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Flipping

Best Exit Strategies for House Flippers

Even after you’ve created your fix-and-flip business plan and work schedule—unexpected events, changes, and delays can still happen. So, you need a good exit strategy to pull yourself out of the gutter and save what you can of your investment. 

For many, the flipping business is a lucrative real estate investment strategy to earn your profits more quickly. But, the reality is that there are many variables beyond your control that can drastically change your estimates. Even so, these obstacles shouldn’t automatically mean defeat. 

By having exit strategies ready, your fix-and-flip project will be prepared for any unexpected challenges that pop up. As Benjamin Franklin once said, an ounce of prevention is worth a pound of cure. 

The 7 Best House Flipper Exit Strategies

Like with any business plan, an exit strategy is an essential part of your project. The main goal is to minimize losses and maximize profits—even when things don’t go according to plan. Use any of these 7 exit strategies below for a solid plan B.

Short-Term Exit Strategies

Sometimes you just don’t have enough time and you need to make decisions fast. In cases where time is an important consideration, here are some short-term real estate exit strategies to help you keep things going.

Lower Your Price

A good exit strategy is to lower your price. Of course, you don’t want to go too low or you’ll lose money on your investment. 

This is why many real estate investors use the 70% rule to be confident they’re buying a property that is reasonable to flip. This rule of thumb means you won’t pay any more than 70% of the After-Repair Value of the property minus the value of renovations. To get the ARV, simply add the property’s current value with the value of renovations.

For example, if a property has a value of $100,000 and needs $20,000 in repairs, then its ARV is $120,000. After, calculate 70% of ARV ($120,000 × .7 = $84,000) then subtract the value of renovations ($20,000). According to the 70% rule, you should pay around $64,000 for the property. Your expected profit will be the ARV minus the value from applying the 70% rule ($120,000 – $64,000 = $56,000)

This gives you enough wiggle room in your budget for unexpected costs and the potential to lower your price without eating too much into your profits. 

Now, the percentage you lower will also depend on the receptivity of the market. Sometimes dropping your price by just 5% can do the trick. But other times, you might have to go lower. Whatever the percentage necessary, lowering your price can save the sale and allow you to still make a profit.

Wholetailing

Wholetailing is uncommon, but another possible exit strategy. It’s similar to wholesaling, except you cover the repairs and renovations necessary to make the house livable. Think of it as a combination of fix-and-flip and wholesaling. 

Like in wholesaling, you first purchase a property’s contract. After that, you perform a fix-and-flip and cover all the necessary repairs and renovations, such as the property’s structure, appearance, electrical wiring, and plumbing. Once the property is in livable condition, it’s ready for a buyer.

Not sure if wholetailing is for you? Here’s a list of things that make a property eligible for the strategy:

  • The property has to be clean and clear of any infestations such as mold, termites, and so on.
  • Essentials such as plumbing and electrical wiring have to be functional.
  • The structure has no major issues and fixtures are in good condition—as in no broken stairs, holes in ceilings and walls, broken floors, etc.

In addition, you can put up wholetail properties on the Multiple Listing Service (MLS). As a minor version of a fix-and-flip, flippers can consider wholetailing as another source of income. Diversifying your income options can help you generate an income in case your flipping strategy tanks.

Breakeven

Sometimes, the best exit strategy is the one that avoids any loss. In this case, you simply sell the property at the price you obtained it in order to minimize loss. It’s not ideal, but the silver lining is that breaking even will at least cover any debts, repairs, and renovations. 

Long-Term Exit Strategies

For those with fewer financial and time constraints, you can opt for long-term real estate exit strategies. These options are for those who aren’t in urgent need to replenish their finances.

So, another good exit strategy is to convert your fix-and-flip project into another real estate investing business. Tapping into another market and going for different types of deals can increase your chances of turning your investment around.

Hold Out

When the market runs dry, sometimes you’re left with no other options than to hold on to the property. In this exit strategy, investors can hold onto the property until a profitable offer comes along. This exit strategy goes against the nature of a house flipping business, but if you can afford to wait, a delayed sale may be worth it.

There are also a few notable ways the buy and hold strategy earns money:

  • Capital Gains. If you invest in the right market, the property value increases with time. Delays in the sale could also mean higher profits if the market heats up. 
  • Equity Gains. In contrast to capital gains, this refers to the amount of property that you actually own as opposed to the amount you have financed.

Rent Out Short-Term 

Whether it’s listing your property on Airbnb or specifically offering your own private short-term rentals, you can make roughly 2-3 times more renting your flip out short-term, compared to long-term. You’ll have to be prepared to manage your short-term rental and spend a lot of time dealing with guests, however, unless you’re going to work with a property management company. 

That being said, it’s also a great strategy if you just want to rent your flip out for a short period and then sell it later on (like when market conditions improve).

Rent Out Long Term

The business of property rentals has peaked in the past 50 years, with more and more renters looking for places to live. If your project is fixed up and ready to be lived in, then you can choose to rent it out as your exit strategy. 

By renting, you can generate income on the property and help your finances recover. If the rental continues for extended periods, it can also pay for itself and generate passive income in the future.

Offer Seller Financing

For buyers on a tight budget and flippers eager to find a buyer, seller financing is a good exit strategy that can help both parties. With this option, the seller acts as a lender to the buyer. You can negotiate almost any terms you want: purchase price, down payment, interest rate, term length, when a payoff is due (also called the balloon period), etc. In Michigan, a land contract is typically used, but you can also offer an actual mortgage. In either case, you’ll need a very experienced attorney to walk you through all the legalities. 

Apart from the benefits, it provides buyers, there are also several benefits for sellers. Some notable benefits are monthly income, an increase in ROI from interest, and spreading tax liability for a few years. Nevertheless, be mindful there are also disadvantages that come with seller financing. For example, you may have to deal with the buyer’s inability to pay, taxes, title searches, and so on.

Conclusion

Even a well-laid-out plan isn’t full proof. Sometimes, there are factors beyond your control that can affect your house flipping business. But just because it’s not going as planned doesn’t mean there isn’t an opportunity for profit.

