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With Flipping Profits Down, Consider These 4 Alternative REI Strategies

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Overall, home flips were down 12.9% in the third quarter of 2019, according to the latest report on ATTOM Data Solutions fixes and flips. Among other trends, the data show a seasonal slowdown in this sector, in addition to the reported low returns of nearly seven years.

And, as most household flippers can tell you, profits are down. Recognizing and preparing for this unprofitable phase of the fix-and-flip market is the best way to protect yourself. Please continue reading. Talk more about the latest reports, what that means to you, and what your options are.

Home flipping profits may diminish … but here’s what investors really need to know

This year’s”Home flipping report, “Many focus on the actual flip slump. Indeed, the number of single-family homes and condominiums sold within a year has declined since the second quarter of 2019. But it seems to be an annual phenomenon. And they actually rose slightly year-on-year.

Related: Six important considerations when looking at real estate statistics and data

What I thought was most important was that the return on investment (ROI) of home flipping reached the second lowest point since 2011. The lowest point was in the first quarter of this year. Housing costs are rising, inventories of bad properties continue to decline, Foreclosure decreased by 6% year-on-year..

Among them, “Zombie properties(Abandoned property before foreclosure) now accounts for less than 3 percent of the country’s inventory.

Detailed information from the report

The report by ATTOM Data Solutions is edited from the sales certificate data. It calculates the difference between the purchase and sale prices of single-family homes and condominiums sold within 12 months (total ROI).

The report shows that analysis of sales certificate data revealed a ROI of just over 40%. However, the data available only includes the purchase and sale prices. For the purposes of this report, ROI (“Average Total Flipping Profit”) is the difference between the purchase price and the flipping price.

This report does not take into account rehabilitation or other costs. According to veterans, they estimate that such costs are usually carried out between 20 and 33 percent of the repaired value (ARV). This means that the net profit of veteran flippers is actually significantly lower than the stated 40%.

Other important housing data from ATTOM

If you don’t have time to read the ATTOM report, here are some other important highlights:

  • Distressed sales as a share of all transactions Lowest point In almost 13 years.
  • Distressed sales in the third quarter of 2019 (bank-owned (REO) sales, third-party foreclosure auction sales, and short sales) accounted for 10.5% of all single-family and condominium sales. Occupied. Down From 11.3% in the previous quarter to 11.6% in the same period last year.
  • Distressed sales as part of all sales are now Lowest point Since the fourth quarter of 2006.
  • The higher the house price, the slower the delivery date.
  • House The price has risen In the fourth quarter of 2019, there was a 9% year-on-year increase across the country. This means that a typical home maintains financial growth for most average wage earners.
  • Also as a mortgage interest rate Stay lowThe shortage of affordable homes puts downward pressure on sales.

Related: How Data Analysis Can Enrich You With Real Estate Investing

Profit volatility may decrease, but there are still options

Investors in the home flipping business model are wise to make adjustments now, as inventory of bad properties is declining.While acquisition and rehabilitation costs are increasing, strategic and timing changes can occur significantly. Reduce taxes paid for this activity..

In him The ultimate guide to flippingBrandon Turner admitted it, “”[Flipping profits] You are not the only one to maintain. Instead, the profits you earn should be shared with the government when the tax time comes. House flipping is generally considered “active” income and is therefore taxed at the highest level. “

Flipping is taxed at the highest tax rate corresponding to the normal income tax range. This can be reduced to a capital gains tax rate, but you can still benefit from the potential of bad properties. Continue reading below for a list of this and other potential options available.

Home rating

1. Hold the property one day a year and change your intentions.

As you may know, capital gains are the profits from the sale of assets (such as homes and real estate). Such profits are considered taxable income.

If you sell your property within a year, you will be subject to a capital gains tax (short-term capital gains) based on the normal income tax range, which can be very high. However, if you hold your assets for at least one year, you will pay a much lower capital gains tax rate (long-term capital gains) as long as you can prove that you intended to hold them. Assets for use in productive investments (similar to the 1031 exchange).

Some simple facts about capital gains tax:

  • Capital gains tax is assessed based on the positive difference between the original purchase price and the sale price.
  • If you take the total capital gains and subtract the capital losses, Pure capital gains..
  • The long-term capital gains tax rate can be either 0%, 15%, or 20%.
  • The short-term capital gains tax rate is based on the normal income tax range and can be as high as 37%.

2. Consider live inflip for a few years.

Living in a house you are upside down can definitely be difficult. Usually, a lot of construction is underway and things can be difficult to organize. Mindy Jensen’s article Just deal with it.

But Mindy and many other investors (including myself) see this as a great way to avoid paying taxes on their flips through the Taxpayer Relief Act passed in 1997. I did. Two of the five years before the sale.

If you can live in your property for two years while you flip it over, you can then cancel up to $ 500,000 in capital gains ($ 250,000 for singles). ..

3. Change to the BRRRR method.

Brandon Turner first coined the term BRRRR It has been popular since a few years ago. If you’re new to it, the BRRRR method walks you through the process of buying, rehabilitating, renting, refinancing, and iterating.

Landlords, renters, homeowners, realtors

This includes:

  • purchase Property: Specifically, the property that you plan to keep, not invert.
  • Rehabilitation Properties: You also need to be livable and functional while adding value.
  • Rent Property out.
  • Refinancing Property: Try to find a bank that offers cash instead of paying off your debt. You also need to borrow the valuation. So, as soon as your property is rehabilitated and rented out, look for a bank that is ready to rent out your valuation.
  • repetition This process is repeated for a stable flow of cash flow.

4. Use the 1031 exchange to defer taxes on sales.

Instead of flipping a house over quickly, you can grab a house and increase your purchasing power. 1031 exchange.. The 1031 Exchange will postpone the payment of capital gains tax when selling one rehabilitation home and purchasing additional investment property according to certain steps.

If you use the 1031 exchange, you must have intended to hold the asset for productive use at the time of purchase. However, rules and regulations allow you to change your intent after purchase if necessary.

Renting a rehab property for a period of time to take advantage of the 1031 exchange is a great idea and definitely should be considered.

Conclusion: Learn how to adapt to stay profitable

If you are an investor flipping home for profit, diminishing returns may be a concern for you. However, there are options.

You can adjust your activities by slightly changing your business model. This helps reduce the tax burden and maximize profits.

As Ashley Wilson warned her Recent articles: “As the number of transactions decreases, it is more important than ever to continue learning from the past so that we can continue to do business in the future!”

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Are you a fix and flippers? Is the data contained in this report relevant to you?

Please refer to the comments below.

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