It’s no secret that purchasing properties is a great source of investment. With this, many people believe fixing a place to rent or renting out a space in your home is the best way to make a profit. However, property flipping is an excellent alternative. We’ve got what you need to know, from how it works to common mistakes investors make.
What exactly is property flipping?
Property flipping is the purchasing of a property with the sole intent of selling it for a quick profit. This generally involves having a short holding period. When people purchase homes, it is typically to gather long-term appreciation. Flipping is most commonly associated with short-term real estate transactions. However, flipping can be used to describe the purchase of any asset to sell for profit. This includes cars, concert tickets, clothing, and cryptocurrencies.
Flipping can be risky, usually done by people familiar with the real estate market. This is because there are no guarantees that the price will increase over time. During the holding period of flipping a home, the owner will most likely work on the house to increase its value for reselling. These renovations may include:
- Painting
- Tiling
- Landscaping
- Demolition of walls
- Installing new cabinetry
- Replacing flooring or old carpets
What is the process of property flipping?
As mentioned above, flipping is most notably associated with real estate. Flipping is a method of purchasing and selling a property within a short period to make a profit. This timeframe is never longer than a year. When it comes to real estate specifically, you can categorize property flipping into two methods:
- The first method is where investors who flip properties target specific properties. These properties are generally in areas with an appreciating market, such as Toronto. Investors will then resell the property with little or no additional investments made into the property. This is reliant solely on the property and market, and not so much the property itself.
- The second method is generally much quicker. It involves a quick purchase and then modifying the house based on what buyers want. This will usually involve renovations and/or cosmetic changes; also known as a reno flip.
Are there risks associated with flipping?
Property flipping has been known to generate a large income for many people. However, like any investment comes the risk of losing money as well. When the market is more competitive, the risks become much greater. When the market fluctuates as it often does, the investor may be left with a house that is losing value.
This is why it is more likely investors will grab a property that is of lesser value and less dependent on the market’s state. However, the market can impact just how much money is gained during the flip. Not only this, but you need to take into account the combined cost of the purchase, any renovations made, as well as the carrying and closing costs. Though flipping may sound like a simple task, it is highly recommended to have a decent understanding of real estate and the market to be done correctly.
Common mistakes made when flipping properties
Many skill sets are required when attempting to flip a property. Not only do you need experience, time, and money, but it also a lot of effort and patience. Many don’t realize what exactly they are getting into during the process. There are many mistakes first-time flippers make, but many are avoidable! Here are some of the most common mistakes:
- Not having enough money. Entering the world of real estate is an expensive venture. The first expense you’ll encounter is the acquisition cost. It is crucial to make sure you are researching your financing options. This will determine what sort of house you can afford. Using a mortgage calculator is a great way of comparing your different rates.
- Not having patience. This one is often overlooked, but super crucial. Waiting for the right time and being patient is the key to making money by flipping. Make sure to hire a real estate agent to help you find and sell the perfect home. This goes beyond just finding a house, as well. Make sure you do your research when it comes to contractors and other professionals who will be working on the home. The last thing you want is a contractor to do a low-tier job, costing you more in the long run.
- Not having enough knowledge. From picking the right property to the right price, knowledge is key. If a neighbourhood is sprinkled with $100,000 homes, don’t expect to buy for $60,000 and sell at $200,000. This is simply unreasonable, and a great way to waste money instead of making some! On the same note, make sure you know which investments are worth your time and which aren’t. You want to make the house appealing to buyers of all types!
Property flipping and taxes
Understanding the impacts of income tax when it comes to flipping houses is very important. As of 2023, the way taxes and property flipping work together changed significantly with the introduction of the Residential Property Flipping Rule. Knowing what this rule is and how it works is a good way of understanding the impacts your flip can have regarding income taxes.
Residential Property Flipping Rule
Imposed at the beginning of 2023, the Residential Property Flipping Rule dictates how profits from a flipped property are taxed as business income. When this new rule is applied, profits from a flipped property cannot be treated as capital gains (50% home inclusion). For this to come into effect, a property must be owned for less than 365 days to be considered fully taxable as a business.
When this new rule is applied, reasonable expenses that were earned income are now tax deductible. With this in mind, any resulting loss will be denied and cannot be claimed as a business loss. There are some exceptions to this new rule, however. These include if a sale is due to a certain life event, such as death, marital breakdown, family member additions, or threat to personal safety.
Conclusion
All in all, it is no secret that flipping properties is an incredible way to make a source of income. However, without proper research and patience, the act can be a big mishap. As mentioned above, always remember to contact a real estate agent to make sure your choices are correct.
Remember, if you are ever in the market for a home for yourself, ample insurance coverage is crucial. Contact us or request a home insurance quote with isure for all your home insurance needs.