A great business plan accounts for bumps in the road. With a good exit strategy, you can maneuver through your obstacles and get the best possible outcome. Consider these exit strategies to continue your flipping endeavors with confidence. Then, you will still have options to save your investments—just in case. 

Did we miss anything? Let us know in the comments below!

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Flipping

Why You Should Always Target Distressed Properties to Flip (And Where to Find Them)

Creepy old mansions may be a nightmare for most people, but they’re hidden gems for a house flipper. These oldie-but-goodie properties are examples of how distressed properties have great value within them, giving real estate investors opportunities to gain massive flipping profits.

Why are there distressed properties in the first place?

Well, there are a lot of reasons why a home could become neglected. Here are a few examples:

  • The home could’ve been a foreclosed home left to someone as inheritance, but it’s located far from where the person currently lives. The home left behind will often go into probate for a year, during which time the new owner cannot touch it. That means it’ll sit for a year, quickly deteriorating.
  • The home could’ve gone through a natural disaster like a flood or tornado, and the owner doesn’t have the funds to repair it. It’ll also sit there rotting away.
  • The home could’ve been a rental that a tenant trashed and the landlord can’t take it anymore—not bothering to fix the home up again.
  • The home could’ve been owned by a hoarder with low income. They pay taxes, sure, but they don’t have the money, skill, or energy to keep the house in good condition.

Any of these situations leave many homes neglected and, eventually, distressed. However, while these homes are someone’s problem, they’re certainly your investment opportunity.

Here are a few reasons you should buy distressed properties, and how you can find these lucrative deals.

The Flipping Opportunity with Distressed Properties

To understand how the concept works, we need to first discuss how a home becomes a distressed property. So, here’s what usually happens:

  1. Owner Hardship and/or Neglect: Owner of a property loses their job, becomes ill or perhaps relocates. They may also inherit the property.
  2. Property Deteriorates: The issues above lead to the property falling into disrepair. At a certain point, potential buyers either don’t want to take on the repairs or can’t get a standard mortgage on it due to the poor condition.
  3. Cash Opportunity: At some point the homeowner will try to sell the property. Or maybe a motivated flipper can convince them they should sell. Either way, they will have to sell at a discount due to the lack of market demand for the property when it’s in poor condition. 

Situations like these give you opportunities to buy properties at a low price. These distressed properties are ideal for flipping because they’re rundown homes with tons of hidden value. Yes, they’re cheap because they’re in poor condition, but the lack of market demand will drive the market value even lower than the cost of repairs. 

The Risks and Benefits of Flipping Distressed Properties

Now, while the benefits of flipping distressed properties sound exciting, there are certain risks you’ll need to consider before committing to one. Here’s a chart to help you see the full picture:

The benefits are great, but the risks are inevitable. By anticipating the potential issues that sometimes arise with distressed properties, you’ll be ready to handle high-risk, high-reward fix-and-flip projects without a hitch.

Ways to Find Distressed Properties

You won’t find “distressed property” a common label in the real estate industry. Instead, you’ll need to think more strategically about how to find situations that will have motivated sellers. 

Thankfully, there are several ways to seek out distressed properties. Here are some of them:

  • Drive For Dollars: Select a neighborhood and look for homes with obvious signs of neglect. These can be signs like multiple notices on the front door, peeling and faded paint, an unkempt yard, broken windows, or uncollected mail.
  • Access the Multiple Listing Service (MLS): If you can find a way to access the MLS (say, if you have a real estate license or a friend who can help you), you can find distressed properties with remarks like,  “handyman special” or “fixer upper”. The longer the property stays in the MLS, the higher the motivation of the seller.
  • Find Foreclosed Properties (REOs): Peruse REO and bank-owned properties to find good opportunities. Lenders and banks aren’t in the business of keeping properties, and want to get rid of these non-performing assets as soon as possible. They will likely sell the homes to you at a discount.
  • Identify Homes with Delinquent Mortgage Payments: You can find public records of delinquent mortgages at your local courthouses. Individuals who can’t pay their mortgage are likely willing to sell their home to avoid foreclosure. 

You can also try to find motivated sellers with delinquent property taxes, as they’re likely behind on mortgage payments as well.

  • Consider Probate Options: You can visit the probate court to find properties left behind by situations such as divorce or death in the family. In some cases, the family left behind might not want the home. That said, keep in mind that you’ll need a special process to make an offer, since the property will be sold through an executor or attorney.
  • Get in Touch with Out-Of-State (OOS) Owners: Whatever the reason is for them moving to another state, some homeowners struggle to maintain the properties they can’t visit often. The result is distressed properties with highly motivated sellers. You can identify these people through direct mail or networking.
  • Check City Records for Code Enforcement Tickets: A property getting numerous tickets for neglect is a sign of an owner not taking care of their property and may be interested in selling.

Conclusion

Distressed properties are the perfect choice for house flippers since your goal is to acquire undervalued properties with the highest flipping profit. By buying valuable properties at a low price point, you’ll set yourself up to gain a large margin for a profitable fix-and-flip project.

What is your experience with buying distressed properties? Do you have any tips on successfully flipping them for a high profit?

Image courtesy of Malte Luk

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Flipping

9 Best Ways to Remodel Bathrooms for a Fix-and-Flip Project

Bathrooms are one of the most popular rooms in a home to renovate, and it’s clear why. People spend hours in their bathroom every week getting ready, cleaning it, and practicing basic hygiene. In fact, a study in England found the average adult will spend 416 days of their life in the bathroom. 

Given the importance of a good bathroom, it goes without saying that prospective buyers of your fix-and-flip home will scan bathrooms and make quick judgments on them. Well-maintained bathrooms with new fixtures and updated features can often seal the deal for residential properties.

Moreover, compared to kitchens, most properties you’ll come across will have more than one bathroom.

