Market Conditions in Vermont>Question Details

Krista, Home Buyer in Chester, VT area

What's the prospect for long-term flipping? Need advice!

Asked by Krista, Chester, VT area Wed Mar 5, 2008

20-something couple in Windsor country, VT. Love to travel & will probably be in the area for apprx. 2 more years. To make a profit to pay off student loans so that we CAN travel, would like to flip a house, but every resource I've found on the topic refers to short-term flipping--making a flip as quickly as possible for minimal interest and a high profit. With both of us working full time--and interested/experienced in carpentry and renovation--we'd like to buy a run-down house now while it's a buyers-market, live in it for the next year or two while renovating on evenings and weekends, and then, perhaps when the market is more favorable for sellers, sell for a profit. Pretty sure we can afford a down-payment and be approved for a mortgage, but I'd like to hear from a professional whether this sounds like a viable plan and, most importantly, if there are any tax (or other) laws in VT that would affect the profit. Any advice VERY appreciated. Thanks!

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First, by most definitions "flipping" is short-term--3-6 months. And your description is correct: Doing it as quickly as possible, ideally for a large profit. "Long-term flipping" is an oxymoron.

What you're referring to is much closer to a "buy and hold" strategy, combined with a rehab. (Buy and hold often implies buying and renting out, which is what a growing number of investors are doing now.)

Okay, so those are the definitions. Does your plan make sense? It could. It's worked for others. But keep in mind that many of these rehab jobs take far longer than you expect. And while it's going on, areas of your house are going to be marginally inhabitable, at best. Some people tolerate that better than others.

You would want to find a property substantially underpriced. Or discounted because of its condition. Then get it thoroughly inspected. Not just by a home inspector but, as appropriate, by an electrician, plumber, and possibly a structural engineer. You don't want your $25,000 rehab turning into a $60,000 rehab due to structural flaws or other very serious problems.

The next question is what the market will look like when you're ready to sell. Not just real estate in general, but in the area you buy. John paints a gloomy picture, but he's probably not that far off. With the financial news out just today--the impending bankruptcy of another major lender, job losses, a declining stock market--coupled with oil over $100 a barrel, the prospect of trillions (yup, trillions with a "T") of possible mortgage defaults over the next few years, wars in Afghanistan and Iraq (the latter costing over $10 billion a month for the foreseeable future...hey, maybe 100 years according to one presidential candidate), a health care crisis--the prospects for the next few years look, um, uncertain. To be on the safe side, I'd certainly be looking at a time horizon of more than one or two years. And I don't know what the major economy/employer is, but I'd be cautious if any sizeable chunk depends on people's discretionary income.

As far as taxes, that's something for an accountant to answer. Not only because of his/her expertise, but also because part of the answer depends on your particular financial situation. In general, though, probably the greater effect on your taxes will be federal laws, such as capital gains taxes (preferable to the taxes that a true "flipper" pays). You'll need to keep detailed records of your expenses. Lots of other things I'm reluctant to mention here, but you'll want to go into this with the proper planning.

Like I said, I've known people who've done what you're hoping to do. (Someone in my office began a similar project about 3 years ago. He's still working on it. I really doubt you'd be able to complete the rehab in a year, even if you totally commited to it.) But your time frame may be too short, and the economic issues over the next 5-7 years means you'll have to be super-careful if you even want to consider going ahead.

Not what you wanted to hear, I imagine. Still, I hope that helps.
1 vote Thank Flag Link Fri Mar 7, 2008
Don Tepper, Real Estate Pro in Fairfax, VA
MVP'08
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The market looks flat for the next few years or more, but again this depends upon where you're buying the property. If you enjoy the process of rehabbing a home then maybe this isn't a bad plan but turning the property around in a few years might not be possible and you won't see a jump in appreciation like you did maybe three or four areas. Maybe you look for a home that's split level, fix it up and then rent out the upstairs or downstairs, have cash flow. It is a buyers market right now but will be for some time in most areas, so no need to rush into anything.

