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Flipping

Flip Responsibly: 8 Legal Risks You Must Know About House Flipping

Source: Zillow listing in the City of Detroit

We get it. It’s scary to get into real estate investing, especially if it’s to flip a home.

Countless shows have “proved” flipping to be easy, but the reality is much more challenging. As a house flipper, how much money should you spend on the renovation? How fast do you have to complete it?

And, most importantly, how can you flip a house legally?

Well, you must know eight legal risks when doing house flips. You may be in trouble if these aren’t handled properly, so we’ve outlined the most crucial house-flipping legal risks below.

Risk #1: FHA Re-Selling Restrictions

The Federal Housing Administration (FHA) is the largest mortgage insurer worldwide and gives mortgage insurance for loans made by approved lenders. Unfortunately, the FHA also places several restrictions on its mortgages, which limit how often a home can be bought or resold.

For example, known as the “anti-flipping rule,” you must wait at least 90 days before selling or flipping an FHA-financed home. Moreover, any resale between 91 and 180 days where the new property price exceeds its previous price by more than 100% will need more documentation for the FHA.

Risk #2: Building Codes and Zoning Regulations

Ensure that the property you buy complies with all local building codes and zoning regulations. Failure to do so can result in costly fines for both the buyer and the seller. So, take your time researching local laws to stay updated with any changes in any area before flipping a house.

Risk #3: Right of Rescission Rules

Be aware of any “right of rescission” rules that may apply in your jurisdiction when transferring property from one party to another. These legalities can vary by state, but they provide rights and protections if a homeowner wishes to back out of an agreement within three days of signing the contract.

Risk #4: Real Estate Contracts and Disclosure Statements

It goes without saying (rather, we wish it could) that you should understand the contract that you’re signing when purchasing a property. Read through the entire thing carefully and ask questions if there are any items that aren’t clear.

What novice flippers might miss, however, are the disclosure statements that must be included in real estate transactions, like lead-based paint disclosures or radon gas disclosures. Not complying with these regulations can result in fines and lawsuits against your flipping business, so always double-check.

Risk #5: Financing Fraud

Document everything thoroughly when financing a flip project. You’ll want to do this because lenders are tightening up, most notably regarding mortgage fraud and loan misrepresentation.

Refrain from misleading them about your financial situation to secure financing for a property, as failure to disclose all necessary information can lead to serious legal repercussions. And once again, fully understand the terms and conditions of any loan you take out.

Risk #6: Fair Housing Laws

Fair housing laws protect buyers from discrimination based on race, religion, gender, or nationality. As a flipper, you must abide by these laws and never discriminate against potential buyers when marketing your flipped home. If found in violation of this law, you risk heavy fines and even jail time.

Violations include, for example, sending out a direct mail advertisement for a home featuring only families with young children and not mentioning any other age groups or demographics—it’s considered discrimination.

Risk #7: Mortgage Loan Fraud

Chances are, you don’t have enough cash on hand to purchase your property. So, you’ll likely involve banks and lenders to finance your project.

Lending can become a cycle: you take out a mortgage to purchase the home, the next buyer acquires their own mortgage to buy the home from you, and so on. That cycle becomes ripe for mortgage loan fraud, where the buyer misrepresents their financial situation to get a larger loan.

To avoid fraud, request proof of income and other documents when dealing with buyers. You can also use third-party services that review potential buyers’ credit scores and verify their employment history before they purchase the home from you. These practices will help protect you from any fraudulent activities.

Risk #8: Issues With the Property Title

You may notice a lot of affordable properties in the market to flip for a significant profit. But between lenders, borrowers, real estate agents, and more, it can be challenging to know who owns the property you’re looking to flip—who can legally sell it to you.

So, before you acquire any property, ensure that you have title insurance to verify the title’s status on your behalf, and do your due diligence before making any major decisions. As much as possible, you should avoid dealing with fraudulent titles or legal disputes that could arise from a previous owner.

House Flipping With No Legal Repercussions

House flipping can be an incredibly lucrative business venture. By understanding these legal risks upfront, you’ll be in a much better position to have a large profit margin when entering this endeavor.

Just remember: consult with a local attorney if you have questions or concerns prior to doing any real estate transaction. Ensure that everything is done in accordance with all applicable laws and regulations to truly (and surely) build your house-flipping empire .

Do you need more help in house flipping? Join as a member, subscribe to our newsletter, and attend our upcoming meeting to stay updated with the market. You’re only as strong as those around you!

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Flipping

Taxes Made Simple for House Flippers

Source: Zillow

House flipping is a popular real estate investment strategy in which investors purchase properties, usually at a significant discount, fix them up and then resell them for a profit.

While the practice has been around for decades, it only gained popularity recently, particularly in the wake of the housing market crash of 2008, when many homeowners lost their homes to foreclosures—leading lenders to sell for cheap, and investors to buy rundown homes to rehabilitate and sell at profit.

Still, interestingly, house flipping is not just for professional real estate investors. Anyone can be a house flipper with the right knowledge and drive. In fact, many first-time investors have found success in this niche market—we’ve seen it happen.

If you’re thinking about getting into house flipping, there are a few things you need to know about the tax implications of this type of investment. Check them out below.

1. Document Every Expense!

As with any other investment, you must keep good records when flipping houses.

This will help you in two ways:

  • Doing so will make it easier to calculate your profits (and taxes owed) when you sell a property.
  • It will give you the documentation you need if the IRS audits you. As you can imagine, flipping houses can generate a lot of documentation, so it’s essential to have a sound system for organizing and storing your records.

2. Expenses to Deduct During Tax Time

If you’re flipping houses, there are a ton of expenses you can deduct when it comes to tax time.

There are two main types:

  • First, just about everything you spend buying, fixing up and selling the property.
  • Secondly, your business expenses, like auto payments, gas, for your auto, computer stuff, marketing the property, even snacks you buy for the contractors!

