flipping houses

[Pat]

Don't let all of the people says the markets are soft get you down. People are always buying houses, so if you do it right that isn't a concern. Timing a real estate market is like timing the stock market, it's not a good idea. A down market is the least of your worries.

Given the right skills, training, outlook and cash, it is possible.

To start with, when you sell a house you lose about 7% right off the top in broker fees. So you need to minimize that. So go get your license and train to get your brokers license. That will significantly add to your bottom line and give you a good knowledge of the local market.

Then go get some training. To start with, get trained in lead-safe work practices. Then in plumbing and electric. A course on kitchen counters would also be a good idea -- maybe from Home Depot. Get the training you need.

Figure you won't make a profit on 100% of the houses and you need enough money to put one house on the market and start the next one. So figure you need enough money to do 3 houses at a time. This is money you can safely lose without hurting your family. You never want to be playing with money that you need.

You're talking non-owner-occupied houses and you don't have a track record, so figure you can borrow 75% of the price from a bank.

Who knows what the market is where you live, but let's figure you can buy a house for $100,000. So you need $50,000 plus closing costs, lets say $55,000. Now you want to put $20,000 into it. So you are up to $75,000. Now a wonderful person comes in and buys it for $150,000 and you've held it for 3 months -- pretty quick turn around.

This math is sort of off the top of my head, but here we go. Other might come to a different conclusion, but that's cool.

Expenses: Purchase $100,000 + $5000 closing cost + $20,000 repairs. New expenses: $1,500 interest and $2,000 taxes + 10,500 real estate commission +1,000 closing expense. Total Investment: $140,000

Sale price $150,000 - $140,000 expenses = $10,000 profit (for 3 months work)

I think the capital gains rate is like 20%, so you get $8,000.

So go look at houses in your area and run some numbers and see what it looks like. Tha'ts the only way to know.

Now two final points. First, for your house or for other homes, get trained on lead safe work practices. You've got kids and you don't want to harm them. Even working someplace else you could bring lead home on your cloths. Second, notice in this calc that the real estate broker made more money than your did. Having a real estate license will significantly increase your bottom line. "for sale by owner doesn't cut it".

[hallerb]

Richard davis who started the TV craze on flip this house advises START SMALL, bigger jobs bigger risks:(

Richard and trademark got booted in a A&E shakeup but weill be back on the air with a similiar show on discovery.

trademark has a multi million lawsuit against A&E

[John Keiser]

Not capital gains rate, AFAIK.

[Todd H.]

This is fabulous. LOL--gonna be usin that in the future for sure.

[gfretwell]

It is also true. The other guy who made out like a bandit was Levi Strauss, selling pants.

[bambam]

They are SHOWS. Television ain't real life. People don't blunder into making large profits on small investments in anything, houses included.

That said, people do make money by fixing and fllipping .... I'm one who does, consistently.

You need several things going for you:

1) The first rule is that you make the profit when you buy, not when you sell. Selling only realizes it.

You need access to listings and sales data so you can keep current on the market. Otherwise, you won't recognize a bargain when you see it.

You also need a strong sense of neighbourhood trends and timing.

2) You must have the knowledge and savvy to decide what renos to do, and the ability to do them or cause them to be done. I started buying fixer uppers as a way of providing work for my guys when we hit a slow time ... I'm a renovations contractor.

The key is to neither under nor over improve.

3) You must be able to make the timing work. Interest expense and property taxes can chew you up pretty good if you can't.

4) You must have deep pockets.

First, these are risk investments, and are only as bankable as you are.

Second, the better returns are on the higher end. It is easier to make a hundred thousand on a million expenditure that it is to make twenty thousand on a two hundred thousand expenditure.

My first advice would be not to get into this. First, because interest rates are rising which will soften most markets. And second, because given the time and risk it will take, you'd probably be better off taking a part time job.

That said, start with your own house. Fix it, sell it. Keep doing it, until you have a track record and a really good feel for the market. By then, you'll have the answers to all your questions.

And you'll know whether or not it is something you can do and want to do.

Ken

[mrsgator88]

I have a friend who does something similar. Here's how it goes.

Buys a house cheap in a somewhat run down area. Fixes it up somewhat to make it a desireable rental house. Rents the house, then borrows against the increased equity to make the down payment on another house. Repeat!

PROS

- No realtor commissions because its never sold

- Cheaper to fix up, because its only going to be a rental

- No seller concessions. Want to rent it fast, just cut the rent a little or throw in a free month, much cheaper than typical seller concessions

- Tax benefits - you get to keep writeoffs and avoid capital gains

CONS

- Cheap houses are hard to find now (except in places where it may be hard to rent them)

- Interest rates are so much higher, this directly affects your profits

- Have to work fast to get a renter to

- Hard to find workers who work cheap but good and fast

- Harder to finance, lenders are leery of fixup equity, too many have been burned by fixup scams

So my friend has been doing this for a few years now. Its a little like a pyramid, every time pulls equity from a rental house he uses some for his own living expenses. To make a little more money, his wife got a realtors license to get back some commission on purchases, and she also became a mortgage broker to get back commission on their financing. She also does some deals for others as well (but not full time, they've got 4 small kids and another on the way.) Because its now hard for him to (profitably) convert properties, he may have to get a job for income. Even if he sells his rental houses, they are so highly mortgaged that once the mortgages are paid off there wouldn't be much money left over. But eventually the rents will go up, the equity will go up, the mortgages will be paid down, and he'll be making good money. But that's years from now.

