will kill you, alone. Never mind the initial costs for testing, schooling and licensing.
You can track homes on your own without having to get a real estate license.
If you sit down and seriously add it all up, you'll be happy paying the 3 percent commission.
For me to get my license, i need to pay about $1,000 in taking the classes, fingerprint and etc. I will shop around when i try to figure out which broker i want to work for. Different brokers charge different fees.
If i don't get my license, TX is a non-disclosure state, every time i need to find out what a house actually sold for, i need to get in touch with my agent, it is a slow and inconvenient process. Plus, to flip a house successfully, i really i need to study the local real estate market more thoroughly, otherwise if i base my decision solely on how much i can get the house for and how much houses in the area sell for, im not flipping, i am simply gambling. Track some of the flipped houses in my area, understand why some houses sell really fast, others stay on the market, try to avoid mistakes other people have made, and implement the things that other people did right on my own flip.
Also, from a financial point of view, if i work with an agent, even with a negotiated commission, my agent takes 1.5% from the sale of a 250k house, thats $3.75k, when it comes to selling, say the house sells for $330k, my agent actually does some real work for me, she takes 2%, thats $6.6k. Together, my agent took a little over $10k from the entire buying and selling transaction. For me to do it on my own, i need to invest $1k to get my license and then maybe $1.5k in keeping it each year.
Last edited by some1livesinamerica; 01-19-2018 at 08:56 AM..
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