Say you spend $10,000 repairing and renovating a house that you sell for $50,000. In this case, you can deduct the $10,000 in expenses from your profits, leaving you with a taxable gain of $40,000.

3. You’ll need to pay capital gains tax on your profits.

When you sell an investment property, you must pay capital gains tax on any profits you earn. Capital gains tax is simply a tax on the profit you realize from the sale of an asset. In the case of house flipping, your asset is the property itself.

The good news is that there are ways to minimize your capital gains tax liability.

For example, if you hold the property for more than one year before selling it, you will be eligible for the long-term capital gains tax rate which is generally lower than the rate for short-term gains. Additionally, you can take advantage of certain deductions, such as the costs of improvements made to the property.

4. You may be subject to self-employment tax.

Another issue you can face is if you’re flipping houses as a business venture—then you may be required to pay self-employment tax on your profits. Self-employment tax is essentially Social Security and Medicare tax for the self-employed. The current rate is 15.3% which includes the employer and employee portion of the tax.

However, there are circumstances under which you may not be required to pay self-employment tax.

For example, you may not be subject to this tax if you’re flipping houses as an individual investor (rather than through a business entity). And if your total income (including your flipping profits) is below the self-employment tax threshold ($400 for 2019), you will also be exempt from paying this tax.

Of course, nobody is going to flip a home for a mere $400. But you get the point.

5. You can avoid capital gains tax via a 1031 Exchange.

Let’s suppose you’re looking to reinvest your profits from a house flip into another property. In that case, you can do so without paying any capital gains tax by taking advantage of the 1031 exchange provision. This provision allows investors to defer their taxes by rolling their profits into a new investment property.

For example,  if you sell a house for a $50,000 profit, then you can use that money to purchase a new investment property without paying any capital gains tax on the sale.

The negative of doing a 1031 Exchange is that you can’t use any of the funds from the sale to live off of.

6. Other taxes depend on your location.

In addition to federal taxes, you may be subject to state and local taxes on your house flipping profits.

These taxes will vary depending on your location, so it’s important to check with your state and local tax authorities to determine what you’ll owe. For example, in some areas, you may be required to pay transfer taxes when you sell a property.

7. You may be required to pay estimated taxes.

Next up, if you’re flipping houses as a business, you may be required to pay estimated taxes on your profits. Estimated taxes are periodic payments made to the IRS throughout the year, based on your expected tax liability for the year. They’re due yearly on April 15th, June 15th, September 15th, and January 15th.

If you fail to make your estimated tax payments, you may be subject to penalties and interest. Therefore, staying on top of your estimated taxes is crucial if you’re flipping houses as a business.

Uncomplicated Tax, Uncomplicated Profits

We hope this quick overview gave you a better understanding of the tax implications of house flipping.

As with any type of investment, it’s important to do your homework and consult with a tax professional before getting started. But if you’re looking for a lucrative investment opportunity, house flipping may be just what you’re looking for.

Maximize your flipping profits today! Join as a REIA member, attend our upcoming meetings, and sign up for our informative newsletter. We can help you take care of all the details, from repairs and renovations to accounting and taxes.

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Flipping

Increase Flipping Power: How Financing and Loans Work in House Flipping

Source: Zillow listing as of August 2022

Most house flippers don’t have the cash themselves to purchase a property & renovate it outright, so many have to learn how to acquire loans. But if you’re new to house flipping, securing financing may seem daunting.

So the question is—where do you start?

We’re here to help guide you through the process of financing your first flip. Here are the 4 steps to getting a loan for house flipping, so you know how to get one yourself.

1. Determine How Much to Borrow

The figure differs for every individual and investment. Generally, it’ll depend on your current purchasing power, the property’s purchase price, and estimated repair costs (ERC). If you’re new to house flipping, we recommend you work with a trusted and experienced inspector to have accurate numbers.

Once you know the total amount necessary, decide on what type of loan to get.

2. Decide on the Loan Type

Now, different types of loans are commonly used for financing a flip. However, if you want to play it safe, the most common loans are conventional, hard, and private money loans. Here’s the low down on a few different loan types:

Conventional Loans

Conventional loans are usually the best option if you have good credit and can qualify for a traditional mortgage. The interest rates on conventional loans also tend to be lower than other types of loans, making them more affordable in the long run. The only negative is that the property must be in livable condition, which doesn’t lead to the best deals.

Hard Money Loans

Hard money loans are typically easier to qualify for than conventional mortgages, but they come with higher interest rates. Hard money lenders will also often require that you have some skin in the game by putting down a higher down payment or using your own personal funds for the renovation.

Private Money Loans

Private money loans are given by private individuals or investors instead of banks or other financial institutions. Because of that, they usually have more flexible lending criteria than traditional lenders, making them a good option for borrowers with less-than-perfect credit. However, they take higher interest rates and fees.

3. Shop Around for Lenders

Once you’ve decided which type of loan is best for your financial situation, it’s time to look for lenders. You can find lenders online, through a local chamber of commerce, or by talking to other flippers in your area.

When you’re comparing different lenders, pay attention to the interest rate and fees associated with each loan. You’ll also want to ensure that you’re comfortable with the repayment terms. Some loans may have prepayment penalties which means you’ll owe a fee if you pay off your loan early.

4. Apply for the Loan

Finally, you’ve found a few lenders that you’re interested in working with; it’s time to start the application process. The first step is to fill out a loan application. You’ll need to provide information about your financial history, as well as the details of the property you’re planning to flip.

After you’ve submitted your loan application, the lender will review your information and decide whether to approve your loan. If your loan is approved, you’ll be given a loan estimate that outlines the terms of your loan, including the interest rate, monthly payment, and repayment schedule.

Take your time reviewing all options, sift through the best ones, and accept the one that gives you the best terms. Don’t accept loans haphazardly, or you’ll dig a financial hole before you even start flipping.

Expand Your Purchasing Power with Flipping Loans

You’re now ready to shop around for the best deal on financing your next flip!

