Top 7 Reasons Why Flipping Houses is a Bad Idea

As a full-time house flipper, it might seem strange that I am writing an article about why flipping houses is a bad idea. However, being a full-time house flipper https://en.search.wordpress.com/?src=organic&q=investment property gives me direct and first-hand knowledge of not only the pros but also the cons of flipping houses. While I love flipping houses, the fact of the matter is there are a lot of negatives to house flipping and its not a good fit for everyone. While there are many positives to flipping houses such as the potential to make a quick profit, being your own boss, and a flexible schedule there are also many negatives to flipping houses. Some of the negatives to flipping houses can include the potential to lose money, large amounts of needed capital, very time-intensive, stress and anxiety, time and opportunity cost, physical and manual labor, and high tax bills.

Why Flipping Houses is a Bad Idea

Let’s take a closer look at the top 7 reasons why flipping houses is a bad idea to help you decide whether flipping houses is a good fit for you or not.

Potential to Lose Money When Flipping Houses

While we all have heard stories about the guy flipping houses a good investment that made a fortune flipping houses or have seen the TV shows that tout spectacular profits from house flipping. The fact of the matter is, flipping houses is a form of real estate investing and just like any other type of investment, there is a very real possibility that you can lose money as opposed to making it. While there are many things you can do to minimize your chance for loss on a house flip such as knowing and understanding your real estate market, buying the house right, having a workable plan, and using a detailed budget even with all of these tools in your house flipping toolbox the potential is always there to lose money on a flip. So if you have an aversion to risk or speculation house flipping may not be a good fit for you.

Large Amounts of Capital Needed to Flip Houses

House flipping is very expensive not only due to the money needed to purchase the home but also because of the money needed to rehab and hold onto the property. So unless you or your house flipping partner has deep pockets the sheer amount of money needed to flip a house can keep you on the sidelines. While it’s true there is potential house flipping loans out there such as hard money loans and private money its not always easy to obtain these short-term real estate loans and they can have very high-interest rates. I’ve actually heard of some hard money lenders loaning money at an interest rate as high as 15% not to mention the upfront points that can be charged at the start of the loan.

Flipping Houses Can Consume All Your Time

It can be hard to explain to someone who has never flipped a house before, just how demanding flipping houses can be on your time. While it’s true that flipping houses lets you be your own boss and offers some short-term flexibility in your schedule when you are flipping a house it tends to consume all of your waking moments. It really is amazing how even the simplest of tasks that you budget an hour or two for can end up taking all day, especially when it comes to rehabbing the property. In fact, there is even a running joke around the worksite of our flips that however long you think a task will take you better double it. So if you are someone with very little time on their hands and you cannot devote a substantial amount of time to a house flip then flipping houses might not be a good avenue for you.

Stress and Anxiety When Flipping Houses

Even with the most well-laid plans and detailed budgets often times things don’t go as planned when flipping houses and unexpected surprises are almost never good. Such as finding out the house your working on needs to be completely rewired to bring it up to code. House flipping is a lot like a roller coaster with a lot of highs and lows. While it can feel great to reach the finish line and receive a big paycheck, there are usually a lot of lows and high-stress situations along the way. So if you are someone that doesn’t handle high-stress environments or bad news well house flipping might not be the best choice for you.

Time and Opportunity Cost when Flipping Houses

Watching house flipping TV shows can give you a distorted sense of reality when it comes to the amount of time it really takes to flip a house. As house flipping shows tend to not paint a true or clear picture of the amount of time it actually takes to flip a home. Speaking as a house flipper myself the fastest I have ever flipped a home from the purchase to the sale was 3 months and on average it usually takes us closer to 6 months to complete a flip. Because of the amount of time, it takes to flip a house you need to consider the opportunity cost associated with house flipping not only in relation to the amount of money being tied up but also the amount of time that must be invested. Knowing that a house flip can take a half a year or more to complete, is there something else you could be doing with your money or your time that would yield better results? 

Lots of Physical and Manual Labor

Flipping houses usually means a lot of long hard days filled with manual and physical labor. While it’s true you can farm some of the work out to subcontractors a lot of the manual labor usually falls onto the house flipper because of the lack of qualified workers and the high cost of labor. On our house flips we do have some work completed by professionals but the work we have done usually centers around technical jobs like electrical and HVAC that were not qualified for. While a lot of the grunt work and physical labor we do ourselves to protect the profit of the house. As a house flipper in the Midwest, if we hired out all the work to be done on a home, there wouldn’t be a profit left at the end and more than likely we’d lose money. So if your someone that doesn’t like to get their hand’s dirty, house flipping is more than likely not a good fit for you.

Flipping Houses Can Lead to High Tax Bills

If you’re going to flip houses then you need to understand and be prepared for the typically high tax bills that go along with house flipping. Because house flipping is usually a short-term investment (less than 1 year) you are taxed at the short-term capital gains rate which can be much higher than the long-term rate. Beginning and new house flippers are usually shocked by the amount of money they have to pay in taxes on the profits from their flip which can be as high as 40% or more depending on the amount of your overall income.

What Qualifies as Flipping Real-estate with the Canada Profits Agency?

In October 2016 the Canada Revenue Agency (CRA) introduced new adjustments to its property sector reporting necessities. The greatest transform was the CRA’s addressing of those that have been non-compliant while in the real estate property sector, specializing in those who don’t accurately report their merchandise and companies, unreported funds gains, unreported cash flow, and most of all for real estate buyers – house flipping.

