how do house flippers actually make money when all they do is 103

Question

hi - i am a buy and hold investor but thinking about flipping.

Flipping homes to me seems like a day job where I am always looking for the next deal and at the same time i never really get any money in my pocket because i am rolling over the gains?

Am i missing something here? how do home flippers get money in there pocket without paying taxes?

David DuCille · Answer

most everyone else has hit it here but I'll add that if your quick flipping than yes you are paying taxes and since you aren't holding for more than a year you are paying short term capital gains which are taxed at the same rate as ordinary income.   Many are doing what i dubbed "delayed flips" where they do the BRRRR thing and then sell.  When they sell later 1. it's at long term cap gains rate of 15% and 2. over the past decade with a rapidly appreciating market they are selling it for even more than what they would have gotten right away.  So they make a years worth of rent and then sell for even higher profits.

Keep in mind, you pay taxes when you are making money.  If you can buy a property for 100k put 30k into it and sell it for $200k even after closing costs, you are pulling in 50k of income.  And if you are really leveraging your time by having realtors or wholesalers bring you the deals and contractors doing the renovations, you really aren't doing a whole lot of work other than signing off a few documents and writing a few checks.  IT sure beats sitting in an office 9-5.   Literally 2 deals like that a year, someone can make 100k income for 8 weeks of work.

Ezra Henderson · Answer

No I don’t roll all the profit into future properties. I pocket the profit (minus taxes) and use the original money I bought the property with to buy another.

For example, the last house I bought for 115k cash. I put 30k into it, and sold it for 215k. I made a 55k profit after closing costs. Then took the rest of the money from the sale that wasn’t profit (115k again) and bought another house with it.

Caleb Brown · Answer

On flips you can't avoid taxes. You just need to run #'s accounting for taxes. If you have all the money eaten up from taxes then you need to dive deeper into the #'s.  BRRR is popular because you can rehab a property, hold and rent it. Down the road you can 1031 into something bigger and avoid the taxes.

Dave Foster · Answer

@Akram Mollah, There are many fix n flippers out there who use 1031 exchanges all the time!!!  WAIT EVERYONE!  Before flaming listen to how they do it.

Instead of fixing and flipping their first house they do the ever popular BRRRR popularized here.   So instead of selling and only having profits to buy their next "flip". They refinance that property and hold it.  They use the refi money to buy their next "flip".  And do the same thing.  By the time they are over the one year mark they now own 3 or 4 houses.  And now the process pace escalates.  They could very easily have 2-5 houses in some process of "fixing".  Some they have purchased with refi money.  And some they have 1031'd into.  And by the say, when they 1031 they purchase 2 or more replacements instead of going one to one.  For a fix n flipping die hard this approach will only slow you down the first couple of transactions.  After that it's off to the tax deferred races!  They are fixing properties all the time.  And they are flipping properties all the time.  Just different properties at the same time.  They just have enough properties that they are only selling after owning for more than a year.

How do you pull money out?  A combination of net cash flow and refinance money (not taxable)!  I have several clients who regularly do 20-30 exchanges a year.  And everyone of them has been held for well more than a year so every one is an appropriate 1031 exchange.  Because they were patient with the first one.  My most prolific client is actually here on BP and sees these posts  If he'd like to chime in???

Sometimes people have to fix n flip to pay bills other than real estate initially.  Some just can't get away from the adrenaline.  Some just love to fix and don't love land lording.  There's reasons for both.  But a disciplined BRRRR approach can give you both!

Paul De Luca · Answer

Everyone has a "day job" but the difference is that some jobs have far more leverage to earn more than others. Being a wholesaler, agent, or flipper are still high leverage jobs because if you sell more you can earn more than someone working for a salary or hourly wage. Sure being a buy & hold investor/landlord can be more passive than any of the aforementioned jobs but unless you have a lot of units your income is going to be comparably lower.There is no avoiding taxes but like @Dave Foster explained you can defer the taxes via 1031 exchange or BRRRR to recoup a % of your money by refinancing (tax free).

Basit Siddiqi · Answer

As others have pointed out, flips are not eligible for 1031 exchanges.You are not required to keep buying up when you do flips.Flippers normally look for cookie cutter projects to work on so things can be more predictable.I.E. they may look to buy 3 Bed 1 Bath for $50,000, put $40,000 into it and look to sell it for whatever the ARV is

Carlos Ptriawan · Answer

in my personal opinion, doing 1031 even if an asset is held more than a year, is not really the best choice sometimes because, in the next purchase, you may have to rush to find a decent replacement property. I prefer to pay tax especially if I have a large PAL as the tax would be minimum.Now, you create continuous PAL by investing in a passive activity like syndication.

Carlos Ptriawan · Answer

it is not really full-time because the rehab is executed by the contractor, also flipper can just use traditional financing before a rehab if a home condition is still acceptable.The biggest challenge for flipping is not tax but unexpected surprise in my opinion,both from market and from surprise condition of the house.

Carlos Ptriawan · Answer

It is. Especially when market is stable.

Carlos Ptriawan · Answer

suspended PAL is the answer !Rehab cost and suspended PAL from other activities can easily offset profit/tax from flipping activity.It's almost like tax free even if it's taxed at ordinary income rate, due to offset from PAL and QBI deduction.

how do house flippers actually make money when all they do is 103

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