As you can see, using a loan is much better than using cash, as it increases your flipping power. Even if you’re a seasoned flipper and have a ton of cash on hand, you still want to increase your deal flow as much as possible to flip more properties. Loans allow you to work on bigger and better projects—even multiple projects at once—without tying up all your own cash in them.

And if you need more help, don’t hesitate to join as a member of REIA today and attend our upcoming meeting. You can also sign up for our newsletter so you never miss any important tips to become a successful house flipper.

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Flipping

5 Easy Ways Flippers Can Spruce Up the Lawn Before Sale

Source: Curbed

Are you getting ready to flip a house? If so, it’s important to make sure the outside looks as good as the inside.

After all, no one wants it to look like a neglected eyesore or it will scare away any potential buyers. And yet, you have to strike a perfect balance because you don’t want to spend too much time or money on it either.

In the house flipping industry, time is money—the longer you spend remodeling the property, the less profit you earn. Landscaping tends to eat up a ton of time and effort, which means that if you’re investing in long-term lawn care, you’re not flipping fast enough.

On average, flippers spend between 5 and 10% of their budget on landscaping. This may not seem like much but you’d be surprised at how much value this brings. In fact, studies have shown that sprucing up the lawn can increase the home’s value by as much as 20%.

That’s a lot of additional profit for each flip. But this isn’t the only reason why you should invest in landscaping. Keep in mind that construction work to renovate other parts of the property will likely mess up the yard, so much so that you might need to redo the entire lawn.

So, let’s take a closer look at how you can effectively spruce up the lawn without going over budget.

How to Spruce Up the Lawn Without Breaking the Bank

No flipper wants to dedicate a huge swath of their budget to landscaping. So, here are a few cost-effective tips for you to improve the lawn without going over budget. The goal is to ensure that the home will attract potential buyers—notably, the target market that you want to reach.

1. Remember Your Audience

Before going crazy with your landscaping to-do list… first, consider what your target buyers will want. For example, if you’re hoping to sell to an older group of people, then perhaps it would be better to not have a lawn at all since they may not want to regularly maintain it. Young professionals, however, would likely opt for a patio or outdoor deck to entertain their friends, rather than a high-maintenance yard.

But if you’re targeting families, then feel free to go level up the landscaping. Chances are, these buyers are prioritizing wide open spaces for their kids and pets to play in. In fact, not having a poorly-maintained lawn may turn them off from seriously considering your property.

Apart from your target buyers, also consider what real estate class the neighborhood, tenant pool, and property belong to. For instance, it won’t make sense to create a beautifully-landscaped lawn for a Class C home since an expensive feature to maintain would be the last thing its tenants want.

2. Make the Grass Greener

A well-manicured lawn and tidy garden can go a long way in boosting your property’s curb appeal. The grass, in particular, has the most visual impact on guests when they first see the house.

Simply adding either fertilizer or grass seeds can go a long way. In fact, do this the minute you start on the flipping project. That way, the grass will already be fuller, healthier, and much greener by the time you’re finished and ready to sell.

As tempting as it is to constantly mow the lawn, it actually puts stress on the grass, especially if you trim off more than 20% at once. So check the cutting height of your lawn mower before turning it on and going to town with it, and ensure that you’re not mowing the grass too often.

This shouldn’t stop you from regularly pulling out the weeds, though. After all, who wants to see an overgrown lawn?

3. Edge the Lawn

If you want the lawn to appear tidier to potential home buyers, use an edger to trim the grass along its perimeter. Doing this creates a crisp and neat border that will make your property look cleaner and more professional, undoubtedly increasing its curb value.

Edging can also highlight landscaping design elements, which is important if you want to draw a buyer’s attention to a particular area of the lawn. It also prevents weeds and turf grass from growing into flower beds, so you no longer have to worry about the aesthetic appeal of your blooms.

4. Don’t Forget the Grass Clippings

For many, grass clippings are sent straight to the garbage can. But for flippers, they’re heaven-sent. Rather than bagging them after mowing the lawn, leave them where they are. Since they’re small and comprised of mostly water, it won’t take them long to break down and fertilize your garden.

However, make sure to clean up the grass clippings from your driveway, the sidewalk, and the other hard surfaces surrounding your lawn.

5. Invest in Lawn Repair Mix

You can easily fix bare patches on the lawn with a lawn repair mix, which typically consists of compost, fertilizer, and grass seedlings.

For better results, remove the dead grass and loosen the soil until at least three inches below the ground. This will give the lawn repair mix enough space to grow. Take care not to overwater this spot to prevent the seeds from scattering.

Sprucing Up the Lawn Won’t Break Your Budget

As always, the goal is to create a lawn that fits the criteria for selling that particular property to a particular target market. You don’t want to spend too much time, effort, and energy on a project that won’t pay off. In all flips, the faster you sell it, the more money you’ll get to keep, so make sure that your remodeled lawn will help you earn the profits you want.

In this article, we proved that landscaping projects aren’t as scary, expensive, or as time-consuming as you think they might be. With just a few easy fixes, you can increase your flipping profits without spending too much time and effort beautifying someone else’s lawn.

For more house-flipping tips, reach out to our team of experts at Logical Property Management. We’ve been serving the Metro Detroit real estate market for more than two decades now, and have everything you need to succeed in the area.

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Flipping

Does House Flipping Qualify as QBI Deduction?

Man repairing a house
Source: GO Banking Rates

Over the years, the IRS has been cracking down on taxpayers taking advantage of the qualified business income (QBI) deduction. Because of that, some house flippers are wondering whether flipping houses can still qualify as a business.

So, let’s dive in and see what you need to know.

QBI Deduction: What Is It and Who Can Claim It?

QBI deduction is a tax break that allows business owners, freelancers, and independent contractors to write off up to 20% of their total taxable income. This effectively decreases the income tax they owe to the IRS. However, not everybody is eligible for it.