Right here’s what you need to know to remain inside the CRA’s fantastic graces in the wake of those extra guidelines.

What is house flipping based on the CRA?

Home flipping transpires when real estate buyers order earnings-technology properties Along with the intention of immediately reselling them for income. The CRA states that there are three levels of property flipping:

Expert contractors and renovators, who get and provide real-estate speedily, in some cases demolishing or renovating the property ahead of they offload it.

Center traders or speculators, who assign a “suitable-to-market” clause to a different get together or even a final buyer soon after paying for a residence. This can be carried out a lot of periods ahead of a residence’s ultimate sale, usually unbeknownst to the initial vendor. The CRA considers this to get “shadow flipping”.

Individual renovators, who renovate and Dwell in their not long ago ordered Attributes with the intention of marketing it just after proclaiming a principal residence exemption.

Assets flipping very quickly became a favorite and eye-catching way for investors to get paid huge income, thanks partly to Canadian real estate property selling prices and truth exhibits that featured the practice. Though real-estate flipping isn’t in opposition to the law in Canada, the CRA states that each one funds made from assets flipping – such as revenue from appreciation and property commissions – have to be described.

What does this mean for housing traders?

As of Oct 2016, any Canadian who offered a residence over the fiscal calendar year is now required to report basic sale info on the Schedule 3 “Funds Gains (or Losses)” segment in their revenue tax return. This facts includes the day of acquire, handle of the house, and various aspects about any home offered which was claimed being a principal home. Sellers will no more manage to declare the principal home tax exemption without having first reporting the sale. Prior to this latest policy, the CRA did not need reporting of principal home sales to qualify to the exemption.

The transfer was reportedly built in order to extra efficiently crack down on serial assets flippers who assert expenditure Homes as principal residences in an effort to gain tax exemption on their revenue. One more reason for The brand new tax restrictions is always to gauge just how common house flipping is in Canada, and what its possible results (if any) are on the overall point out with the housing current market.

What do I have to do to stay outside of problems?

If you think about your self to be a assets flipper, then the really best thing you are able to do in order to avoid difficulty Together with the CRA is to be honest within your reporting of profits. By thoroughly reporting property gross sales designed All year long and appropriately boasting your principal off market real estate home, you’ll be free and apparent to continue investing with out worrying a couple of substantial tax Monthly bill or penalties with the CRA. For individuals who are more vigilant about possible tax repercussions, think about choosing a Certified Accountant to assessment your gross sales exercise for legalities. Depending on the recommendation of a bookkeeper or housing lawyer may not be ok, since they aren’t as informed about the particulars of tax regulation as Accredited Accountants are. Using a CA about tax time can present you with valuable tax guidance and also enable to identify important publish-offs, generating them a lot more than truly worth their price.

The CRA’s current addition of stricter home flipping-relevant regulations means that real-estate buyers will need to stay vigilant with their reporting at tax time. Knowledge precisely what is considered to be assets flipping, being trustworthy in your reporting, and consulting accounting specialists will ensure that you help it become through the impending tax year unscathed.

Three reasons to invest in rental property

Most people invest in rental property for one of three reasons:

To generate monthly income

To create a capital gain

To diversify their investment portfolio

Let's look at each of these.

Generate monthly income

This is an appealing reason to invest, especially when it comes to funding your retirement. Regular monthly income from a rental unit can go a long way to supplementing your retirement savings or pension. But how long you have until you retire is important to consider. Because of the costs, it can take a few years for a rental property to generate a stable and positive cash flow. Of course, any loss you face at the start can be used to offset your other income, and this can be a beneficial tax strategy for high-income earners. But Continue reading it's important to remember that if there is no reasonable expectation that your property will ever make a profit, your losses may be denied by the CRA. It's therefore crucial to keep accurate records and consult with a tax expert for guidance. Location, amenities and vacancy rate all play a role in how much rent you can charge and therefore, how much income you can generate. But if you have five or more years until you stop working and are up to the challenge, the right property can start to generate positive cash flow before you retire.

Creating a capital gain

Creating a capital gain is another popular reason to invest in rental property. Leveraging your existing assets can help. The more you can leverage, the lower your capital outlay and the more substantial a rental property you can afford. This also frees up more of your cash to pay off your non-deductible debt or add to your other investments. But you must make sure you don't over-extend or your debt commitment may force you to sell. Panic selling due to poor planning often leads to a loss. Rental property is also not a liquid asset. If you need cash, it can take time and may be difficult to sell. The real estate market faces long up and down cycles, and if you're forced to sell in a downturn, you may lose on your original investment. It's also important to remember that any gain you realize will be taxed. In Canada 50% of your capital gain is taxed at your marginal tax rate.

Diversify your investment portfolio

Finally, rental property can be used to diversify your investment portfolio. When interest rates are low, the stock market volatile and property values are on the rise, rental property can be an attractive investment. It's also a hedge against inflation because your rent will likely increase over time, but with stable or falling interest rates your mortgage payments will not. However, buying rental property is not risk-free and you must consider your opportunity costs. A substantial down payment of 20% or more is typically required, and you will likely face unexpected expenses. While diversification is important, your expected returns should be equal or greater to your other opportunities to make the investment worthwhile.

A financial partner can help

No matter what your goal, finding a financial partner that will help you maximize your investment is crucial. Rental homes are often perceived to be riskier by lenders and some may have higher borrowing rates and stricter qualification rules. Look for a financial institution that takes into consideration all your assets, as well as your income and credit situation, and will work with you to make financing as affordable and accommodating as possible.