First post, first possible deal, and I would love any insights. I'm in Minneapolis, where RE isn't cheap, but the market is still very workable. My plan is to fix and flip on this one. My cousin and his wife are design build team, so I can trust my my contractor. It's a town home which has a good HOA website, prior year's financials for review, seemingly good neighborly activity and transparency. HOA is $300/mo.
The seller is in a hurry, and I have an inside connection on this deal before it would hit the market. Overall, the house is just outdated and needs refreshing. There are no pending asssessments, plus the roof and mechanicals are all new in the last few years.
Value as is: $215k
Rehab: $30k, gets me an updated kitchen, updated 2 bathrooms, carpet, and other minor finishes.
ARV: $260k - $280
There are good comps, even in the same complex, to support the ARV. My contractor could have the work done in about 30 days.
My other costs:
$10k selling costs, including buyer's agent's commission, based on my relationship with my agent
$1k, 90 days tax, insurance, utilities
40% capital gains
What other costs should I figure in? All in all the spread is about $20k - $40k. Does this seem like a good deal, with enough margin for risk? It looks good to my untrained eyes. This unit could even sell at $300k+ with a higher level of finish, though I like the target level we're at for reaching a larger buyer market.
I have enough cash to cover the whole project. Since I'm not seeing lots of other good opportunities, I'm leaning towards paying cash to save finance and interest fees. If I decided to hold the property and rent, could I finance at a later point even though I'm the owner?
Thanks in advance for any help.
Looks like you’re at 84% ARV after repairs.
What’s the back up plan? What will this rent for if you can’t sell it and how long are units like this sitting on the market?
You’re on the higher end of the first time homebuyer market and the $300 HOA could affect many buyers ability to buy this.
I’m also slightly confused on the 40% capital gains tax.
Can you clarify how you’ve reached this number?
I read that 40% is a good estimate for capital gains on a flip. Is that not right? And rent seems like a reasonable option. Maybe $2600/mo. I assume HOA monthly would be my expense. Time on market seems in line with housing. I think one comparable sold at about 20 days and on the other end, up to about 100 days.
It's a little lean but a Townhome should be pretty easy to nail the exit value on because the comps are easier and there are less construction things to go wrong. 10k seems pretty low for selling costs. I'd ask for a detailed closing cost est from your agent. Deed tax, title fees, both sides commissions unless they are doing it for fee. Also, I like to figure in a credit towards the buyer's closing costs. You won't get hit with it every time but you certainly will have buyers asking. Another due diligence thing I would look at is exactly what the HOA covers on the exterior because they vary. Good luck!
@Jordan Moorhead If you are doing multiple flips in your personal name/LLC/Partnership and not in an S-Corp then 40% may be a reasonable estimate. Key word is "multiple" flips. You are going to pay tax at your ordinary income rate (depending on your income and if you are filing single or MFJ). Lets say your normal tax rate is 24% under the new tax law. You could also pay SE tax of 15.3% on any profit (this may depend if you are flipping multiple homes and if the IRS considers you a dealer vs an investor). Thus a total tax rate of around 39%. In your case with just one flip I would say SE tax would probably not apply. There are also state income tax considerations to take into account as well.
You can also deduct any self employment tax you pay on your individual return and if the flip is done in an S-Corp then SE tax is mostly eliminated. There are "reasonable comp" requirements etc. in an S-Corp but for a high level analysis I will not get into that here.
Another option is to rent it and hold it for over a year and then pay only long term capital gains tax.
@Austin Hendrickson that's why I always like to have a good CPA around!
Thanks for the comments everybody. Yeah, it's the not the largest upside, but the risk seems minimal, and like has been said, easy to estimate the rehab costs. I'll likely make an offer today, learn a few things if it's accepted, and be happy if I don't lose any money on my first lesson.
Not enough margin in it for me. The market slows down in the winter as there aren't as many buyers and sellers in the market and with interest rates rising we don't know how it will reset in the spring/summer. If the market or purchasing power drop at all you may find yourself fighting to make a profit. If you think you are very conservative on your numbers you can go for it but I wouldn't be interested. March/April arn't great times to sell houses so you may want to try to push out closing or plan for holding costs to get you to the June. If you break even you would at least gain experience.
On the tax side, you wouldn't be paying "capital gains" - your income would be subject to ordinary income tax rates and likely SE taxes. SE taxes scare a lot of people but they may not hurt you too much if you are over the Social Security limit. In 2018 figure your MN taxes won't really be deductible so your estimate of 35-40% tax rate would be an ok estimate. Only way to get closer would be to talk to your tax preparer.
Thanks John, great perspective about the market, interest rates, and timing. Given the market slow down in the winter, is there some level of price inflation on both sell and buy sides? So one might overpay on a property in the winter, sell in in spring when prices might take a slight dip, and poof, there goes your margin?
In general prices seem to drop during the winter because there are less buyers in the market. On the other hand the supply of houses in the winter is also lower. A reduction in supply can push up prices but the lack of people wanting to move during this period of time drop it back down. In high demand areas prices may not be affected much but in general prices seem to drop in the winter and rise again in the spring/summer.
This year may be a little different though - if interest rates raise to where purchasing power is being affected the spring prices may not rise as much as the past few years.
This is all speculation - when purchasing a flip the hope is that you can get in and out quickly so you don't have to deal with a change in market conditions. The slow flippers have been rewarded the past couple years but if you roll back 8-10 years slow flippers lost all their money.
If you are confident on price and can get it turned quickly it may be worth your time.