I'm new to the RE investing world after spending most of my life in the film industry and I'm looking to make the switch. I just spoke with one of my mentors and he suggested I start off by targeting a good and relatively cheap up and coming neighborhood and become a RE agent. Then, when I begin to learn what makes a good deal in my targeted area I can begin searching for investors and go in with them. He said I ought to start small and look to make quick one year flips (for the lower capital gains tax) with properties that require only basic changes. After I have a couple of small flips under my belt and some investor backing he suggested I could scale up to bigger flips or move on to buy and holds.
Any thoughts or suggestions on this strategy? From previous threads I know some people are very wary of obtaining a RE license, but in this situation could it be a viable option?
This is tangential to your question, but wanted to mention it...
If you purchase a house with the intention of fixing and selling it, you will ultimately pay marginal tax rates on your profits, NOT long-term capital gains, regardless of how long you hold the property.
If the IRS determines that your intent all along was to sell, they will label you a dealer (at least for that transaction), and the property will be considered inventory, not an investment.
If creating a tax strategy around your investing efforts is important to you (and it should be), make sure you consult a qualified CPA or tax attorney before you start making assumptions or listening to other investors (including me :)...
A flip that takes a year is not "quick." Furthermore, as Jason said, if you do this a lot it becomes income from a trade or business as opposed to LT capital gains. Finally, even if you got the LT cap gains treatment, it will be more profitable to do several flips in a year with the same capital and pay higher taxes than to underutilize your capital in order to save on taxes.
1. When you started flipping how many houses did you complete in your first year?
We did 13 our first year. The first couple took an extraordinary amount of time, but that's because we focused on building systems and processes that would allow us to flip additional houses much more quickly and easily.
It worked...while the first couple took a really long time, the rest were pretty quick and easy...
My recommendation is to always think of it as a business, and each house should be done in a way that makes all future houses easier, cheaper, and quicker...
2. If you were in my shoes and trying to break in, would you consider starting off as a RE agent? If not, what approach would you recommend?
There is certainly nothing wrong with getting your license (in my opinion). It will give you access to the MLS, it will give you access to other agents, and it will allow you save/make more money on your own flips.
That said, having your license certainly won't make or break you. Do it to enhance your business and make things easier...don't do it because you think you have to. There are certainly ways around all the problems that getting your license solves, and it takes a fair amount of time and effort to get licensed.
3. When you're zoning in on a good area to find flips, what's most important in your mind to look for?
I want areas where I see other houses selling quickly and where market values aren't decline much, if at all. Having lots of other houses selling in an area not only means that you are looking at a desirable area, but it also means that you will have less concern when it comes time to get an appraisal (you will know what to expect).
I also look for areas where other investors have come in (or are starting to) and are flipping houses. Lots of renovated houses will draw a lot of potential buyers, and other investors can do your marketing for you.
Thanks for the candid advice. A couple follow-ups to #3:
Where do you go to data mine local stats such as population growth, days on market, and appreciation? Is it as simple as MLS or are there other reliable resources out there?
What indicates to you that investors are beginning to trickle into an area and are flipping?
How much of your information is acquired via networking / walking / driving vs. statistics?
Real estate investing is probably one of the most prolific careers. One can begin real estate investing with shoestring budget, and you can do it part time or full-time according to your convenience.
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I would sell right away if you want to sell right away, and hold it for a year or more if you want to pay down the loan or if selling it lease/option is the only way to get it occupied when fixed up. I would never hold something just for tax purposes. With the right CPA you can sell everything now and still pay very little in taxes.
Sage,
Like mentioned above there are TONS of post about obtaining a real estate license. I think there are several questions to ask yourself.
Do you WANT to be a Realtor?
or are you doing it just as a stepping stone to becoming a Investor? Im not real farmiliar with Newton Mass, but my experience with my real estate license in AZ is it cost alot more then you realize. all kinds of Fee's and requirements to obtain it and ends up costing alot more then I orignally realized. I could see it being worth it if I wanted to sale real estate full time, as a realtor. But as far as it helping me investing? almost none. Public access is allowed for most MLS's and they dont show quite everything but most info. One thing that you cant access is actual sales, but I dont think it's worth the money unless your investing a ton. Personally I'm at the beginning in investing and purchase a house every 5 or 6 months. A $20,000 house every 5 months doesnt make sense to obtain a license. The savings for me personally doesnt add up for me to obtain my license in Texas where I currently am. 3% comission (or 1.5 after broker split) on a 20k house just isnt worth it. Plus most real deals, wholesale deals, dont offer comission! so actually on the last 3 or 4 I've purchased none of them would of provided any comission. Now if i was investing in 200k houses, maybe it'd be worth it for the $6k Comission. REO's generally have good comission. My area also has very good public access to the MLS, unsure if it's like that in all areas.
I also do not sale my properties, never have. Might make a difference if your looking to flip properties, you would possibly be able to save some comission. Need to find a broker ok with that. I would research more locally before I went too much further.
Is there a pay per month/sale type broker in your area? (ex. $50 month desk fee and like $350 per sold deal. )
Dont forget you'd still have to offer the other realtor a comission, so at most your saving maybe 3%. If you become a Realtor you have to disclose every time you attempt to purchase or sale real estate.
-Scott
Scott, if I were to become a RE agent it would be a stepping stone toward a full-time REI. FYI Newton, MA is a pricey suburb 15 min outside of boston. Most areas go for $400K to way, way more. However, I feel like it makes more sense to work outside of Newton since when I'm able to invest it certainly won't be here!
There is one brokerage that offers to pay for all fees and courses associated with the license if you make one deal in the first 12 months you're with them.
I haven't heard of many investors starting off as a RE agent, but I might be wrong. If anyone of you have, or know of someone who has, I would love to hear how it turned out.
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Nov 11 '09, 10:19 PM
