Advice on first deal: town home flip with $20k - $40k spread

[Andrew Cox]

First post, first possible deal, and I would love any insights. I'm in Minneapolis, where RE isn't cheap, but the market is still very workable. My plan is to fix and flip on this one. My cousin and his wife are design build team, so I can trust my my contractor. It's a town home which has a good HOA website, prior year's financials for review, seemingly good neighborly activity and transparency. HOA is $300/mo.

The seller is in a hurry, and I have an inside connection on this deal before it would hit the market. Overall, the house is just outdated and needs refreshing.  There are no pending asssessments, plus the roof and mechanicals are all new in the last few years.

Purchase: $200k

Value as is: $215k

Rehab: $30k, gets me an updated kitchen, updated 2 bathrooms, carpet, and other minor finishes.

ARV: $260k - $280

There are good comps, even in the same complex, to support the ARV. My contractor could have the work done in about 30 days.

My other costs:

$10k selling costs, including buyer's agent's commission, based on my relationship with my agent

$1k, 90 days tax, insurance, utilities

40% capital gains

What other costs should I figure in? All in all the spread is about $20k - $40k. Does this seem like a good deal, with enough margin for risk? It looks good to my untrained eyes.  This unit could even sell at $300k+ with a higher level of finish, though I like the target level we're at for reaching a larger buyer market.

I have enough cash to cover the whole project. Since I'm not seeing lots of other good opportunities, I'm leaning towards paying cash to save finance and interest fees. If I decided to hold the property and rent, could I finance at a later point even though I'm the owner?

Thanks in advance for any help.

[Austin Hendrickson]

@Jordan Moorhead If you are doing multiple flips in your personal name/LLC/Partnership and not in an S-Corp then 40% may be a reasonable estimate. Key word is "multiple" flips. You are going to pay tax at your ordinary income rate (depending on your income and if you are filing single or MFJ). Lets say your normal tax rate is 24% under the new tax law. You could also pay SE tax of 15.3% on any profit (this may depend if you are flipping multiple homes and if the IRS considers you a dealer vs an investor). Thus a total tax rate of around 39%. In your case with just one flip I would say SE tax would probably not apply. There are also state income tax considerations to take into account as well.

You can also deduct any self employment tax you pay on your individual return and if the flip is done in an S-Corp then SE tax is mostly eliminated. There are "reasonable comp" requirements etc. in an S-Corp but for a high level analysis I will not get into that here.

Another option is to rent it and hold it for over a year and then pay only long term capital gains tax.