There once was a time when real estate was going up so fast that "flipping" didn't take brains, just enough money and enough time. Those days are over. I have a neighbor who bought small houses in the neighborhood, but on big additions, and sold them for a nice profit. This is in a top suburb. I just saw him this afternoon, its been two years since he's done one of those "flips."

If you want to try this, remember, its a job, and if you treat it like a full time job, starting at the bottom, working your way up, you'll eventually make some good money. Good luck!

S

[Vic Dura]

On 27 Sep 2006 19:09:04 -0700, "Pat" wrote Re Re: flipping houses:

No, if you are flipping houses regularly you do not get CG treatment. When flipping, you are "in the business" of buying, fixing, selling houses.

A better approach is to buy a fixer-upper, live in it as your principal and only residence for 3 or more years while restoring/fixing it, then sell it.

That will get you a $250k CG ($500k married filing jointly) exclusion with the rest of the gain qualifying for LTCG treatment. That is a very good way for a young couple to build sweat equity.

[Pat]

Additional Con: you are in the rental business. That's a tough job. Wait till the furnace goes out at 2:00 AM or the cops call you about the all-night party that ripped the place apart.

[dpb]

..

I'm glad you pointed out the fallacy in the CG argument--I was going to, but finished the thread and you had done so...

Minor point--if is principal residence, isn't it only required to be two of last five years (altho that is immaterial in the case hypothesized of continuous occupancy) to qualify for the exemption? Also, I don't think it has to be the _only_ residence, only qualify as the principal one. It's been a while and the rules could have been changed, but that's what I was remembering...

[mkeary]

There has been alot of good info in this thread. Here are my 2 cents:

When I was considering trying the flipping game, I took an adult education class at a local community college called "Investing in Real Estate for Fun and Profit". 6 or 8 2-hour classes on a weekday evening for ~$70 was well worth it for the information gathered and contacts made. Topics included buying rental property (and calculating profit potential), flipping, finding bank-owned real estate and other bargain sources. Guest speakers included a mortgage broker who works with people who want to own or flip investments, a local businessman who makes his money flipping, and a general contractor who talked about some of the structural elements to thoroughly evaluate before getting into a property. Class was run by a real estate agent. Highly recommended if you can find a similar resource. I was living in Syracuse at the time. (Although I explored the options tentatively, my day job moved to NJ, so I was occupied selling my main home and buying a new one... then the market began to sour. So I have not actually done a flip. Maybe when the market improves, some years hence...)

Someone mentioned the capital gains exemption for a primary residence... I believe the required residence time is 2 years, not 3. And there is some time span in which this is required (like 24 of the last 60 months, or some such). Apparently this is to keep you from claiming as your primary residence a house you bought 10 years ago, lived in for 3 years, then rented out for the last 7. If this is an avenue you plan on persuing, look up the tax law.

Regards, Teo

[JoeSpareBedroom]

This raises another point: When I began shopping for a house in 2002, several people recommended a particular agent and when I asked what impressed them so much, they said "Just talk to him for 20 minutes - I can't explain". The guy's knowledge of every damned thing related to real estate was astounding. Four years later, he's still providing service in ways that will not make him any money (from me), but will generate referrals.

If I were considering flipping houses, I wouldn't go near the idea if I didn't know someone like that.

[mamace]

Thank you all for your input and help. I will re-think this through. According to the majority of responses, I came to the conclusions that 1) it's not a good time now, 2) I will need a lot of money to do repairs and allow it to possibly sit on the market 3) I need more experience in contractor management and other construction work 4) well I'm not gonna go on and on but I get the point.

Thank you all once again and maybe I will consider another source of income for my family, I don't have many skills but I'll try something. I hate when people advise me to do daycare (I'm already doing that with my own kids :). I do wish there were good paying jobs out there that could be done at home and not a job that I have to invent. Thanks everyone.

[Vic Dura]

On 28 Sep 2006 07:46:51 -0700, "dpb" wrote Re Re: flipping houses:

Yes, you are entirely correct. I didn't want to get too wordy so I just cut it short to convey the general idea.

[Oren]

By investing in the long term, now is still a good time to buy. Interest rates are still low compared to ten years ago. Long term - I mean having tenants (that is another subject).

Your family can be a source of income/loan for your first "investment". They can also help with any initial repairs.

Good Luck.