For instance, the City of Detroit is known for its affordable housing stock (you can snag great homes for as low as $40k). But look at how many Zillow listings in the city have at least three bathrooms:

Especially if you have multiple bathrooms like this in a property (like in multifamily buildings), you need to have a strategy in mind when approaching bathroom renovations. Remember, good outcomes are a result of good planning. Poorly planned bathroom remodeling projects can quickly turn into a financial nightmare—stalling the project’s completion and depleting its potential gains.

So today, we’ll show you 9 specific steps to use as you remodel your bathrooms. Use these for a flip that’ll sell in seconds—without going over your renovation budget.

1. Replace Cabinets? Just Reface Them

Ever heard of refacing kitchen cabinets? You can do the same thing to bathroom vanity cabinets. It’s easy, and it saves you a ton of money instead of replacing them with new ones.

Here are some general steps to go about it:

  1. Sand all exterior surfaces
  2. Make veneer cuts to cover the existing cabinet
  3. Paint the cabinet with contact cement to give it a milky glow
  4. Apply the veneer to the cabinet
  5. Trim the loose edges and add the molding
  6. Lastly, install doors and some drawers

Aside from refacing the cabinets, you can also save a couple of bucks by covering up dents and holes in the wallboard with wainscotting. It looks brand new without replacing anything.

2. Be Cheap, But Don’t Overdo It

You may be tempted to cut down costs as much as possible. And avoiding expensive features, like new bathtubs, showers, toilets, and sinks can save a lot of money.

That being said, you should steer clear of rock-bottom offerings that will turn off most home buyers. Everyone can tell if a bathroom is renovated with cheap materials. Plus, it’ll wear out sooner and actually cost more to maintain in the long run, which is something rental investors, in particular, will be wary of. 

Instead, find the sweet spot of quality and functionality without steep price points.

Check big box stores like Home Depot for bathroom remodeling bargains. They’ll have everything from faucets to large mirrors, so you’ll have a wide variety of products (and prices!) to choose from. If you go with higher quality brands, you’ll also get hardware with lifetime warranties for your faucets and showerheads, which is a nice perk to pass along to potential buyers.

3. Keep the Throne Glistening

The toilet is the main feature of any bathroom. Every potential buyer and investor will expect it to be clean, sparkling, and fully functional. Any amount of rust or grime could turn them off from considering the property at all.

One pro tip we can give you is to replace the toilet seat. We know, it’s really simple. But this crucial DIY can change the entire look of the toilet, making it look brand new without spending tons of money on replacing the entire bowl. 

It’s inexpensive and does the job of impressing prospective buyers.

4. Save with Laminate Flooring

If you’ve been in the industry for a while, you probably know that laminated floors have a bad reputation for being boring and dull. However, for a flip-and-fix project, laminated floors for bathrooms check all the boxes.

Here are the advantages of choosing laminated flooring:

  • It’s inexpensive and easy to source.
  • It holds up against moisture and stains.
  • It’s pretty easy to clean and maintain.
  • It’s extremely durable.

You don’t have to use laminated flooring for the entire property, as that can lower the value of the home. But, installing laminate in your bathrooms is a great, affordable decision.

5. Refresh the Bathtub

Does the house come with a bathtub? Great!

Is it in good condition? If not, there are ways to fix it.

With good refinishing, you can turn any old tub into a new one. Try using special paint to cover up cosmetic blemishes. If the task is too much, you can also contact a professional bathtub refinishing company, like Permaglaze or Miracle Method, to do the work for you.

Refinishing will always be cheaper than replacing the tub. The finished result looks like new, without the “new” price tag, and that keeps both you and potential buyers happy.

6. The Devil’s in the Details 

Ensure that you repair or replace essential fixtures like door hinges, doorknobs, towel racks, showerheads, all the faucets, and even the toilet paper holders. These are all inexpensive and do wonders when it comes to making a bathroom look more high-end.

Another pro tip is to avoid polished chrome or polished brass finishes. The style is outdated and can look quite cheap. Instead, try going for brushed nickel, stainless steel, or matte black to create a more modern look.

It’s even better if you can match the fixtures for a consistent “branding” or design. Spending a few extra bucks for matching fixtures will look more impressive to prospective buyers and investors.

7. Clean Out the Caulking and Grout

Caulking and grout—especially in bathrooms—can look dirty over time. So, ensure that you clean or replace them to brighten up the bathroom and give it a refreshed look. You can do it yourself with a toothbrush or hire professional cleaners to scrub the corners throughout. 

If there are any signs of mold or mildew in the shower, you can also create a DIY bleach solution to remove it. Here’s how to make it yourself: 

  • Mix 1 part bleach with 10 parts water.
  • Put the solution in a spray bottle.
  • Use the spray bottle, soak the affected tiling.
  • Spray more on visible areas like light-colored tile grout or caulk.
  • Be patient and wait for at least five minutes to let the solution sink in.

Are you pressed for time? You can also contact professional cleaning services in your area to clean your bathroom for you. It’ll cost you extra money, but it certainly saves you a lot of work.

8. Don’t Fix Anything That Isn’t Broken

For a fix-and-flip project, it’s always better to keep everything that’s still functional.

If the toilet isn’t dripping, don’t replace it. If the bathtub isn’t leaking, don’t change your entire plumbing system. Is there any mildew or moldy spots? Clean them up and open the windows to ventilate the place. 

Basically, don’t fix anything that isn’t broken. Every upgrade should be necessary and add value to the property. If you spend too much, that will eat into your profits when you go to flip it. 

Moreover, moving or replacing the plumbing system is crazy expensive. Just use HomeAdvisor’s calculator to see how everything adds up. Given that you want to protect your flipping profit at all costs, don’t replace or move the plumbing system unless absolutely necessary.

9. Add Extra Lighting Fixtures 

With everything spick and span, ensure that you put enough lights in the bathroom to show off its design. Flickering or struggling lights can turn off prospective buyers and investors. After all, no one wants a dimly lit bathroom. 

Make sure you also replace the light bulbs with a higher wattage, especially if your budget is pretty tight. Add ceiling lighting and some vanity lights if you can afford it, too. This will brighten the space and make it feel bigger.

You’ll be amazed at how a simple light improvement brightens up a small space.

