Are you a real estate “flipper” or a”keeper”? Most home buyers are keepers, owning their houses andcondos for five or more years. However, even as residential sales pricescurrently “stagnate” or “plateau” in most cities, accordingto the latest statistics from the National Association of Realtors and othersources, flippers continue to profit.
WHAT IS A REAL ESTATE FLIPPER? There isno official definition, but a real estate flipper is a buyer who acquires aproperty and holds title less than 12 months. Other names for property flippersare “quick turn specialists” and “speculators.”
Purchase Bob Bruss reports online.
“Buy low, sell high” is the motto of flippers.
There’s nothing wrong, illegal, immoral or fattening aboutthat. However, buying low and selling high isn’t always easy.
Real estate flippers usually must add value to earn profits.Not only do flippers buy 25 percent or more below the market value ofequivalent property in good condition, but they increase the purchasedproperty’s desirability by improving it to increase the value more than thecosts incurred.
The most profitable real estate example of adding more valuethan the improvement costs is fresh paint. Everybody has witnessed a shabbyrun-down house suddenly brought to life by exterior painting.
Although your results will vary, spending $1,000 on exteriorpaint of a house often produces $10,000 increased market value, sometimes more.Interior paint can produce similar profitable results.
SPECIAL TAX BREAK FOR OWNER-OCCUPANT FLIPPERS. If youenjoy tax-free income, consider becoming an owner-occupant flipper. That meansyou buy a house or condo, move in to make it your full-time principal residencefor at least 24 months, and then profitably resell it after making valuableimprovements that add more market value than they cost.
Thanks to Internal Revenue Code 121, yourprincipal-residence sale profit is then tax-free up to $250,000 (up to $500,000when both spouses meet the occupancy test and file a joint tax return in theyear of sale).
WHO SHOULD BECOME A REAL ESTATE FLIPPER? Flipperproperties are especially attractive to beginner real estate investors gettingstarted. Having earned substantial profits from fast-flip properties, I amaware the profits don’t always materialize as quickly as expected.
For this reason, especially for the first few properties, a”get rich slow” attitude is best. Later, after experience is gained,flipping properties becomes easier, perhaps even developing into a full-timeprofitable business.
Flippers are especially ideal for investors with a flare forspotting sound, well-located real estate in need of upgrading. When you see arun-down house and cry out “yuck,” you are a potential propertyflipper.
SECRETS OF PROFITABLE PROPERTY FLIPPERS. Althoughany type of property can be flipped, most flippers specialize in houses becausethey offer the best potential and the largest market of prospective buyers. Thesecrets of profitable property flips include:
1. Find a motivated seller who wants to sell due to anurgent reason and is willing to sell below market value in return for a quicksale. Strong seller motivations include out-of-town job transfers,unemployment, divorce, financial problems, illness, death in the family, andmoving to a better house.
2. Look for fix-up properties needing inexpensive cosmeticwork. “El dumpo” houses often just need fresh paint, new light fixtures,cleaning and minor repairs, new carpets and flooring, and fresh landscaping.
Examples of unprofitable but necessary fix-up work to avoidinclude structural changes, new roof and foundation repairs, which are veryexpensive but add little or no market value.
3. Search sources of “fast flip” properties,including real estate agents, newspaper classified ads, foreclosure sales,probate sales, bankruptcies, expired MLS (multiple listing service) listings,vacant rental houses, absentee out-of-town owner lists, and properties withunpaid property taxes.
4. Drive around desirable neighborhoods looking for vacant,run-down or abandoned houses. Jot down the address, take a digital photo toremember the house, and then check the owner’s mailing address at the taxcollector’s office to discover an owner who might be anxious to sell.
If you discover a house that has been owned for many years,often with a small or no mortgage and a large equity, that owner might beextremely eager to sell at a bargain price.
DISADVANTAGES OF FLIPPERS. But flipper properties,even when they produce large profits, are not without possible disadvantagessuch as:
1. Profits from the sale of investment properties heldless than 12 months are taxed at ordinary income tax rates. However, when aflipper holds title more than 12 months, then the sales profits are taxed atthe long-term capital gains tax rate, currently 15 percent or less, plusapplicable state tax.
Of course, if you own and occupy the property as yourprincipal residence more than 24 months within the last 60 months beforeselling, then your profit up to $250,000 (up to $500,000 for a qualifiedmarried couple) is completely tax-free. Home sellers who repeatedly sell theirhomes every 24 months are known as “serial home sellers.”
2. Some flippers don’t enjoy the work of fixing up propertyto add market value. Serious flippers quickly learn do-it-yourself work wastestime and money. The smartest flippers hire professional contractors. However,obtaining cost estimates and supervising workers can be time consuming.
The goal of every property flipper is to add at least $2 ofmarket value for each $1 spent on cosmetic improvements. Wise management canoften orchestrate improvements on a typical house to completion within 30 and 60days.
3. Fast flippers who sell quickly after completing theiradded-value improvements forfeit long-term market-value appreciation, which hasaveraged about 5 percent annually, according to the National Association ofRealtors. In recent years, this annual appreciation was even greater.
CONCLUSION: Flipping properties for resaleprofits is a great way to start investing in real estate. But flippers shouldbe aware of the pros and cons of this profit opportunity, including the incometax aspects of long- and short-term profits. A valuable resource is anexcellent new book, “Flipping Properties for Dummies,” by RalphRoberts, available in stock or by special order at local bookstores, publiclibraries, and www.Amazon.com.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
Copyright 2006 Inman News