-- Oren

"Well, it doesn't happen all the time, but when it happens, it happens constantly."

[HeyBub]

Keep looking for that part-time job. Plan on making money from your very first sale. Here are a couple of success stories from acquantances of mine:

1. A police officer friend ruminated that since officers usually carry clipboards, so why not a bullet-proof clipboard that could be used as a shield? From his days as a youth working in a fiberglass fabricating shop, he knew such a material existed. He bought a sheet of the stuff, sawed it up on his band saw, mounted a clip. His cost, per clipboard, was like a buck. Sells all he can make for .95.
2. Another friend used his woodworking skills to make trophies (bowling league, baseball, that sort of thing) - more of a hobby than anything else. Just on a lark, he tried marketing his work. Landed a contract with Mongtomery Wards to make 1200 "Worlds Best Dad" trophies for a Father's Day promotion. He made a couple of thousand dollars profit but, as he said, "I was never so goddamn tired of doing the same thing over and over...."

Point is, good ideas are a dime a dozen. It's the marketing that makes or breaks the idea.

I, personally, have written two books:

"Toilet Tissue Origami - The Ultimate Book for the John," and

"The Bible in Morse Code - For the Scholar Who Has Every Other Translation."

Each, no doubt, will make me a millionaire. I just haven't had the energy to promote them.

[BIG-SCAM]

I have seen those shows. They pretty much say anything to convince you are going to get rich and make big money fast. All they are selling are books or tapes. But there is a sucker born every minute that will fall for those scams. If you really believe those shows, feel free to fall for the scam. People like you help our economy. However, since you are into things like this, I have a deal for you. I have this old 1998 Chevrolet. I bought this car for parts until I realized this is a very valuable collectors car worth well more than $650,000. It's in great shape, only lacks an engine, transmission, rear end, battery, seats, radio, tires, hood, radiator, rear bumper, windshield, dashboard, front doors, and needs a little body and frame work where it was hit by a minor train accident. (The train was only going 40mph when it collided with the car, head on). I'll give you a great deal on this car. All you have to pay me is $499,000 and this beauty is yours. You cant pass this up. Email me privately and I will provide you a PO Box to send your check. Once I am paid, you can come and drive this wonderful collectors car home.

By the way, I have a 2005 collectors penny. According to the "Coin Vault" tv show, this penny is worth, $8000 to $10,000. It's in mint condition, and has been preserved in a plastic bag. I'll let you have this beauty for $7500. This is the deal of a lifetime. But you must accept this offer within the next 2 hours, or you lose out on this great deal. Call our toll free number, and have your credit card ready. Call 1-800-BIG-SCAM.

Dont ever forget. YOU can make big money fast and never work another day in your life. You will soon own yachts, condos, oil companies, and foreign countries. We have guaranteed results.

[trainfan1]

You have to ask yourself - why are these people wasting their time producing "shows" instead of making those huge profits flipping?

Rob

[cas]

We had someone buy the house across from us at a premium. He painted it, did some brick work, removed the handicap ramp (which was tastefully hidden by some shrubs). He upped the price 50k, he had a few lookers. Then he cut the lot up into sections and reposted it. Had more lookers but people didn't seem too keen on buying the 2nd priciest home in a neighborhood when there are 2 1/8 acre lots next to it (from when he cut up the lot - he is known for putting factory homes on the smallest lot the city will allow). He's had the house since mid spring and it's not moving. The last couple I saw look at it asked me about it later, they loved the large yard and mature trees. When I suggested they recheck the lot size they almost crapped then moved on. He had another looker who wasn't fond of the asbestos. :P I've not seen him in a month, the lawn hasn't been mowed in weeks.

[mrsgator88]

1) Its never a good time to buy property. The best time to buy is always five years ago. Therefore, most people don't invest in property and then kick themselves five years later when they see how much money they could have made. Take the time to learn about real estate and you'll be mentally ready when the right deal comes along. 2) There's a lot of nice renovating you can do on the cheap. Not everyone is looking for $100 knobs on the closet doors. Mostly buyers want a clean place that they can just walk into and start living in. Mostly buyers want a clean place that they can just walk into and start living in. Clean and new go a long way. 3) While you're learning about real estate, start fixing up your own house. DIY. Many of these projects can be intimidating, until you actually do them. Its not as hard as you think. Home Depot often has classes on this stuff, especially in the colder months. Start small. Wanna lay some tile? Try the kids bath or the basement bath first. Wanna hang cabinets? Buy some cheap ones and install them in the garage. Thats your practice run. Then try the more important rooms. Some things you'll have to hire out. Again, use your own house as a learning experience.

DIY sets a good example for the kids as well IMO.

4) Don't sell yourself short.

My sister-in-law does small daycare (a few extra kids) and the money is not bad. Plus, with the extra kids, they play with each other and her kids don't bug her so much. She gets a lot more done around the house.

Anyways, I wish there were more good paying jobs too, in OR out of the home:-) Good luck to you.

S