Flipping and appreciation

When you look at the flipping profit, it’s hard to know what percentage of the profit comes from appreciation and what comes from value add. Especially when the holding time is long.

Assuming that market is flat and there’s no price change during your holding period, what’s a reasonable expectation for flipping profit after deducting the cost for selling, property tax, renovation? Assuming your time is free and assuming your don’t have a loan to remove the variable of interest rate.

So it’s a discussion of gross profit assuming cash purchase and cash renovation.

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Good point, hard to tell as well

Are you considering the lost of investment income as a cost in the equation? if not you need to add a conservative 5% to your costs. Say your total cost for the flip is 1M, including 900k purchase and 100k remodel. If you hold it for a year, you need to make about 1.163M just to break even. That’s 263k more than you paid for it. That’s 50k lost income from investment, and 100k for closing costs on 2 sales, and 13k property taxes and insurance. These are conservative estimates.

A much better approach would be to actually live in the flip. You buy it, paint the interior, put in new floors except for kitchen and bathrooms. Then you move in about a month after the sale closes. Do one bathroom at time time so you are not too inconvenienced. The kitchen is the big thing but you can eat out for a while when you do it.

A bonus is if you have older kids (girls too) you can treat it as a learning experience. Have them help and teach them how to do it. They will thank you when they buy their own home. See elt_1s thread on “Teach johnny to pick up a hammer”.

Sell it after 2 years and get the 500k tax credit.

edit- take 25k off my figures. I forgot your don’t pay commission on the buying agent.

Very risky approach. During the Great Recession investors got burned unloading immediately even home prices increased somewhat. The fear was the home prices could tank and that happened around 2010-12. Most did OK after leasing out or hold for 1 year minimum from 2012 and on.
Today, it is based on speculation that home prices will move up forever. Most immediate flips take ~35 days to unload. Buyers sometimes have no choice(no inventory) and like the cosmetic upgrade.

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every real estate person i talked to see no end in the rising market. smells like 2008 based on what i read about that time :slight_smile:

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I would probably flip 3-4 times, maybe to bootstrap, but then buy & hold. or just go to texas and retire.

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Flipping costs are probably 4+% mortgage rate (or more for hard money), opportunity cost of the stock market appreciation (or market rent + tax benefits), time cost compared to passive investing.

Benefits are non-recall mortgage levarage, strong appreciation in some regions (biggest unknown). Presumably, buy & hold in an upcoming market is better than flipping - when the tides are rising all ships rise the same.

But one other aspect is, if you can stream line a process & set of contractors, you might be in for a large profit even on a downer market.

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You are meeting a different person here. SamShueh is a realtor, but his approach is very cautious as he knew what happened during 2008-2011 and year 2000 period.

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Deleted my last post to not distract further.

Can you flip houses using funds from a 401K? If so, can you avoid the gains taxes? And can you do work on the house, unpaid (like painting or installing cabinets, etc.)

No unpaid work. You can do flipping in iras as something like a project manager/coordinator. Nothing more. Also not in 401k, but in IRA/ROTHIRA.

Taking active part could ruin your IRA’s tax exempt status.

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You can flip one IRA, but you probably need enough cash to do it without a loan. Your IRA isn’t going to qualify for a mortgage.

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Or if it does, it’ll be something like 50% down at 10% interest (made up numbers, but rule of thumb significantly higher).

The reason is IRAs are only allowed to take non-recourse loans, so banks carry higher risk doing this. Most banks won’t, but private lenders might (hard money etc).

Like Marcus said, IRAs does not qualify(allow) for mortgage. IRAs must have full cash to pay…etc.

Mortgage is like Margin account, IRAs will not allow those Mortgage or Margin account.

Wrong.

https://www.pensco.com/blog/how-to-use-non-recourse-loans-to-buy-property-in-your-ira

IRAs do allow borrowing, but it cannot be recourse loan. THere’s UBIT and UDFI, but it’s very easy to not hit them. It may or may not fit your definition of mortgage, i am just saying “mortgage” in the sense of borrowing, which is possible.

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Darn it. So I need essentially $800K to flip a $1M house?

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I have one anectodal data about this: A friend of mine tried using his mothers IRA to buy a rental for her, he was quited about 40-50% down + 10% interest.

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Thought you couldn’t rent to family members. Though that was part of a 401K-RE discussion I thought

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Oh, yeah, arms-length. He was buying it as an investment. So they did not have plans to live in it, but to rent it to strangers.

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