For instance, only business owners with pass-through income may take advantage of the QBI deduction. This includes the following:

  • Sole Proprietors: An individual, such as a freelancer or independent contractor, who runs an unincorporated business
  • Partnership Members: Two or more people who made a formal agreement to oversee a business together, sharing in its profits and liabilities
  • S-Corporation Shareholders: People who own shares in an S-Corporation and include its income and/or losses on their personal tax returns

In short, you’ll have to double-check if you qualify for the tax deduction to take advantage of it, as there are some income limits and business types that may affect your eligibility.

What Does Not Count as QBI?

Now, not all income types qualify for QBI. In fact, there are nearly 20 different income types that the IRS does not consider as QBI. Here are a few of them:

  • Income from out-of-country businesses
  • Investment items (e.g., capital gains and dividends)
  • Interest income not related to a business or trade
  • Annuities received from something unrelated to a business or trade

Of course, as a house flipper, your only concern is if income from flipping is included on the IRS list. Well, it’s not specifically mentioned by the IRS. So, are you eligible for the 20% tax write-off?

Does House Flipping Qualify as QBI Deduction?

The law says that the QBI deduction will only apply to taxpayers who are sole proprietors of a business or trade, a member of a partnership, or a shareholder in an S-Corporation. So those in the fix-and-flip business will be eligible if your operations are conducted within one of these entity structures.

However, there are still rules dictating how much you can deduct from your total taxable income:

  • If you’re single or unmarried and your total taxable income is less than $164,900, then you can deduct 20% of your qualified business income.
  • If you are married and filing jointly with your spouse and your total taxable income is less than $329,800—then you can deduct 20% of your qualified business income.

Because of W-2 wage limitations, things become more complicated when your total taxable income exceeds these thresholds. If this is your situation, then it would be better to call an accountant for advice.

Confused? Don’t sweat it—here’s a quick example to help you understand QBI deductions better:

Let’s pretend that you’re a single-house flipper whose net operating income is $100,000 and W-2 wages are $50,000. Since you fall below the $164,900 threshold, you can deduct 20% from your net operating income, amounting to $20,000.

Assuming that you belong to the 24% tax bracket, this QBI deduction will save $4,800 on your tax bill.

Yes, House Flipping Qualifies as QBI Deduction

The QBI deduction has undoubtedly benefited a lot of industries, particularly real estate, where house flippers are now seeing more profits earned from every sale they close. But if you are still confused about the calculations, then we recommend working with a certified public accountant (CPA).

Calculating your QBI deductions is a huge headache and as a busy house flipper, you simply do not have the time for that. That is why you should consider joining the Real Estate Investors Association of Oakland County—our members have access to tons of resources that help them take their house-flipping business to new levels of success.

From landing sales on your fix-and-flip projects to help you determine your tax write-off, REIA has everything you need. Interested? Check out our website to see what your next steps should b

Calculating your QBI deductions is a huge headache—which you may not have the time for. Consider reaching out to REIA and our team of experts to help you with everything. Subscribe to our newsletter as well and join as a REIA member to attend our upcoming meeting!

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Flipping

Build Your Flipping Empire: Step-by-Step House Flipping Business Plan (Part 2)

If you only want to buy a single house to fix and flip as they do on TV shows, do you really need a full-blown business plan? Well, yes! You certainly need one if you want to succeed in the game.

Even if you’re just flipping one house, going in unprepared and without a plan is setting yourself up for trouble. You can go over budget, waste time due to lack of scheduling, and sabotage your house flip.

Instead, go through this Build Your Flipping Empire series to learn how to make a flipping business plan before you jump in with both feet. Doing so, you’ll complete your investment on time and on budget, making a hefty profit that you can roll over into your next project.

In other words, you’ll carve out a path that’ll lead you to long-term success in house flipping.

We’ve already covered the importance of having a house flipping business plan[1]. Now, let’s take a look into what you actually need to put into it—one part at a time.

1. Executive Summary

The executive summary is a synopsis of your entire business plan and serves as the first impression. Remember that potential lenders, financiers, and other business prospects will often only read the executive summary, so ensure that it provides a concise and comprehensive overview of your plan.

You should also include your mission statement here to show your goals and values as a house flipper. For example, if you value family-friendly, move-in-ready house flip projects, your mission statement can say, “Our mission is to grow our house flipping empire one property at a time by turning distressed properties into profitable ones for aspiring young families.”

2. Management Team

A good business plan also has your contacts in place and responsibilities assigned. From the contractors to the real estate agent, list all of them down with detailed roles, qualifications, and experience in house flipping projects.

Here’s an example of what this section will look like:

My team is composed of professionals equipped with the necessary skill sets and work experience to get the job done with quality and efficiency.

  • General Contractor: John Smith

For over 20 years, Smith and his team of subcontractors (plumbers, electricians, painters, roofers, etc.) have fixed homes all around the City of Detroit. Regarded for his quick and skillful work, Smith has earned the trust of two generations of Detroit residents.

  • Real Estate Agent: Jane Doe

Doe is an exceptional licensed real estate agent specializing in wholesale and house flipping deals. In her 17 years in the industry, she closes a whopping 4-6 deals per quarter, averaging 20 per year.

  • Bookkeeper: Jody Miller

Alumni of the University of Michigan, Miller graduated with a bachelor’s degree in accounting. Her financial skills can effectively expense accounted for and within budget, helping our team generate the highest flipping profits.

If you’re new to house flipping and don’t have a lot of connections yet,  then take this as an opportunity to build your team. You don’t want to waste time gathering people once a flipping project starts, as having the best people around will contribute to the stability of your operations.

3. Goals & Objectives

Think about what your ultimate goal is for the house-flipping business. Do you just want to flip 1 house a year? Or do you want to build a nationwide flipping empire to quit your day job? Remember to make your goals actionable, measurable, and realistic based on your available resources.

Here’s an example:

Our goal is to be one of the leading house-flipping empires in Michigan. Starting from the City of Detroit, we’ll grow our portfolio by expanding to neighboring cities until we have projects all around the state.

