There is no way around it, when you consider investing in real estate, or anything else for that matter, you need to do your homework to keep your investment safe and avoid surprises.
First, spend time with yourself to define your goals and then, spend time with the math to estimate the costs carefully before you invest. Everything costs something, but somethings are worth the cost.
First your goals: Ask Yourself:
“Do I want to get my hands dirty?”
“How involved do I want to be?”
“Do I want a single pay out of profit”
“Do I want a steady stream of income?
The buy-n-flip model of buying a distressed house at a low price, renovating it, and reselling it for a profit within 12 months is usually pretty hands on. If you don’t actually do the remodeling yourself, you will be supervising your contractors, so you get quality work, on time, and within budget. The Fix-n-Flip model will give you a one-time pay out, and if you did your preliminary market research properly, it will give it to you quickly, in less than a year.
The buy-and-hold model of buying houses, fixing them up or not, and renting them out will give you steady income. In this model, an investor can choose to rent the property out or occupy the property. There are varying levels of involvement for the investor to consider. Landlords are investors who own one to three properties and manage them themselves. This is the hands-on level. Portfolio Investors own four to ten rental properties and hire property management companies to manage them. This level of involvement is less hands on. Turnkey investors are the least involved personally with their investment, they purchase a property that already has a tenant and management company in place. Basically, only their money is involved.
One of the cost differences between investing in fix-n-flipping and investing in fix-n-holding is the income taxes that you will have to pay on the profits. According to FitSmallBusiness.com, flipping houses is generally not considered passive investing by the IRS. Most real estate fix-n-flippers are considered dealers by the IRS. A real estate dealer is defined as someone who purchases real estate and sells it to customers “in the ordinary course of business.”
Ordinary Income. Profits on flipped houses are treated as ordinary income with tax rates between 10% and 37%. The profits you make are not considered capital gains with the lower tax rate of 0% to 20%. Taxes for flipping also usually include self-employment tax, which is 15.3%, double what you typically pay as a W2 employee.
Capital Gains. On the other hand, according to FitSmallBusiness.com, profits made from properties held more than 12 months are typically subject to more favorable long-term capital gain tax rates ranging from 0% to 20%. This profit is also subject to self-employment tax .
Keep Your Receipts
The answer to handling the tax expense for a fix-n-flipper or the fix-n-holder is to think like a business; budget for the taxes in your expense calculations and take them out of your expected profits so the return you expect is realistic. And, keep excellent books. You will want to itemize your deductions and income in either type of investment so when it comes time to calculate your profit for tax purposes, you can determine your profit by subtracting your expenses from the final sales price. Keep your receipts. If you keep no records, you might have to pay taxes on the entire amount of the sale, not just on the profit.
REI Capital Resources is a direct lender as well as a broker of funding solutions. We offer short and long-term financing options that are perfect for buy-n-flip projects or buy-n-hold projects.
Please give me a call when you have the perfect investment in mind and know how much money you need.