Am I missing something?

Question

So i recently started a post with the question of Flipping Houses in Queens or Brooklyn (NYC)

Here is the thing, for someone like myself who is looking to start investing in NYC,where the market is tough to get into and everyone here seems to have negative comments and not much advice for newbies like myself to invest in.

Wouldn't it make sense to get an FHA loan that only require a min of 3.5% down payment. Buy a single family house, or even a 2 family for 350-500k in a neighborhood that's up and coming hold it for the required 90 days - put it back in the market and if you did your math correctly and assumptions, you can have a good profit?

What seems to be missing? doesn't it make sense to do this what i just mentioned above?It would be awesome if BP could have a webinar on this.

Darren Sager · Answer

@Juan Perez if you're expecting the market to move that quickly up in price on a home I think it's more speculative in your approach, that's all.  Nothing mean meant by it.

There's nothing wrong with using the FHA program to get into your first property.  I can't say I'm personally not a fan of the 203K loan program.  I think contractors who are a part of it charge more because they know the borrower has no choice but to work with them.  Your best bet would be to find a good contractor and have them apply to be part of the program in my opinion.  Still most might not want the extra paperwork involved.  Doesn't hurt to try though.

Eric A. · Answer

I doubt any property, even in NYC, will appreciate enough in 3 months to cover your closing costs on both the purchase and sale (let's say 3% of sale price each time), plus cover any broker fee if you intend to market with a broker on the flip (6% of sale price).  Unless of course you find a fixer-upper and you force the appreciation by doing a gut renovation with an FHA 203k rehab loan.  Then it might work, but you'll likely be spending way more than 500k all in to do that.

Darren Sager · Answer

Doesn't seem to me like you're investing @Juan Perez.  To me it seems you're speculating or just plain gambling on the market.  If it's moving that fast I think I'm ready to sit on the sidelines waiting for another crash.

Ben Leybovich · Answer

You took the words right out of my mouth...hahah This stuff is classic!

Kevin Siedlecki · Answer

@Juan Perez - I think you and @Scott Trench answered your question for me. Your new plan sounds like a good way to get started!

Juan Perez · Answer

@Scott Trench thanks for the feed back!, I read on HUD's website that it must be your primary residence for a minimum of 90 days, yes I do plan on making one of the units my primary residence while renting the other, I do also plan on getting the 203k loan to have at the very least the kitchens renovated, I will not be able to afford a fancy home by no means, I want to buy withing my price range. there is an up and coming neighborhood in Queens NY with LOTS of development happening, also has one of the main transit HUBS connecting millions of New Yorker's and tourist to Midtown Manhattan. Its an area im familiar with and have seen properties that are still affordable with the opportunity for some renovation. I was hoping for this to be an approach that can work and at the turn of a year or so have some profit, I feel it must be a slow start specially in NY.

Scott Trench · Answer

@Juan Perez Good Idea. One big problem.

Here's why it's a great plan. First, you can use very little down to get into the property. Second, you can often combine an FHA loan with a rehab loan (203K) to get low interest rates on your rehab costs. Third, you can live in the property, meaning that if it doesn't sell, you are no worse off than a homeowner, and get to live in your newly renovated building until the neighborhood rebounds to where you can exit. Fourth, if you live there for at least two years, you might be able to sell the property and keep ALL of the gains TAX FREE.

This is called a "live-in-flip"

The downside is that part of the deal with an FHA loan is that you have to live there for a full year - planning ahead of time to sell out before that year early is called "fraud." Waiting out the full year (IMO) is a very small price to pay for all of the advantages to the plan above. It's like signing a one year lease in exchange for a fantastic and relatively low risk shot at tens of thousands, if not hundreds of thousands of dollars in tax-free profit and a flip with training wheels while you live in the place.

Now, all of this is assuming that you intend to actually rehab the property - if that's the case, then this can be a great way to get started in REI. If, on the other hand, you are buying a fancy home, moving into it, and hoping it will go up you are not an investor. You are a homebuyer and will likely put yourself into big trouble.

Yes, you can repeat all of the above with a 2-unit, or even a 4-unit. I did it personally with a two unit and opted to keep it as a cash flowing rental when I moved out.

Kevin Siedlecki · Answer

@Juan Perez - I love the way you're thinking outside the box. If you keep thinking creatively, you'll hit on something; I don't think this is it, though.

From your first post, I'm not sure how you are expecting to make money. Where is the excess equity that makes your profit? Are you assuming appreciation? Is your profit the rental income you made? It might work if you got something from a motivated seller way below market value, but not in the scenarios you bring up. There are three major things that make that a very risky, if not impossible strategy.

1) Small updates are not going to affect the appraisal at all. Appraisals are based on comps, and adjusted for beds, baths, square footage, and general condition. Without making major improvements, you won't change the general condition enough to affect the appraised value.

2) Closing costs and holding costs - In addition to paying the mortgage, taxes, and insurance for 3 moths plus the time it takes to sell, when you buy and when you sell you're shelling out thousands of additional dollars for inspections, appraisals, lawyers, realtors, etc. The 6% to the realtor upon sale will eat up pretty much your whole profit after those other expenses, even in the best case $450k sale on $400k purchase.

3) If you can buy that $450k house for $400k today, that means the seller couldn't sell it for $450k, so you probably won't be able to sell it for $450k in 90 days, either. You could sit on it for months, and then end up selling it for the same you bought it at, which is not a break-even deal, because you will be out thousands in the costs I mention in point 2.

Pamela P. · Answer

Hi Juan,

Just curious. Why are you stuck on flipping in Queens? I live in Queens too, but I'm looking to flip in CT where homes are more affordable therefore financing is easier. From the math I've been doing, the flips in CT will offer larger spreads (eg profits) vs the metro area.

Am I missing something?

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