One by one, we will purchase distressed properties, and flip them into quality homes, all the while turning a profit to fund future projects as we continually grow our house-flipping empire. Our ultimate objective is to flip unloved properties into family homes.

Pro tip: Break down long-term goals into short-term ones so they’re easier to achieve and clearly mark the journey towards achieving the overall business objective.

4. Market Analysis

Knowing the real estate market in detail can help you make informed decisions moving forward. The market analysis provides insights to assess whether your business plans are likely to succeed or need some tweaking, all in relation to the competition.

Additionally, your market analysis will show prospective lenders, investors, and business partners your market knowledge and how you plan to use that for your financial plans and gain.

Here’s a list of questions to guide your market analysis:

  • Is the neighborhood gaining real estate popularity?
  • Is the property type you’re flipping in demand?
  • Is there a large pool of potential buyers?
  • What are the local crime rates?
  • How far is my prospective property from the necessary facilities?
  • What are my weaknesses against the competition?
  • What are my strengths against the competition?

Let’s use some data from 2021 to have a quick look at how a market analysis can go:

Recent statistics show a rise in flipping activity in Michigan. For example, in two Wayne County zip codes alone, 25% of all real estate sales were house flips, and Redford saw a 99.9% increase in house flipping in the first quarter of 2021—doubling the rates of the previous quarter.

Given the statistics, you can see these parts of Michigan are highly saturated and competitive. We can infer that pricing gets more competitive, with margins between buying distressed property and selling a flipped house getting smaller.

As for the whole state of Michigan, the online newsletter Michigan Chronicle reported in 2021 that house flipping is experiencing a huge resurgence providing “a lot of opportunities”. Michigan Chronicle used statistics by ATTOM data solutions and found that average Michigan flippers pocket minimum 20% of sales profits.

Although some cities in Michigan are highly competitive with advanced house flippers, there is still an abundance of opportunities state-wide for novices. Strategically, we can start in less competitive areas until we progress to more advanced markets.

The market is always shifting, however, so ensure that you constantly update your plan. After all, a great business plan is one that remains relevant and can guide you even in the later stages of your empire.

A market analysis is an opportunity for you to learn more about the house-flipping business. Another focal point of this section is getting to know the competition—how competitive is the market? What makes them competitive? Are there certain competitors to look out for?

Take note that getting into the flipping business without learning about it is one of the novice mistakes you want to avoid, so take your time with this section.

5. SWOT Analysis

“SWOT” stands for Strengths, Weaknesses, Opportunities, and Threats. Your SWOT analysis lets you gauge how you compare to the competition, identifying your relative performance in the market.

Let’s break down each letter and see what you should put within each section:

Referring to the infographic above, the guide questions show you what’s being asked for under each section. After the guide questions, the bullet points show sample information of what you input.

The SWOT analysis examines 3 factors: you, your competition, and the external factors of the area you plan to do business in. By having comprehensive knowledge of these factors, you can work smarter, and in turn, maximize your profits.

We’ve only scratched the surface of what goes in this section of a house-flipping business plan. If you want to take a deeper dive into the SWOT analysis, we’ll go into this in part 3 of the series!

6. Lead Generation & Marketing Strategies

Next, determine the best ways you can generate leads and market your business. We understand that this can be a challenge in the house flipping business, but try out these methods to get started:

  • Leverage Networking: Helping other real estate investors is a great way to keep your deals flowing. Pooling together resources can help you establish mutually beneficial relationships with other flippers and other real estate investors. Even if you have to split the profits, networking gives you consistent work while building your empire.
  • Drive for Dollars: There are many leads out there that can offer you profitable deals, and it’s just a matter of driving around and finding signs like “for rent” or “for sale.” These signs often have contact details of the assigned real estate agent or seller listed, where you can make direct calls to ask about possible deals. It’s also a great opportunity for you to build your network of agents.
  • Real Estate Agents: If you’re looking for a helping hand that has substantial knowledge of the real estate market, a real estate agent is your best bet. They can help you find leads, teach you the tricks of the trade, and get word of your house flips out in the market. Since these relationships are mutually beneficial, they can even become a long-term business partner.

These are just some lead generation and marketing strategies we found will be the most helpful for your house flipping projects, but you can use a mix of different strategies for more results. Remember to list down and define which ones you plan on using in your house-flipping business plan.

7. Finance Plans & Projections

You can’t do any business if your finances aren’t in order. So, will you be financing your house flip projects out of your own pocket or will you seek the aid of a lender? Because if you need funding, then it’s paramount that you earn their trust.

So, here’s what you need to include in this section:

  • Documents: Prepare all the necessary documents that show you’re financially able and responsible. You can include income statements, cash flow statements, and balance sheets.
  • Earnings: Tackle how much you expect to earn and how you will allocate your earnings. If you expect to earn $50,000 per deal? $75,000? Will you allocate 80% for future project funds? Will you keep 20% or less for yourself?
  • Budgeting: Although each project will come with its own set of repairs and touch-ups, it’s always good to have a standard budget as a guideline. You can list them out as percentages, so you show how you’ll stick to a budget and avoid over-improving properties to protect your profits.
  • Projections: Go over your business projections. Where do you see yourself months from now? What about 3 years after? Your projection should cover the next 2-5 years to give a clear picture.

Remember: One of the main reasons for making a business plan is to use it for getting approval on loans. So make it awfully clear how financially viable your flipping business is to earn others’ confidence.

8. Growth Strategy

We understand that it’s hard to think far into the future when you’re still getting your business off the ground. However, setting goals can keep you in line while showing future lenders, investors, and potential business partners that you are dedicated to building your house-flipping empire.

Here are a few examples:

  • Invest in Single-Family Homes: Single-family homes are a commodity that most types of buyers consider, so the pool of prospective buyers is larger. Opting for these kinds of properties increases your chances of closing a deal while lessening the effort you put out to gather leads and market the property.
  • Diversify your Real Estate Portfolio: Although house flipping is the main priority in building a house flipping empire, that doesn’t mean you can’t add other real estate ventures to your portfolio like wholesaling real estate, as it also starts with distressed properties.

