New Construction "flips"

[Anna Strausbaugh]

Hi! I've recently been considering a new avenue of "flips" in our market here in Boise and wondering if anyone else is doing it or if it's worth it to do (particularly if it's worth the tax hit)? I'm a real estate agent, but also an investor and in this market that is tight trying to find good cash flow in long term rentals or margins on flips often being pretty tight as well if you aren't doing a lot of the work yourself. I've been seeing an interesting opportunity in buying new construction at the pre-construction phase and locking in your price early, then by the time it is finished you've gained $100k in value (sometimes more, sometimes less). Then you sell once it's completed and get great returns because there's so little inventory of completed new construction homes. Anyone else doing this? I'm trying to get my husband on board with the idea as he's much more conservative than I am when it comes to new investment ideas. I feel like it's fairly safe as long as we buy in neighborhoods that allow rentals, that way we can always rent it out if things go sideways and we can't get what we want for the place. I do feel like it would be a big tax hit on that gain if we don't hold it for long. Thoughts on this?

[Eric Winkler]

Hi Anna!  I can't speak to the Boise market per se - but I can speak to the model of build to flip - as I have worked with many investors successfully in this arena. There are a couple of factors to consider from my perspective.  First - the market itself - many markets have low inventory, high demand and rising appreciation - as I am sure you do in Boise right now as well.  Here in Florida - same thing - high demand, low inventory, high appreciation.  Next - the builder - what kind of build timelines are we looking at?  12 mos?  18 mos?  More?  The construction itself - are you starting with a property that is near completion or are you starting from the ground up?  Various pros and cons on either side of course.  For example - property is near completion (60-90 days) - Pro:  less likely to be delayed and closer to the finish line  Con:  Probably paying at or very close to market value.  Starting from the ground up:  Pro:  Many builders can/will offer better pricing especially if you can bring volume and/or have investors funding builds - wholesale pricing = immediate equity + appreciation = higher profitability.  Cons:  it's ground up construction  - know your builder, their strengths, their timeframes, and their weak links.  Finally - exit strategy - we know what to do if everything goes the way we want it to, but what if it does not - meaning we decide to hold - I agree with @Joel Wilson above -this is where it would be a good idea to run a cash flow analysis on the property before diving in.  As far as the taxes - it would be a good idea to work with a tax expert - there are many different ways to deal with the taxes, depending on how you have structured yourself and your investment.  Again - I am no CPA - but I would take a look at deferred sales trusts as well.  Wishing you success in your endeavors!