Conclusion

Now you’re ready to renovate that bathroom and improve your profits on your next fixer-upper. By following the tips in this article, you can boost your profits by impressing prospective buyers and investors with a great bathroom. Set the tone for the rest of the property with a clean, freshly renovated bathroom. 

Remember to reface instead of replacing, never sacrifice quality for lower cost, avoid over-renovating, and pay attention to the smallest of details. All of these tips help you bring bathrooms up to par without eating into your budget

Anything else we’ve missed? Comment your personal tip down below to help other flippers!

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Flipping

Top 5 Mistakes Novice Flippers Overlook (And How to Overcome Them!)

Reality TV shows may paint a picture of how easy it is to flip a property, but the actual reality is much more complicated than that. Unfortunately, beginner real estate investors often jump into the business without knowing anything about real estate and how it works!

In a nutshell, house flipping is buying a distressed property that you repair and sell for a profit. It’s one of the best ways to earn money from real estate, whether you do it full-time or only as a side hustle. In fact, flippers can make up to $25,000 profit on a typical house in the City of Detroit (provided, of course, that you follow the right advice). 

But like any business, house flipping takes knowledge, planning, and hard work to be successful. Without the proper guidance, you’ll only lose your hard-earned cash. 

So, here are five common mistakes that novices overlook and how you can avoid them altogether.

#1 No Market Knowledge

There’s more to house flipping than what you may know. One of the biggest mistakes new flippers make is buying a property that falls within their budget but is unfortunately located in an undesirable market. As a result, they end up stuck with a home they don’t need, with all their savings tied to an undesirable property.

Solution: Work with an experienced, local real estate agent who knows the real estate market well and can show you the ropes. Experienced agents will know things such as current market prices, what buyers are looking for, and the latest trends in the neighborhood. Then, continue learning by talking to other investors and following real estate investment blogs (like this one!).

#2 Investing Too Much Time and Money

The whole point of house flipping is to earn a good return on investment. But that is impossible if you spend too much money upfront. Moreover, time is also of great essence in the flipping business. On average, it shouldn’t take you longer than 1-2 months to sell it. The longer a property stays on the market, the more you have to pay taxes and maintenance. This increases your capital expenditure and squashes your potential flipping profit.

Solution: Follow the industry’s 70% Rule, which says you should only pay a maximum of 70% property value minus the repairs. This rule is significant for new investors who don’t have extra money to cover a project that goes sour.

For example, let’s say the property value is $200,000 after $10,000 of repairs. In this situation, you should spend no more than $133,000 to purchase the home ($200,000 – $10,000 x .70 = $133,000). If you spend too much money, you won’t be able to sell it for a significant profit.

On top of this, ensure that you work with a professional contractor before you purchase the property. They can inspect the home for you and provide an accurate repair cost for your budget.

#3 Overestimating Your Skill and Knowledge

Are you tempted to save money and repair the distressed property yourself? Keep in mind that so many things can go wrong if you don’t have the necessary knowledge and experience. It only takes one bad swing of the hammer to do irreversible damages to the home!

Solution: Start slow and look for homes that require minimal repairs (remember the 70% rule). You can gradually take up more complicated projects as you increase your knowledge and experience. Alternatively, work with a licensed contractor to flip the home for you so you won’t have to update the wiring and plumbing on a 60-year-old house.

#4 Miscalculating Cost of Repair

This is the most common mistake! 

One thing that most of the flipping & improvement shows get right is the “unexpected repair”. The demo crew opens a wall that exposes dry rot, termites, a major plumbing issue, etc. 

Miscalculating the cost of repairs can make your expected profits disappear. 

Solution: Look for projects that don’t require much work and talk to a trusted contractor to help you bring the home up to suitable standards. Also, build in 10-20% Cost Overrun in your repair budget. Don’t go overboard!

#5 Overvaluing the House

Finally, one of the classic rookie mistakes is estimating your sales price at the highest price possible. While this does happen, and it’s great when it does, you’re better off being a bit more conservative on your estimated sales price. 

Solution: Consult your real estate agent to land on a realistic price based on market analysis and careful consideration of the competition.  

Conclusion 

Home flipping is still a lucrative gig, provided that you are willing to invest the time and effort. While the concept is as simple as selling for a profit as fast as you can, there are so many pitfalls that can derail your efforts and put you in a financially difficult spot. 

Instead, learn from the mistakes of others! Avoid the top five mistakes novice flippers make to become successful flippers without burning cash.

Need more help in flipping houses? Feel free to get in touch. I’m more than willing to help you in your journey to become a successful house flipper.

Image courtesy of Sebastian Herrmann

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Flipping

How an S Corp Election Can Help Flippers

While house-flipping is potentially very profitable, there’s an expensive catch.

You might have to pay a self-employment tax, which is a whopping 15.3% of your profit. That’s a significant amount of money that can go to your next vacation or property you want to flip!

Nevertheless, there is a way to set up your business in such a way that you’re not required to pay the tax. Let’s take a look at how an S Corp election can help you pocket more of your flipping profits.

Why House Flipping is Subject to Self-Employment Tax

While the usual real estate investments such as buy-and-hold are considered a passive activity, flipping homes conducted in a limited liability company (LLC) are active transactions—required to pay self-employment tax on top of the income tax.

Let’s define these two things that come with flip-and-fix projects.

Active Income. Active income applies to anybody who runs a business where one earns ordinary income from performing a service or selling a product. Business owners must pay the 15.3% self-employment tax up to a net profit of $128,400. (Beyond this threshold, you’ll only pay 2.9% as the Social Security portion of the self-employment tax is removed.)

Self-employment Tax. In essence, self-employment tax is similar to payroll taxes withheld from an employee’s wages. For self-employed individuals like house flippers, however, they must cover both the employer and employee portion of the tax. In addition, members of an LLC taxed as a partnership are considered self-employed individuals—which means their earnings will be subject to self-employment tax if they participate in the partnership’s trade.