Do your research about the neighborhood and area you're buying in, job projections, new companies coming into the area, transportation developments, what sets the area apart from others, will the area be desirable in five or ten years, what are the rental rates, and so on. Hope this helps.
1 vote Thank Flag Link Fri Mar 7, 2008
Real Estate is local and it should be considered as a long term investment.

Unfortunately flipping has been made to seem easy and lucrative. It is neither. Individuals who profit the most from flipping are able to do their own work.

The minute you start subbing it out potential profits can be lost. There is so much calculation on market condition, interest rates, competitive properties for sale to name a few that factor into flipping.
1 vote Thank Flag Link Fri Mar 7, 2008
Pam Winterba…, Real Estate Pro in San Ramon, CA
MVP'08
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Short answer: poor.

Long answer: Why tie up your capital with something that has a very high probability of blowing up in your face? It will remain a "buyers market" for the next 5-8 years, if not longer. Rent for the next 2 years and keep your powder dry.

What you're starting to see now is the beginning of the end to the largest speculative bubble in the history of the United States. It's not going to be better in 2 years. Odds are good that it will be worse. A lot worse.
1 vote Thank Flag Link Fri Mar 7, 2008
I subscribe to the Dennis Gartman letter which is only available to major institutional investors. I also have 30 years in the investment business and have a pretty good understanding of the markets on a worldwide basis. It is believed that you will be looking at a 5 to 7 year time horizon for success ... If you have the patience and the funds (if necessary) to hold your investment and not worry about it for that length of time, you will be very successful. Hopefully tax benefits on new REO purchases will be a component of any future stimulous plan ... that NEEDED component could lessen the time horizon for success. Good Luck!
0 votes Thank Flag Link Mon Nov 3, 2008
Hi Krista, I am a wholsaler/investor specializing in flipping houses for big profit. If you buy a property to flip, you want a wholesaler to buy from. I find properties in marketing areas for investors. That is I find a property for say $40,000 that needs about $20,000 in repairs, now this property will already have a lot of equity, and be located in area that has high comps. If this is an investors area, comps will continue to climb, so longer you hold, higher the value. If you havent found a house to flip yet, let me know, will be glad to help.
0 votes Thank Flag Link Mon Nov 3, 2008
In a market where appreciation is rising quickly, a flipper can make a lot of mistakes and still make a profit. Some flippers who made money, did so, despite their poor decisions. I have seen flippers boast about their profits of 50k.......but the fact is, they overpaid for a property by 30K, and overspent on the wrong improvements. In this type of situation, the flipper made 50K, not because they were savvy, but because the market carried them and covered for their mistakes. While they were boasting about their gain of 50K, in reality, knowledgeable RE Pros and investors knew their mistakes prevented them from making 100K.

In a market that is not showing rapid appreciation, the ability to successfully flip a property depends upon great decision making, savvy purchases, carefully budgeted improvements, and managing expenses from day one.

You need to live in your home for at least 2 years as your primary residence or you will be responsible for capital gains tax. Consult a tax advisor for advice for your situation.

Are you able to buy well, manage expense, and have the market at least hold steady. If the market holds steady, and you buy low, and make improvments that add value, yes, you can flip. Few can do this well and for huge profits. Are you looking at this as your home first, with a potential for financial return?
0 votes Thank Flag Link Fri Mar 7, 2008
Deborah Madey, Real Estate Pro in Red Bank, NJ
MVP'08
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Hi Krista, I would say you are on the right track. Ideally the person who has the resources to ride out the hard times stands to make the best profit in a flipped house where people usually get in trouble is when they over extend. The tax considerations usually favor someone holding on for a longer period (Land Gains Tax), but you need to speak with a tax professional in any case, as everone's situation is different. Good Luck in your house hunting!
0 votes Thank Flag Link Fri Mar 7, 2008
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