House flipping is the business of buying and selling houses for a quick profit. It is a lot easier to flip a house in an escalating market, but if you do your homework and have a fantastic eye for deals, you can create a profit in almost any market. Keep in mind that house flipping does not entitle one to use capital gains tax rates because you aren’t holding the property as a rental for at least a year. Your profit will be taxed as ordinary income.

Start Small

If this will be your first reverse, begin little. Buy an entry-level house or condominium that doesn’t require a ton of work. Price out each of your anticipated improvements with the help of a contractor, and be sure you completely know how long the work will take. Though you stand to lose a lot even on a tiny real estate deal, it’ll be nothing compared to what you can lose on the rehabilitation of a Hollywood mansion. Be happy with a little profit your first workout. The purpose of your first deal is to learn the principles and minimize loss. Once you know what you’re doing, it is possible to move up to bigger projects on more expensive homes.

Location, Location, Location

Don’t sacrifice location for price. It will always be a lot easier to market a house in a nice area than in a poor one. And although prices will be higher, so will profit. When exploring neighborhoods, start looking for places with low crime rates, higher owner occupancy rates, near to but not next to freeways and close public transit, schools with good test scores and well-kept parks.

Focus on Cosmetic Improvements

Some houses look pretty good but have outdated furnaces, outdated roofs and galvanized iron pipes. You want to purchase the house which has a newer roof and furnace and aluminum pipes but looks horrible. Loud, mismatched color schemes, carpeting with animal scents and walls covered in dirt will be your new best friends. These are the houses that require only minor cosmetic improvements to noticeably improve their worth.

Build in Markup and Cushion

Whenever you are looking at houses, make a note of the difference in sales price of comparable houses which have and have not been remodeled. In a flat market, this differential will account for your expenses and profit. Estimate your carrying costs, which will be the monthly costs to maintain the building through the renovation and sale; your remodeling costs; a 10- to 20-percent cushion for unexpected contingencies; and your markup–the profit you wish to make. Don’t forget closing costs on both sides of the trade and also the sales commission.

See related