Fixed and inverted The house looks cool on “reality” TV, but in reality, many find it not as profitable as it is perceived.
Home-turning television shows have sparked a fad. After wearing some episodes of the TV series, thousands of aspiring new investors, including my Uber driver, are rushing to try it out. Both the data and my personal experience seem to show that it’s not as profitable as many believe. In fact, it can be a very risky venture.
Investors are losing money on house flips
The first thing experienced investors will notice about these TV shows is that the rough numbers displayed at the end do not always take into account a lot of costs. So even in these silver screen scenarios, the actor usually has far fewer pockets than the original pocket.
Data from ATTOM, a leading provider of real estate and real estate data, also shows that many are losing money. The latest “Home Flipping Report” reveals that average house flipping profits are declining. The number of flippers using cash has also fallen to the lowest level in eight years.
According to RealtyTrac, 21% of transactions show a gross profit of less than 10%. So, if you add up all the numbers, these deals probably lost money. This adds to 8% of flips sold at a price lower than the purchase price of the property.
None of these numbers track far more new investors who have bought real estate, got stuck in rehab, or over-improved.
I flipped the property in the past. To be honest, it was fun. However, investors need to distinguish between entering an expensive hobby and investing for a positive profit.
One of the major flaws in the house flipping model is tax.. Uncle Sam takes most of the profit with the tax on the inverted property. It’s extreme.
Most people overlook the fact that they have to give up 20 to 40 percent of their profits on taxes. If the flipper has already spent money by the time he receives the tax invoice, a malicious cash crunch cycle can begin. Most people don’t enjoy being chased by the IRS for $ 50,000 or $ 500,000 in past taxes.
This all adds to the speculation involved in flipping the house. Even if you really know your asset value and market, there are many factors that are out of your control. This includes neighborhood foreclosures, natural disasters, interest rates and the media. All of this can affect your ability to resell more within a particular time frame. In 2008, millions of people lost this strategy.
Why you like to buy and keep
I like buy and hold models. That means that when I renovate a property, I know I’ll put a tenant there that pays rent and provides me with income. The property can continue to generate cash profits, regardless of the value or market of the property.
Income from long-term rental properties is also taxed at a lower tax rate than flipping. You can defer taxes or exempt returns by using the 1031 exchange or self-managed IRA.
For me, Buy and Hold also checks the two most important boxes where people first invest in real estate. They are free in time and place, which comes from the passive income provided by good wealth management. If you are rehabilitating your home and trying to turn them over yourself, you don’t understand it.
We are republishing this article to help new readers.
What is your strategy of choice? Buy and hold, modify and flip, or something else?
Feel free to defend playing in the comments!