Plus, if a flip looks like it’s going to flop, an exit strategy and an alternate venture you can consider are property rentals. In a nutshell, it’s all about diversifying the investments in your portfolio to secure growth.

  • Growing Your Capital Faster: Another way of looking at “growth” is looking for opportunities that can grow your financial capital quicker. By choosing and making the right investments early on, you’re on the fast lane to having more financial freedom, and in turn, the liberty to take on higher risks and higher reward projects.

There are more ways to ensure that your flipping empire grows. You can conduct more research to see what else you can do (and include in your business plan) so your vision is both short- and long-term.

9. Exit Strategy

Considering that your house flip project can flop when you’re just starting out can be discouraging, but having an exit strategy can be a lifeline to saving your investment. Rather than looking at it as a backup plan for failure, see your exit strategy as a “Plan B” for you to turn a profit—whatever happens.

So, identify alternative ways where you can get a return on your investment. Here are some you can consider for your house flipping business plan:

  • Slash Your Price: Lower your price if you’re pressed for time. If your flip seems like it’s going to flop, lowering your price can effectively heat up the market again. Even if it’s not as high as you expected, you can still walk away with some financial gain.
  • Tap a Different Market: If your house flip isn’t picking up in the buyers’ market, tapping into a different market can be a viable option. Long-term rental can present itself as another business venture and a form of passive income.
  • Rent It Out: With a property flipped and ready for residency, an alternative to closing a sale can be renting it out. Apart from being an alternative way of getting a return on your investment, you can add rental properties to your portfolio. Having different avenues of income also helps with gaining the financial stability you need to grow your house flipping empire.

Your exit strategy should be the next most financially sound option that aligns with your circumstances, so evaluate your situation carefully before taking any action.

A Foolproof Plan for Flipping Success

Learning more about the business, strategizing growth plans, and planning exit strategies can provide you with the direction you need to move forward with your goals.

Apart from serving as your guide, your house-flipping business plan will also provide comprehensive information on all areas of your business for new investors, lenders, potential business partners, and other people might do business with.

Business plans aren’t just for you, but also for those who will work with you.

With all your bases covered, you are clear and confident in what you want to achieve and how you plan on achieving it. You’ll be well on your way towards creating a house-flipping business that won’t turn into an expensive, capital-depleting flop.

This is the second installment of our series on house-flipping businesses, so stay tuned for our last installment! And if you have any questions or specific topics you want to learn, let us know by dropping a comment below or getting directly in touch with our team.

Categories
Flipping

House Flipping Business Plans: How To Create One (with Examples!)

A rehabilitated home in North End, Detroit
Source: Detour Detroit

Flipping real estate makes for a great reality TV show, but it can also be a lucrative investment strategy if you know what you’re doing. What they rarely show on screen, however, is the importance of having a business plan for flipping homes—one that we’ll provide for you in this article.

Read on for our house-flipping business plan template!

The Ultimate Business Plan Template: Planning for Success

The goal is to build a solid foundation that serves as your living roadmap for your house-flipping empire. Only when you have the goals and action steps in place can you put yourself toward investment success, attracting real estate investors, financial partners, and home buyers to work with your company.

Here are the 8 steps you need for a thorough house flipping business plan:

Step 1: Mission & Vision Statement

Start by creating your mission and vision statement. Change the following placeholders:

[Company Name] [what you do] [what you offer] to [who your customers are] with [your benefits, e.g., faster, more reliable, lower cost].

Here’s an example of a great house flipping business plan:

Flipping Fortunes finds, fixes, and sells fixer-upper homes to investors and homebuyers in the City of Detroit. Unlike other companies, we are Detroit locals and partners of Logical Property Management company that has been operating in the area for more than two decades.

Step 2: Products & Services

Next, list down all your company’s services and support each title with a short description. Here’s what it may look like for Flipping Fortunes, the fake house flipping business we used earlier:

Flipping Fortunes will provide these services for investors and home buyers in Metro Detroit:

  • Complete property restoration or renovation: Our team will scout, inspect, budget, and manage property flipping projects from start to finish. Home buyers and property investors can then purchase affordable, quality homes at a fraction of the cost of a newly built home.
  • Professional assistance for house flipping projects: Our team will help real estate flippers and DIY home flippers with everything they need to complete their flipping projects, including connections to professional inspectors, licensed contractors, and experienced real estate agents.

The more details you can add, the better. After all, interested real estate investors and financial partners will want to know everything your company can provide for them before engaging and signing the dotted line with you.

Step 3: Management Team

In this section, you want to explain more about the “who” of your business. Is your team composed of knowledgeable and experienced real estate experts who’ll live up to your company’s promise?

Here’s a quick example:

  • John Doe, CEO: Licensed real estate broker and property manager for the past two decades. Doe began as a real estate wholesaler before spending most of his career working with several agencies and property management companies. In all of his ventures, he always specialized in house flipping projects, having now flipped more than 250 projects.

Be sure to include each individual’s expertise, experience, knowledge, and everything else that can prove their capability and solidify their role. The higher you can lift your team members, the more trust you’ll gain as a company.

Step 4: Success Factors

Next up, what needs or specific niche are you addressing in the particular real estate market? These things are crucial for getting financial partners to join your venture, convincing them ‌you have a great business idea on hand.

Here’s an example of what a success factor could be:

Flipping Fortunes addresses the growing niche within the Metro Detroit real estate market. Our team opens opportunities for valuable fix-and-flop projects, making it easy for investors and home buyers to get their slice of the confusing yet high-performing hotspots in the tri-county area.

Pro Tip: You can also conduct a SWOT analysis to get a clearer picture of your strengths and weaknesses as a company.

Step 5: Target Market

As with any business, your house flipping company’s success depends on the supply and demand, as well as the cost of labor and value appreciation of the renovations. You don’t want to offer your services to a place that doesn’t need them.

