On Instagram, I recently asked my followers what questions they had about starting house flipping. The first house flip is always more daunting & scary because it’s new territory, so I’m hoping I can help to ease the fear by answering your house flipping questions. If you’ve been on the sidelines watching & dreaming of starting your real estate investing career, this post is for you…and maybe it’ll motivate you to get off the sidelines!
Novice House Flipping Questions Answered
How Do I Fund My First House Flip?
If you’re new here, I strongly suggest you stop right here. Click on this link to see my tips for how I got started, and how I suggest everyone should get started. (Bonus: if you go that route, here’s how you can avoid a 20% down payment). But if you’ve read that & you’re ready to dive a little deeper into the world of house flipping, there are ways you can fund your house flips that don’t require mounds of cash sitting in your bank account.
Outside of my live-in flips, I have financed my fix-n-flips (Flip 4, Flip 6, Flip 7, & Flip 8) through my local bank. I have utilized a commercial in-house loan for most of these projects. An in-house loan has a lower-threshold requirement than say a government backed loan or a traditional conventional loan. Also unlike a traditional loan, these loans can provide funds quickly without requiring 3rd party repairs or lengthy wait times.
A Few Things To Note About In-house Loans
- They typically come at a higher interest rate. For my typical flips, this isn’t a huge issue since I don’t own the homes very long.
- The approval for the initial loan will rest heavily on your credit & debt-to-income. After that, your track record becomes a primary factor. For example, I’ve worked with the same bank long enough, they trust from my record that I know what I’m doing & will deliver a profit as promised.
- Many times the approval is based on “committee approval.” The bank has a committee that approves “higher” risk loans. They review my credit, my history, the purchase price of the home, my rehab plans, and my projected ARV.
- The down payment option varies greatly. I’ve put as little as $0 down and as much as 25% down. This varies based on risk, my current situation, overall project, and projected repair & holding costs.
Other Funding Options For House Flips
Many rookie house flippers seek out silent investors to fund the flip. This can be an easier route to funding, but it does not come without risk. For some flips, I have partnered with my parents, & I never plan to seek out any other investors. In fact, investors have sought me out, but I’m not interested in partnering with anyone else. For me, partnering with my parents who have flipped houses & invested in real estate for decades makes sense. But not everyone has that option. So if you’re seeking out investors, make sure you’re partnering with the right person!
If partnering isn’t your jam, and you’re wanting total control (& risk) over the flip, there are a few options you can pursue. A HELOC (home equity line of credit) could be a reasonable option. In order for this to happen, you would need to already own a property with significant equity. Another option is a cash-out refinance on a property. Both of these options are similar. However, neither comes with no risk. If you choose either option and the market crashed the next day, your risk & liability is substantially high…on more than one property!
How Do I Avoid Capital Gains On House Flips?
Again, this is where I suggest you stop right here, and click on this link to get caught up on how I have avoided paying capital gains on so many of my flips. But again, if you aren’t wanting to pursue that option of house flipping, then there is one undeniable fact: you WILL pay capital gains (or go to jail).
A few misconceptions regarding capital gains & house flipping. Many novice house flippers assume they can flip a house & utilize a 1031 exchange to delay the capital gains. Unfortunately, the IRS does not view house flips as investment properties; therefore, they are not eligible for a 1031 exchange. Another misconception is that your capital gains is a fixed fee. The truth is, your capital gains tax is calculated based off your tax bracket for the calendar year in which the home was sold. In addition, the length of time you hold the property also determines your capital gains (anything less than a year is short-term gains). The shorter the time you own it (which is ideal for flips), the more you pay in capital gains tax. Make sure you don’t make this monumental mistake that will cost you more in capital gains taxes.
Tip: Before you sell a house flip, consult your CPA to see what your current tax bracket is & whether you’d be subject to short or long term gains. If possible, delaying the sale until the next calendar year could help ease the pain- based on your financial situation if the following year is projected to be a lower tax bracket.
How Do I Know If A Property Is A Good Deal?
I know I’m biased, but there is no better tool than using a Realtor. A Realtor is a free service to buyers (in most cases) but provides ample knowledge & resources- especially to rookie flippers. A few of the key assets a Realtor can provide:
- Run sold comps for the neighborhood. It’s important to know the current top of the market for your neighborhood. It’s critical you set reasonable expectations on the sale price.
- Negotiate purchase price & repairs. Sometimes buying a flip means buying it as-is, but other times you can request repairs. The role of a buyer’s agent is to assist in this process, and, again, it’s a free service to the buyer.
The typical rule for most investors is the “70% rule.” My dad always has a saying when it comes to buying a flip: Hedge Your Bets. Basically, the 70% rule helps you to do just that. Invest Four More gives a good explanation & examples of the 70% rule. Just remember, you make your money on the BUY…so buy right!
This post is Part 1 of answering house flipping questions submitted via Instagram. Click here to see Part 2.