The 15.3% self-employment tax of your gross salary does chip away at every dollar you earn. Moreover, 15.3% comes in before including the marginal tax rate from the federal and state perspectives. For example:

So, naturally, we want to find a way to save on taxes. One way is to run your flip-and-fix business out of an S Corp instead of an LLC or C Corp. Let’s talk about how you can do this.

How an S Corp Election Can Save on Taxes

First, set up an LLC or C Corp, then elect to have it taxed as an S Corp. Said structure is a tax entity or federal tax election—not a legal one. It’s not for asset protection but for reducing your exposure to tax.

By conducting your business this way, self-employment taxes only apply to a “reasonable salary,” and you’ll pay the remainder of your income as a dividend—not subjected to self-employment taxes. 

Here’s how it’ll go: Set up the S Corp, set up payroll, and begin paying yourself a W2 wage. The self-employment tax will only apply to the W2 wage, and the rest of the income will be considered a cash distribution or cash dividend. Of course, you can only do this with an S Corp route.

Take a look at how the situation now changes and how much you can save:

If you earn $100k with no S Corp (either as a Sole Proprietorship or an LLC), you’ll report your income as Schedule C. You’re going to pay $15,300 on self-employment taxes even before the marginal tax rate or state taxes come into play.

However, if you’re taxed as an S Corp, you can pay $50k to yourself as a W2 wage and have the other half as a cash dividend. With the $100k split up, half of it won’t be subject to the 15.3% tax—and you can pocket $7,650 just like that.

Just remember to never pay yourself the entire profit in W2 Wages. The whole point of setting up an S Corp is to help you reduce taxable income!

Conclusion

There are so many other factors that will come into play, so make sure that you talk to your accountant before considering this tax election for your flipping business. You may be able to amend your LLC to take advantage of this technique or establish a new LLC to start conducting your business as S Corp from the get-go.

Either way, it’s a good strategy to save on taxes legally!

Image courtesy of Jopwell

What do you think of this technique? Any additional tips on how to save on taxes?

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Flipping

How to Find the Ideal General Contractor to Flip Houses

Finding a general contractor (GC) for your house flip can be challenging.

You want someone who knows what they’re doing, is trustworthy, has affordable prices, and has good reviews. This means you need to do proper research before hiring a general contractor—don’t hire the first one you find!

As a flipper, your main goal is to earn a high flipping profit in return for your investment. To do that, you need to renovate the house within a specific budget and timeframe, which means using contractors who stick to deadlines and understand the importance of flippers’ margins.

While simple repairs are easy to budget for and can be done within a month, more complex renovations can easily incur budget overruns and take more than a couple of months to complete. In these cases, it’s best that you hire a general contractor to handle the project for you, or assemble a team of go-to contractors that you work with regularly on your flipping projects. Which you go for will depend on your needs, but this article focuses only on general contractors.

Let’s go through some best practices for finding the ideal general contractor for your flip projects.

Independent Contractor vs. General Contractor

Before we go any further, it’s important to make a distinction between independent and general contractors:

  • Independent Contractors: These are contractors that you directly contract to perform tasks on a contractual basis. They complete the project themselves, without the help of subcontractors.
  • General Contractors: These are also directly contracted; however, tasks are subsequently contracted to subcontractors to complete. They complete the project along with their subcontractors instead of completing the project by themselves. They also handle all the administrative tasks needed (e.g., paying subcontractors, securing building permits, getting insurance for all workers, etc.).

General contractors will coordinate with necessary subcontractors on your behalf and oversee the project for timely and on-budget completion. They are ideal for major renovations and flips, because you can get all aspects of the renovation handled by a single entity.

What to Look for in a General Contractor

Here are the key things to look for in a general contractor:

  • A Good Reputation: The best way to find a general contractor is by asking for recommendations. Contractors work largely based on referrals. Ask your friends and the real estate community if they can vouch for somebody reliable, communicative, and punctual.

Once you have a list of options, go the extra mile to read online review websites and visit the Better Business Bureau to check their reputation and ask about the projects they’ve worked on before. 

  • A Good Contract: Hiring a GC on a handshake is not a good idea. You’ll want a contract that spells out what they will do and what you will do, with deadlines. The more thorough the better! Otherwise, there’ll be no accountability and your project can go sideways quickly.
  • Appropriate Payment Practices: A good general contractor will accept payments in the form of checks and wire transfers. They would also agree to sign a lien release before payment and negotiate with you on the payment schedule.

Stay away from contractors who want you to pay in cash or a lot upfront. Cash payments are not illegal; however, contractors who ask for them might be avoiding paying income taxes. This is a practice done by less-than-reputable contractors. Moreover, a down payment of 30% of estimated costs is typical to cover an initial retainer and materials, but an established contractor won’t need your full payment to start the job.

  • Local Coverage: Hiring a general contractor who lives and operates within the area of your flip is your best option. They will know the local building codes, city inspectors, have a network of subcontractors ready to help them, and you can easily contact them in the event of an emergency.
  • Proper Licensing: General contractors need to be licensed to pull the necessary permits for your property. Without these, your property won’t abide by the local building codes or pass inspection. You’ll end up financially responsible for bringing up the property to the required standards.

Instead, verify their license by asking for the license number. Check it with your state’s licensing board. For licensure information in Michigan, visit the state’s Department of Licensing and Regulatory Affairs website for details on the Bureau of Professional Licensing’s requirements.

  • Proper Insurance: General contractors should be insured for General Liability Insurance and Workers’ Compensation. You can ask to see a copy of their policy and call up the insurance company to verify the information. The insurance should be current and have clear policy limits for you to check. You should also be added as an “additionally insured” on their policy, until your project is complete.
  • Warranty in Writing: General contractors should provide warranties that cover the work they’ve done in your property. A warranty assures them that they won’t be coming back for multiple repairs over an extended period of time (warranties typically last one year only) while guaranteeing you a good renovation result.

This list isn’t exhaustive, but it’ll put you on the right track in finding your ideal general contractor.

Questions to Ask During the Interview

As part of the process, you should also have an interview with the general contractor. Here is a list of questions you can ask to help you identify those who’ll fit your criteria:

  • How many people work for you? How long has your crew been working together?