Instead, your goal is to identify where you can “sell” most of your flipping services to a large market for many years to come.

Step 6: Business Entity

To operate your business legally, ‌choose a business entity and register for your business in the state you’ll operate in. There are many business entity types to choose from, but we recommend that go with one that has limited liability protection, like an LLC or corporation.

Liability protection is crucial for a house flipping business, as there are many things that can go wrong. For example, someone can sue your company because of a property you’ve flipped—where you’ll want to ensure that your personal assets remain protected.

Pro Tip: Consult with a business attorney to learn your options and weigh them accordingly.

Step 7: EIN, Insurance, Permits, & Licenses

It’s also important to ensure that you have the required documents to run your business. Oftentimes, banks and private investors will want to see this anyway. After registering your business, go through the following processes before officially starting operations:

  • Register for an employer identification number (EIN), which you’ll use for tax purposes, applying for business loans, or apply for business bank accounts and credit cards.
  • Look into business insurance options, especially if you’re going to hire employees. You’ll need workers’ compensation, unemployment, and disability insurance. Moreover, research about general liability and commercial property insurance to protect your assets.
  • Obtain the property business licenses and permits for your state and scope of work. You might need to get several permits to work in the construction business. You can also check with your local chamber and business attorney to ensure that you have the complete paperwork.

Step 8: Financial Summary

Lastly, ensure that your flipping business will generate high returns—both for you and for your investors. Here are a few ways you can get financing:

  • Through friends and family loans: Also called Patient Capital, this is when you fund your projects with personal loans from family members, friends, or partners. It’s low stakes and an easier route than traditional bank loans.
  • Tapping into your 401(k): If you don’t plan on retiring ‌soon, you can take a loan out of your 401(k)—either from the classic 401(k) loan or a ROBS loan.
  • Combining financing options: You can also find success in using several financing options to purchase and renovate your properties.

Start Flipping & Start Generating Profits

As your company grows, the projects will naturally increase in complexity and number as well. That is why having a business plan is important, especially if you want to attract investors. Your investors should see that you do your due diligence before putting any money on the line.

Have any more questions? Drop them in the comment below!

Categories
Flipping

Top 5 Youtube Channels to Learn About House Flipping

The Youtube Logo on a mobile phone

Getting better at house flipping can be an essential tool for becoming a successful flipper. Gathering info from books and other resources helps expand your knowledge in the flipping game. Plus, learning from experienced flippers can give you a huge leg up against competing flippers. 

But, you don’t have to limit yourself to books. These days, Youtube is a great learning tool. In fact, 7 in 10 Youtube users use the platform to learn. And it goes without saying, that you can gain a wealth of real estate tips from Youtube. 

To help you get an upper hand in the house flipping game, we’ve collected 5 of the best Youtube channels to learn from. 

5 Best House Flipping Youtubers

If you’re tired of reading books on real estate, well then Youtube is a great resource for getting the latest and greatest tricks in the house flipping business. But, you don’t want to just learn from some random Joe Schmo. You want to learn from someone with a wealth of experience. 

That being the case, we’ve sifted through Youtube’s content library to find the best house flipping channels. 

  1. Lex Levinrad 

Joining the platform in 2008, Lex Levinrad is a veteran of the Youtube landscape. Not only that, but he’s also a veteran of the flipping game. According to Lex, he’s flipped over 1000 houses throughout his flipping career. Currently, he has 17 thousand subscribers and has a total of over 2 million channel views. 

The Lex Levinrad channel will help fill gaps in your flipping know-how. For instance, his video on flipping a fire damaged property. In it, he gives tips about the pitfalls of buying a fire-damaged house and what repairs to focus on. 

With the Lex Levinrad channel, there’s always something new to learn about flipping houses.

  1. HouseBarons 

The HouseBarons channel is run by brothers Dave and Rich. They’re quite successful as Youtube creators considering their channel has garnered over 13 million views in its 10-year lifespan. Add to that, the HouseBarons gathered a healthy following of over 38 thousand subscribers. 

On the HouseBarons channel, you’ll get find a large vault of very specific tips and tricks. Take, for instance, their tutorial on fixing a faulty door. After all, creaking doors that open by themselves might be something you don’t want to show potential buyers during a property tour. 

All in all, the HouseBarons Youtube channel can be a great wellspring of knowledge. 

  1. Real Estate Investing Tips for Beginners

If you’re just beginning your journey in the house flipping business, the Real Estate Investing Tips for Beginners Youtube channels can be a great instructor. The channel has over 720 videos that cover a wide variety of topics for investing in real estate. It has just a bit over 50 thousand subscribers and uploads regularly. 

The channel has a series of videos dedicated to house flipping. There’s even a guide for how to start flipping with just $10 if you’re on a tight budget. From house flipping to wholesaling, you can learn a ton of real estate tips from this channel. 

  1. The Friendly Flipper

Learning from experienced flippers is a valuable experience that can’t be replaced. But some experts forget how to talk to beginners and can drown you in jargon. Thankfully, The Friendly Flipper channel makes this easy. With over 130 videos dedicated to house flipping, you’ll learn a ton and it’s all easy to digest content. 

The Friendly Flipper host a range of videos from interviews with fellow flippers to flipping progress vlogs. For instance, in his latest series of videos, you can follow the entire progress of a flip over the course of just 7 days.

When you subscribe to The Friendly Flipper, you’ll get a great guideline for flipping houses.

  1. BiggerPockets

Finally, BiggerPockets is one of the biggest channels on this list. In fact, it has nearly 900 thousand subscribers to date. And with over 2.3 thousand uploads, you’ll have a lot of content to digest. 

On the BiggerPockets Youtube channel, you’ll get the full breadth of what it takes to be successful in the real estate business. While the channel covers the entirety of the real estate market, it isn’t lacking when it comes to house flipping. For example, one of their most successful videos is a series that goes through the house flipping process from start to finish.

