Hey it is a nice detailed expalaination for newbies and some experienced investors to take note. However, still missing several expenses such as :
1. Property Appraisal -- If I am buying from a Whoelsaler -- I like to have my own appraisal --" as-is" and after repairs value. Which may cost $3000 to $6000.
2. My Profit-- Before I decide to even consider the property --I have to make sure that I make at least $20,000 profit
for houses under $150,000 ARV and $40,000 for houses above $150,000 ARV.
3. Discount -- No one ever sells a house at Full FMV or ARV price --in todays economy. Even before recession --most buyers ask for discount off of listing price. I may discount 10 % to 15 % to sell quickly in todays market.
4. Closing Costs -- If I want to sell quickly after finishing repairs and / or increase my profits by reducing holding costs --I may have to sahre some of the closing costs for new buyer ( end buyer) --upto 3 % --- or some times offer FREE HDTV or even a Car --
5. Realtor's commission --yes -he did mention that when selling --However I may offer 5% commission instead of 3 %
to attract more buyers and more agents
interest --there by creating more competition for offers as well as reducing holding time.
That also assumes that Realtor's commission is paid by Bank ( Lender ) when we buy the house.
6. One more -- Dont forget to add at least 10% contingency --on top of contractor's bid for repairs --
7 Also --if you are buying out of state --make sure the repair estimates are prepared by that city
( state's ) local contractor--certifide and licensed in that state.
8 That reminds me another expense --if repair costs are over certain amount or for certain type structure ( such as a deck or adding new bathroom ) - may require a building permit from city or county--so add permit costs --some times included in contarctor's bid.
In general -- I never take what they show
as profit on listed properties --in BP or other websites. I assume very conservatively --half the profit or less -of the equity shown. Each property has to be evaluated on its own --based on ARV,
holding time, repairs and profit before making offer to buy.
As someone who is just starting to familiarize themselves with all the intricacies of the business, does anybody have an example spreadsheet they'd be willing to share that they use when evaluating a flip? The optimal spreadsheet would include pro-forma projections of all expenses and expected re-sale value of the home. Any help is greatly appreciated.
One other aspect to house flipping, if you are going to make it your full time job, is that in the beginning you will also need to account for your salary. Or rather, how much money do you need to have in savings to support yourself, your bills, etc. throughout the life of the flip.
One other aspect to house flipping, if you are going to make it your full time job, is that in the beginning you will also need to account for your salary. Or rather, how much money do you need to have in savings to support yourself, your bills, etc. throughout the life of the flip.
That is a valid point and is one of several reasons why you should either have enough savings to allow for it or keep your job until after the first flip profits are in the bank and the second one is about to start.
That is a valid point and is one of several reasons why you should either have enough savings to allow for it or keep your job until after the first flip profits are in the bank and the second one is about to start.
I'd wouldn't even recommend going full time until you've had a couple of flips under your belt. One or two successful flips doesn't guarantee future success.
Whenever I leave my day job I want to have no consumer debt and my personal mortgage covered for 6 months at least. That is on top of having a hefty amount of investment capital for flips.
I have a silly question that's been bothering me lately. When an investor flips a property, how do you know how much to put back for income tax? What would a newbie do say for instance...they flip 5 houses in one year and owe the government for all of the earned income? Is there a way to pay earned income to the government after each flip is sold? I have never done a flip but I am seriously thinking about starting one soon, not until I research and put in my due dilliagence:)
There is something called quarterly estimated payments that you could use to pay incrementally during the course of a year.
Keep in mind that you can pay estimated taxes anytime and as many times as you'd like throughout the year -- it doesn't have to be quarterly (though in some cases you'll risk penalties by not paying at least quarterly).
Excellent. Thank you. It's good to know what the professional house flippers do. Although I would like to start out how the successful flippers started out. Im sure after success your buisnesss model changes and you can pay one lump some to the gov at the end of the year for earned income:) thank you for your advice. I appappeciate it. Some day i'll know enough to add a meaningful contribution to bp.
In addition to all that, before you complete your first flip, you should have this discussion with your CPA. If you don't have one, don't start a business until you have built your team and one of those team members is your CPA.
This article is definitely an eye opener for all newbies like myself and anybody who intends to speculate with flipping strategies. I'll be honest, I feel amazed and somewhat scared about how the entire flipping process goes and what it involves, particularly with the costs incurred. HGTV better work on some more in depth description of how those "pros" happen to go through the entire process and make it look like it's an easy game. With practice, of course, the game becomes easier but for us beginners it could mislead in thinking that it's just the handyman work and that's it. I'll definitely keep this article as part of my niche strategies and criteria to undergo in such investment venture. Overall, if you eventually know what you're doing you'll end up loving the game and therefore become an expert at it. Best of luck to everybody!!