You want to work with an established company that has a large team of managers and assistants.

  • Where are you operating, and what is your service coverage?

You want to work with a local company that knows its way around renovations in the area.

  • What similar past projects have you completed?

You want to see their experience concerning the project you’re giving them. If they’ve never done what you need them to do, ask them how they will approach the project.

  • How do you communicate with your clients?

They should give you daily or weekly progress reports with photos and send itemized, detailed quotes and invoices.

  • For this project, will you be using subcontractors or just your own team?

If they are using subcontractors, make sure that all workers are trained, licensed (if applicable), and insured.

  • Are you licensed and insured?

Licenses should be updated and registered in the state where your property is situated. Insurance should include General Liability Insurance and Workers’ Compensation.

  • What would our contract look like?

Not all general contractors will have contracts. If they don’t, you can draft one up. Regardless, have your lawyer review it before everybody signs.

  • Will you provide warranties?

Make sure the warranty is written down and will conform to the requirements of the contract.

  • How will the payment schedule and plan work? Will you agree to sign lien releases?

Agree and sign the payment schedule before the job begins. They should agree to sign lien releases before payment.

  • Have you ever had to deal with lawsuits?

If they’ve been sued, ask what happened and how they handled it. If they’ve sued a client, ask for further information and check public records. If they’ve had serious accidents before, ask how they dealt with the situation and what they’ve improved to make sure it doesn’t happen again.

Conclusion

We hope this article is enlightening and helpful in your search for a general contractor. It might take a lot of effort, but having a reliable and skilled general contractor will protect your budget and timeline for a successful and profitable house flipping project.

The better your general contractor, the more houses you can flip fast, at the highest quality, and for the most competitive price.

Any additional tips for finding the ideal general contractor as a flipper?

Image courtesy of Andrea Piacquadio

Categories
Flipping

5 Signs You Better Walk Away from a Flip

Finding houses that are suitable for flipping is difficult – but that doesn’t mean you should jump on every opportunity that comes around.

Every good flipper knows how to choose properties—and when to walk away from an inevitable flop.

You don’t want to be a rookie who overlooks the basics and ends up with a smaller margin than your time and effort is worth.

So here are five signs to know when a distressed house is better left alone:

1. The location isn’t good.

The most important factor that decides the value of your flip is the location of the house.

  • What kind of city and neighborhood is it in?
  • What kind of residents are in the area? What do they want in a home?
  • How much do similar houses sell for in the immediate area? What features do they have?
  • What are its positive factors (e.g., good schools, shopping centers, etc.)?
  • What are its negative factors (e.g., highways, airports, factories, etc.)?

You need to understand the property in the context of where it’s located to estimate its value, and how fast it’s likely to sell (based on the level of buyer demand in the area). 

Do the same research that your buyers would do, and you’ll see if the location is going to appeal to them.

2. The house is too unique.

While every property will be somewhat different from another, you want to flip a house that’s fundamentally conforming to or better than the standard of the local competition. In other words, they have to be similar to the houses around them, but better somehow.

For example, if the neighborhood is full of single-family homes with 3 bedrooms and 2 bathrooms, you might have a hard time selling a house with 2 bedrooms and 1 bathroom. You will, however, easily sell a 3-bedroom, 2-bathroom home with an attic that can convert to an office area.

Generally, people like lots that are higher than the average size in the neighborhood, so a large lawn is always a good distinguishing feature. Likewise, you might have to be prepared for price adjustments if your lot is smaller than the average locally.

The biggest thing to look out for is a strange floorplan. Awkward layouts will seriously turn off buyers, even if you finish a home to a high standard throughout, and some layouts can’t be changed easily (if at all). Honestly, if you end up with a seriously out-of-date floorplan, you could be better off completely rebuilding a house from scratch in some cases, so this is a definite sign you should walk away if you’re a new flipper.

3. You don’t have enough skills or knowledge.

Unlike professional builders and professionals who’ve been honing their skills for years, you might not have the necessary knowledge to DIY fixes for a higher profit.

  • Do you know your way around basic construction tools?
  • Can you lay carpet, hang drywall, roof a house, and other common but important fixes?

There is money in sweat equity. If you lack knowledge and have to constantly outsource professionals to do the renovations, you’ll deplete the profit you could’ve gotten from your investment. If you lack the skills and still try to fix everything yourself, you might end up making rookie mistakes that’ll be expensive to salvage.

Furthermore, if you don’t have enough knowledge, you could run the risk of hiring a contractor and getting ripped off.

Instead, be realistic and account for your lack of skills when budgeting your flip. If the costs are properly accounted for, you’ll increase your chances of exiting with a good flipping profit.

4. You don’t have enough money.

All real estate investments are expensive.

You need to research your financing options to find which mortgage type will work best for you, and if there’s a lender that can offer you lower interest rates. Cash is possible, however there’s still property holding costs and opportunity costs that you need to consider.

More importantly, there’s the renovation costs. How much will you get after acquiring, holding, and fixing up the house? Novice flippers often underestimate the costs, resulting in net loss instead of gross profit.

To see if your budget is enough to flip-and-sell a house, you need to:

  • Identify how much you need to acquire the property
  • Scan the competition and see how much you can realistically sell and still make a profit
  • Determine how long the renovations will take and budget accordingly
  • Remember to take into account the loan you’ve taken out, taxes, utilities, insurance, and more
  • Be aware of the seasonality that can sometimes affect home prices and the number of days on market (e.g., higher sale prices in late spring compared to winter)

5. You don’t have enough time.

Flipping and selling a house takes a lot of time and dedication—often requiring you to give up a large chunk of your time for a couple of months. 

Not sure if the hours dedicated to flipping will be worth it? Answer these questions:

  • Are you maintaining a separate full-time job? Are you willing to give up weekends and evenings?
  • Do you have the budget to pay someone else to do the work?
  • Will you be available to oversee demolitions, constructions, inspections, and other procedures?
  • How much time will you spend marketing your property? Can you show it to prospective buyers yourself, or do you have the budget to pay for a real estate agent’s commission?

