Flipping is one of the first things that people think of when they consider getting into real estate investing. “Flipping” being you buy a house for below market price, fix it up and then sell it to make a BIG chunk of money.
With shows like “Flip or Flop” on HGTV, flipping looks like a piece of cake. The truth is that it’s a tough job.
When I say job, I mean job. Flipping is not a passive income situation like rental property or owning a note. These pay you each month with minimal continued work.
Flipping requires you to design the rehab, line up contractors, do work yourself and buy materials for a solid month. You literally put in 40 plus hours a week until it is completed.
The IRS treats flipping as if it were a job. Yours profits are taxed at your income level plus Medicare and Social Security taxes. That is 40-50% gone before you see a dime. WOOHOO!
The toughest part comes next.
This job only pays when the house sells. That means you regularly go SIX MONTHS without a pay check. I heard a wise lady say that Realtors, Investors, and Attorneys are all volunteers until the house closes. Boy was she right.
Can you go six months without a pay check? Consider that before you quit your job and decided to flip houses for a living.
An ideal flip takes 91 days from start to finish. Why 91 days? Banks require an investor to hold the property for 91 days before they will lend to your seller. They call this “seasoning”. Most flips, however, take longer than 91 days.
The longest flip in our career took ten months. We did a beautiful thirty day rehab and got the house on market right before school started.
One night a Realtor called and said they heard water in the house. Those words will stop you in your tracks! I high tailed it over to find that a supply line under the sink had busted and had been running all weekend. The normal $15 water bill was over $100. (That’s a lot of water on the floor.)
This caused the tile to crack in the kitchen and we had to pull it off market to redo the floors. This put us way over budget and into the slower winter market.
Making a huge chunk of cash is what makes flipping so attractive right? Let’s look at that. A good profit on a flip is 20% of the selling price. If the median house sells for $150,000, you will make $30,000!
$30,000 … Don’t all those zero’s feel good? Except one thing… Taxes.
Your taxes will reduce your profit to $18,000. OUCH!
Still, $18,000 is not bad. That is $3,000 per month if the deal took 6 months sell. Doing the math that comes out to $17 an hour. Not a bad gig, but it’s a job none-the-less.
Flipping your way to financial freedom is not common. It is time intensive and highly taxed. Plus, you have to continuously be looking for the next house. Otherwise your income stops.
How could you retire this way?
Flipping ain’t easy and it is a job; however it is also an important tool used to gain assets. The savvy investor will use their flip profits to invest in rental properties.
Let’s say you took one flip and bought a double wide on an acre of land. You then fixed it up and rent it out for $700/month. That one deal will make you an extra $8,400 a year for ever!
How may of those would it take to replace your income? My guess is not many. That is the way you retire my friends, and that is why you should be flipping.