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!
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.
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.
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?
“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.
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!
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.
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.
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.
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.
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.
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.
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.
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:
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.
Property Age: Examine recent sales of properties that are similar in age to your flip to get a good estimate on price.
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.
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.
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.
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.
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!
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!