For most people, the time all of this takes isn’t worth it. They’d rather stick to their day job to have a guaranteed income, without the headache of flipping houses, so think carefully about whether or not this commitment is right for you before buying your own investment property. 

Summary

To be a successful flipper, you need to understand the risks involved and how to mitigate them.

Evaluate your house flipping opportunities by doing the following:

  • Check the location of the house in relation to the neighborhood.
  • Determine if the house is competitive enough versus other properties in the area.
  • Budget property and never underestimate the possibility of expensive, underlying problems.
  • Calculate the time it’ll take for you to enter and exit the flip profitably.
  • Be realistic with what you can repair and what you’ll need to outsource.

Making profit from flipping houses isn’t as easy as some other real estate investment methods, but it’s definitely possible with the right knowledge, planning, and courage to walk away from bad opportunities. Keep looking and doing your due diligence, and the right one will eventually come along. 

Trust us, it’s worth the wait.

Categories
Flipping

Flippers: The Best and Worst Renovations

Never over-renovate your flip!

You’ll shoot yourself in the foot if you end up spending too much on repairs or upgrades to the property. 

Your goal is to make money from buying a distressed house under market value, fixing it up to a marketable condition, and selling it at a price higher than the acquisition and renovation cost. So, it’s crucial that you hit the sweet spot of renovating the house just enough to achieve maximum ROI. 

But how will you know what to fix, and what to leave for the future buyer? Which renovations will add value, and which will only hurt your chances of making a higher flip profit? 

Here’s our guide to help you decide:

Know the Best Renovations

  • Competitive Scan

First and foremost, scan the other houses in the area where your flip is located. Research what else has sold and what factors they have in common. Figure out what the market gravitates towards and prioritize the same things in your renovations. 

  • First Impressions

First impressions are important for potential buyers. Anything that will add to your flip’s curb appeal will help attract attention, making buyers curious to see what’s inside. To achieve this: 

  • Have the front door stand out with a contrasting color
  • Maintain the landscaping (if there is any) with fresh flowers and plants
  • Power wash anything that looks dirty or faded
  • Repaint all trim work for a polished look 
  • Replace any old exterior hardware (e.g., doorknobs, mailbox, outdoor lighting, window frames)
  • Add shutters or blinds to avoid the house looking empty/unlived in
  • Kitchens and bathrooms

Kitchens and bathrooms are two of the most important features when it comes to buyers deciding on a house. They’re also much more expensive to overhaul, so many buyers don’t want to have to renovate kitchens or bathrooms themselves. 

But kitchen improvements can help recoup your investment by as much as 66%, so this is one area where you definitely want to spend. 

On the other hand, anything you spend on bathroom improvements can yield an ROI of up to 67.2%, so they’re also a good investment when planning the budget for your flip. 

  • Attics and basements

Attics have come a long way from being a horror movie location to, now, a great expansion and additional space in the house. It’s possible to get back as much as 73% of your investment when the property’s attic is converted into a bedroom or some kind of usable room for potential buyers. 

This is an expensive renovation though, so make sure you do the math properly to make sure it’s worth it for your flip.

Know the Worst Renovations

  • Competitive scan

When you check out other houses in the area, also pay attention to what won’t sell. Each area will have their own preference. Make sure you avoid having similar features as houses that have sat in the market the longest.

  • Extreme tastes

Focusing on renovating the property with elements that will appeal to the largest buying audience. Instead of decorating and renovating based on your own taste, fix it up with the general public in mind. Don’t put any design or functional feature that’s too specific and only caters to niche markets, like crazy, bold colors or wooden countertops. 

  • Home Offices

Even though work-from-home set ups are increasingly becoming popular since the pandemic, most people still don’t need a full-blown office at home. At the maximum, you can recoup around 43% of your investment by adding one to your flip.

If you see that home offices are actually popular in the property’s area, in particular, you can just have a home office that can easily be converted into a bedroom, should the future owner chooses to. An extra bedroom adds more value, too.

Profit is what you want out of your flip at the end of the day. 

To do this, you have to renovate objectively, with your ROI in mind, and not think about trying to turn your flip into a house you’d want to live in yourself. 

Begin with a solid renovation plan, and a carefully calculated budget, and make sure you don’t spend too much money in the pursuit of the “wow” factor.

Image courtesy of Pixabay

Categories
Flipping

Do Flipper TV Shows Help or Hurt the Industry?

Ah, the world of reality TV shows. Most of us have a love-hate relationship with these, as they supposedly mimic real life, yet need to be entertaining enough to make us forget about actual reality. But is that irony helping or hurting the flipping industry?

Over the years, reality shows centered around house flipping have remained amongst the most popular on TV. Just a quick search and you’ll see The Vanilla Ice Project, Fixer Upper, Genevieve’s Renovation, Flip or Flop, and My First Place – all exciting demonstrations that expose newbies to the real estate business.

So, are these shows a force for good – helping to encourage flippers and grow the industry as a whole – or are they making flippers’ lives more difficult?

The Good
These shows might be helpful to the market, as they introduce the real estate business to a wide audience, showing them the appeal and benefits of flipping houses.
They often reflect real-life house-flipping experiences, informally preparing people for what to expect – like how properties often have hidden repair costs. Fortunately, this also makes for an exciting narrative.
They may, therefore, help scare off people who realize that the trials and tribulations of flipping houses aren’t their cup of tea (or maybe not).
They’ve made flipping so widely-known that it’s not hard to explain to buyers and sellers the value of what you do (compared to other REIs, like wholesalers).

The Bad
The flipside of flipping’s TV popularity is that buyers and sellers alike may assume you’re in it to make a load of money, making negotiations more difficult.
These shows might very well be responsible for encouraging people to get into flipping before they’re fully prepared, i.e. committing to a huge investment, equipped only with information that was intended more for entertainment than education.

These newbie flippers will make mistakes on their pricing, leading them to overpay for properties. This makes it more difficult for experienced flippers to make money and stay in business.