No --that price is variable based on what state and what price range --In Atlanta it may be from $350 to $800 for normal appraisal --but for ARV appraisal from an experienced person who specializes in that may be $1000 to $1500 --I may have over priced that --Point is just keep in mind to add appraisal cost as another expense .. Thanks
champak shah
I did the 'appraisal' on the one I'm going to lock down today on my iphone while drinking beers at Tilted Kilt last night. OK, I did go get my laptop and dork out at the bar checking FMLS solds some when I realized it was a winner from my Redfin, Zillow and Trulia apps, but you get the picture.
This is for everyone, not trying to bash people, its your business, run it how you want, but personally I trust agents over appraisers, they have a better feel for the market. Appraisers tend to be more technical and miss the emotional stuff that people are willing to pay for (or not buy over). Appraisers also work larger areas so dont really know the local market as well. Plus, agents will do the work for free if they know they'll get the listing when you're done. If you need help on the rehab estimate, pay a contractor $50-$100 to write up a hard estimate. Or better yet, buy J Scott's book on estimating and do it yourself.
The only one I had appraised before I bought did more damage than helped. It was my first one over $500k so I thought I was covering my bases. Guy I used was way off. Lesson learned.
Not trying to bash anyone, its your business run it how you want, but paying that kind of money for what is nothing more than a fancy opinion is just silly IMO.
BTW, I'm with everyone else, I watch those shows knowing a lot of times they lost money on the deal they show a 'Potential Profit' on. I had to quit watching them because the cost on repairs was not even remotely close to reality and it would just piss me off.
It doesn't take but doing one flip to realize what the hidden costs are. I don't line item mine out before hand (although I do check taxes beforehand in some areas), if my margins are right it all works out, but generally I'm at 15% in costs on any given rehab so if I buy at what BP preaches (70% less repairs) my profit is around 15% of the ARV when the dust settles. I was buying at 65% or better for a while there, but lately its been hard to find them at 70%. so I've been cheating a little. BTW, that 15% cost includes cost of money at 100% of costs with private lending, I pay a little more for that but can do more deals that way.
You can have your projected income tax liability withheld at settlement and sent to the IRS by the title company.
stephen
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Originally posted by @Koel Gaylord:
I have a silly question that's been bothering me lately. When an investor flips a property, how do you know how much to put back for income tax? What would a newbie do say for instance...they flip 5 houses in one year and owe the government for all of the earned income? Is there a way to pay earned income to the government after each flip is sold? I have never done a flip but I am seriously thinking about starting one soon, not until I research and put in my due dilliagence:)
Yes, article was good, but as others have mentioned before, it only accounts for the costs per flip. If one does this full time, there are recurring costs that run through the year that eats away from each flip project, ie hiring a CPA and attorney, in CA we have the costs of a franchise fee to maintain a business in the state, gas money to cover all the driving we need to do looking at potential flips, marketing costs to secure sellers.
And here's one costs that is attached to a flip that we do. In projects that require a whole bunch of jack hammering and noise, we normally give the neighbors a gift card or a bottle of wine to thank them for putting up with the noise. :D
This has been a very helpful thread to read through. I have a high interest in doing flips so reading all of this information is great to me! If anyone has anymore valuable information please post it up!
I agree Gelnn, my post above was what i would consider the minimum amount before even thinking about quitting the JOB.
Great comments on this post, Will. I have one rental bringing in net $1,600 monthly as the house was purchased with my cash. Our personal residence (where we live) was also paid for with cash and have no mortgage. We (my wife and I) run 2 businesses (Nutrition shop and Web Development) that brings in a enough to sustain us along with investment money that brings in about $5,500 monthly. I was forced out of my job as an Electrical Engineer in 2007 and been self employed ever since. We are working to get a HELOC now to do more investing (mainly flips for now).
Expanding into RE investing has been a dream of mine for many years. And now I have the opportunity to make it a reality.
PS. The only flip shows to me that is somewhat accurate in their numbers is "Flip or Flop" and "Flipping Boston" as they always show their holding costs, realtor commissions and other costs when showing their numbers at the end of shows. "Flipping Vegas" is one I like for entertainment only because none of their numbers are ever realistic.
There are some great forms that help break this information down as well (posted on BP of course)! Thanks @Joshua Dorkin for the great information yet again! Always impressed with how much I can learn from this site!
I was just asked a question via PM that I thought I should post here on this thread as it is very applicable to the topic.
The question was, if the renovation costs should be estimated by taking $15 per square foot and multiplying by the number of square feet of the property.
Here is my answer:"You are doing it wrong as you were advised incorrectly. Taking some arbitrary figure like $15 per sq. ft. and multiplying by the square footage of the subject property is NOT how you properly or accurately calculate a renovation budget. What if I had identical model match homes of equal size but one needed a new roof, new HVAC, and had major plumbing issues while the other one just needed kitchen and bath upgrades, paint, and flooring? Same size home but two totally different renovation costs.
You need to learn the costs associated with each item, walk that property and identify everything it needs and then total it all up. That is the ONLY way to come up with an accurate rehab budget."