Between securing funding to looking for the right property, you can learn a lot from BiggerPockets. 

Expand Your House Flipping Knowledge with Youtube

There are a lot of avenues to explore when it comes to learning about house flipping. From reading a book to listening to experienced flippers recount their journey, you can pick up tips from almost anywhere. With this list, you can easily turn on a video to learn a little more every day.

Follow these 5 channels, and you’ll gain enough flipping knowledge to gain an edge over other flippers.  

Categories
Flipping

Selling Flips at Top Dollar: How to Price Your Flipped Home Correctly

A house under renovation
Photo by immo Renovation

Flipping a perfect house is a feeling like no other. After hours of fixing it up and giving the property a facelift, you can sell it knowing you’ll get back all your hard work. And you’ve given an old property a new chance to become a well-loved home again.

Then, you get to walk away with a sizable return on your investment, and get started on your next flipping project.

Flipping has been a real estate strategy for decades, but is gaining serious popularity with the success of shows like Flip or Flop. But, of course, these fixer upper shows only feature the ideal scenarios, enchanting the audience with all the benefits of house flipping.

But the reality is that flips are sometimes flops. It’s not always easy to sell the home at a good price, which defeats the whole purpose of house flipping for a profit. In fact, profit margins from house flipping fell by 3.2% in 2019 due to increased competition.

Nevertheless, the wind has shifted and we’re now seeing a huge increase in flipping profits. Home flippers are now garnering a massive average of 44.4% return on investment.

If you want to join in the fun and earn the highest flipping profits that you possibly can, read on to learn how you can price your home correctly and exit your investments with significant gains.

What to do After You’ve Finished Renovating Your Flipped House

So, you’ve gone through the process of renovating the house. You found a great property to work with, and all the renovations are complete. The next step is putting the property on the market and waiting for offers. But how, exactly, can you land on the perfect price?

Let’s take a look at some tips to price your flipped home according to its value.

Calculate the After Repair Value (ARV)

The after repair value—as the name implies—is the estimated value of a property after all the renovations are complete. For a house flip to be successful, you want this value to be higher than your total costs. You don’t want to have spent 80k for the house and 40k for repairs and renovations, only to have the property only valued at 100k. You need to have a good idea of your ARV in order to properly budget out your flipping project.

Having said that, there are two main methods to determine a property’s value.

  1. The Comp Method: This method is the most common way to determine the value of your property. This method is preferred due to how simple it is to compute your ARV.

You can also have an appraiser evaluate comparable properties that have recently sold in the neighborhood and set a fair market value for your flipped home. Alternatively, you can also use Realtor.com or Zillow to get ballpark figures on comps.

2. The Income Capitalization Method: This method of determining a property’s value is only suitable for large properties such as shopping centers and apartment buildings.

Simply divide your net operating income (NOI) by the capitalization rate (cap rate) to land on the property value. The NOI is what you expect to earn from the property, while the cap rate is the sales value of similar properties sold recently

Unless you’re flipping a large property, you’ll most likely use the comp method to determine your ARV. Only large properties have to take into consideration an NOI. Such as when the building rented-out is at 100% capacity. For smaller properties, the simpler comp method is preferred.


What Makes a Property Comparable

Now that you know how to calculate your after repair value, let’s discuss the details of running comps. When comparing properties, they need to be of similar status. For example, comparing a 3-bedroom house to a 12-story apartment complex would be useless. A comparison needs to fall under certain standards.

The basic criteria you see below are the most important:

  1. Property Size: Compare your flipped home to a property of a similar land and property area. The rule of thumb is to consider only the properties that fit within the range of 400 square feet smaller or larger than your property, and forget the rest.
  2. Property Age: Examine recent sales of properties that are similar in age to your flip to get a good estimate on price.
  3. Property Condition: Use recently remodeled or renovated houses that have similar conditions to your flip as a reference. Comparing your flipped home to another fixer-upper or a brand new, Class A home will only confuse your numbers—even if all other factors are the same.
  4. Other Properties Sold: It’s important to know the value of real estate sold recently. The real estate market is closely linked with the economy and interest rates. Prices fluctuate so sales from more than half a year. If the market is volatile, keep the date of sale in mind when looking for comparisons.

Ensure that you stay true to the criteria you’ll determine, so you compare your property to only the ones that will help you determine the best selling price.

Disregard Outliers

When comparing recent sales, you’re sure to find some extreme or stand-out sales. It goes without saying that these outliers could have extenuating circumstances that altered their sales price.

For example, a large property could be sold for cheap if there were unusual circumstances that occurred on the property, like a crime happening on the premises. In contrast, a small house can sell for above market value because it comes with a lot of amenities, like a huge backyard, an indoor sauna or a pool.

When you are looking for sales to base your property’s price on, you need to eliminate these extremes. Only when you get the real average on sales of similar properties will you land on the best estimate of your flipped home’s price.

Here’s a sample list of what you may have after running comps:

  • House 1: Sold for $100,000 at 1000 square feet
  • House 2: Sold for $150,000 at 1000 square feet
  • House 3: Sold for $110,000 at 1100 square feet
  • House 4: Sold for $105,000 at 995 square feet
  • House 5: Sold for $70,000 at 1200 square feet
  • House 6: Sold for $120,000 at 1180 square feet

Both houses 2 and 5 are outliers in this comparison and should be disregarded when scouting for a comparative price. We may not know why they’re priced so differently, but we still don’t want them to have an impact on our end result.

Conclusion

House flipping is one of the most lucrative and resource intensive projects in the real estate industry. If you’re not well-versed with the investment strategy, you can end up with a huge money sink that’s burning a hole in your pocket instead of walking away with the promised, coveted gains.


Nevertheless, there is a solution to flipping with confidence. And that’s to master the art of pricing your flips correctly—earning you high flipping profits with minimal risks in the process.


If you need any additional tips in flipping a house, feel free to drop us a message! Our team of expert property managers are more than happy to help house flippers price their fix-and-flip projects.

Categories
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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