In a worst-case scenario, these flippers end up negatively affecting the properties they work on – turning homes into worse shape than how they started, and with too much debt to be restored by anybody else.

The Conclusion
Real estate investing – especially flipping – can be quite lucrative, but that’s because it’s also quite risky. That’s something which reality flipping shows actually capture pretty well.

What they don’t communicate as strongly is the fact that, when you’re flipping houses, you really have to know what you’re doing, because it requires a huge financial and mental commitment from your end.

That said, it’s vital to know where and when entertainment deviates from reality. Oftentimes, these shows play down the risks (the cost and process of renovating and selling a house) and play up the benefits (the “insane” profits you’ll get in a short amount of time). So make sure you do your research if you’ve been inspired by one of these shows, so you don’t end up stuck with a half-flipped house that nobody wants.

Remember that the ones being featured on these series are experienced professionals – so make yourself as knowledgeable as possible before trying to follow in their footsteps.

Any stories about flipping TV shows impacting your real-life flipping business? Share them below!

Image Courtesy of Monica Silvestre

Categories
Flipping

Can You Make Money Flipping Blighted Houses?

Are blighted properties diamonds in the rough for property flippers?

Many investors were attracted to Metro Detroit when they heard about $500 houses for sale on eBay. Now, it’s more like $10k a home, but can you still realistically make money by flipping these?

What are blighted properties?

Blighted houses are abandoned properties in derelict or dangerous condition. They might have overgrown lawns, dilapidated roofs, broken doors and windows, or other signs of neglect. These houses have been deemed uninhabitable, and need either complete renovations or a tear-down to become livable once more.

Where are the blight areas in Metro Detroit?

There’s a big difference between a blighted property and a blighted area. You should be able to make money flipping a blighted house in a neighborhood with solid buyer demand, but flipping for profit in a blighted area is another story – so it’s important to know where you’re buying.

You can see plenty of blighted areas in the City of Detroit, due to the area’s history, which saw the population plummet by nearly two-thirds in the 70s and 80s. Residents left, causing a corresponding loss of tax revenues, resulting in significant cuts to city services. 

This led to neighborhoods full of neglected, vacant properties. You’ll see this in Brightmoor, Burbank, Ravendale, State Fair, Grixdale Farms, Petosky-Otsego, NW Goldberg, and Westwood Park, where roughly 30-40% of buildings are unoccupied.

However, this isn’t the case across the entire Metro Detroit area. You still have the “Ring Cities” surrounding Detroit, which don’t have these blighted areas. Overall, the Metro Detroit real estate market is generally healthy.

Are blighted property flips profitable?

So, many people are curious about the potential “flippability” of these houses in blighted areas. Can you make money from flipping them? We’ll have to go back to the basics of how a flip can be profitable in the first place.

What’s important when flipping a house? 

  1. You Need to Get It at a Good Price

Like any real estate investment, you need to acquire your blighted house at an excellent price to achieve a decent ROI. 

This applies to tear-downs as well–which is a common situation for blighted homes–where you actually just want the land that a house is currently sitting on. You’ll need to buy the property cheaper than a bare plot of land, because of the additional cost to demolish and remove rubble. 

  1. You Need to Renovate Fast and Efficiently

At the heart of every good flip is a fast and cost-efficient renovation, which requires accurate prediction of the overhaul costs. If you’re a beginner, correctly budgeting for a blighted property flip can be quite tricky. There can be a lot of hidden, expensive problems within their walls! 

This is exactly what buyers of $500 houses didn’t realize–a deal on a blighted house is often too good to be true. Did you consider that it’ll be a knockdown? Is the layout of the house costly to change) even good?

If you’re buying a blighted house in a blighted neighborhood, renovations will probably be a nightmare. It’s not uncommon to experience break-ins, theft of materials, and vandalism (all of which equal additional costs and headaches) – and after all that, you still likely won’t be able to find a buyer at a profitable price. Which brings us to our next point about flipping blighted properties…

  1. You Need to Sell It at a Profitable Price

You need to sell it at a price that makes financial sense. Look for a price that’s 70% of its market value, minus repairs. It actually takes a special skill to find distressed properties and negotiating it down to a profitable price! So keep this example in mind: If the house will sell for 100k fully fixed up, and it will cost you 30k for renovations, then you should pay no more than 40k.

70% x $100,000 (market value) = $70,000

$70,000 – $30,000 (repairs) = $40,000 

If the math doesn’t add up–steer clear. You can end up spending more money fixing than acquiring, but don’t overspend and end up with a house too expensive for the area. Which leads us to our next point…

  1. You Need People to Want to Buy

You don’t want to be stuck with a fully-renovated house that nobody wants. Your flip needs to be sellable at the price you need, within the time you have, to a willing market, in the right area. 

Maintaining and holding a vacant property while you wait two years for a buyer doesn’t make financial sense. So make sure you’re confident that there is a market for what you’re fixing up, – which, if it’s in a blighted area, there almost certainly isn’t. (In the City of Detroit, some abandoned areas have steadily improved, but it’s still a slow process.)

It may be hard to believe, but you can still lose money, even if you’ve only paid a couple of dollars for the house. You may buy it for next to nothing, but end up spending so much money and time renovating it, that it costs you more than what you’ll sell it for. And what happens if people don’t buy it at all? This is why it’s important to know the difference between flipping a blighted house in an up-and-coming area, versus flipping in blighted neighborhoods.

If you have great experience in restoring and selling neglected properties, and you’re in an area that does have buyers, and you have enough contingencies in case it doesn’t fall through, then you’ll probably make a lot of money flipping blighted houses. Experts will benefit from its high-risk-high-return factor. 

However, it’s never a safe bet. If you’re a newbie, you might want to avoid this type of real estate investing for now (and stick to Ring City properties instead, where the risk is significantly lower). Flipping blighted houses is definitely not for the faint of heart!

Have you thought of flipping blighted houses? Or maybe you’ve done it already? It’d be great to hear from you below.

Image Courtesy of: Webdexter Apeldoorn