Hello. I am new to this site but have been investing in both flips and long term holds for the past 14 years. Own over 30 properties and own a couple of businesses. To buy a property in hopes of appreciation sounds like the same advise I heard from everyone while living in CA back 2006. Back then the so called next door investor whether it was the waitress at Dennys or my Mailman everyone was telling me how they bought a house in X city, with little or no money down and is loosing $500 per month while renting it out but that was not a problem because they felt it was a small price to pay given the upside in appreciation. All they had to do is sale in one year and they would make $50-$100k. I never considered that investing. Investing in my option is to make money the day you buy. Sure there is value play and other methods but in this market it is just too hot to think values will keep going up. One day and it can be 3 months or in a year but there will be alot of investors left standing when the music stops during musical chairs in this market.
Buy, Buy, Buy.. who cares if you dont make any cashflow because you are banking on appreciation. I have always treated Appreciation as a bonus and never bought a deal in hopes of appreciation. What Flippers need to know if you sale more than 5 in one year you will be considered a Dealer. IRS taxes the heck out of you thus many dont realize they loose alot of their "profits" to taxes. As a Flipper you have gotten yourself a job not a business. I like that you are cautious and dont want debt but real estate is a leverage play. If you talk to any SUPER successful old timer who has over $10 million net worth you will hear they used some leverage but did not bet the farm on any one deal. They did not over leverage. In real estate you make your money on the purchase. If you buy correct and are well capitalized you can push through the down markets. Some good points made here about using S corp to reduce SS and employment taxes. I would suggest getting a small mortgage on your investment properties no more than 60-70% thus giving you some cushion if the market goes south. Another strategy might be to do the BRRRR method as that will give you conservative loan to value but you dont sale you keep and make monthly cashflow from each deal while increasing your net worth. The bank looks at your Financial Statements to determine your risk. FS is like the adults report card when they come into adulthood. Having a high net worth helps to open doors. Having high income from flipping is not always a good thing for bankers. Also another option that I have been hearing but I personally dont use is using self directed IRA. The money has to go back into that account including profits but you might be able to pay yourself as a Project Manager thus giving yourself a good salary while growing your cash from one flip into another and thus building a great retirement account. You can always dip into it and pay the taxes/penalties as you take out so not like you cant access until you are at legal retirement age.
Sorry for the long response but just think people forgot what happens when markets turn and all this easy money goes away. It was not long ago that all the over leveraged, banking on appreciation investors walked away from their investments when that play was no longer feasible.
One last point, as many others said you have to do smart tax planning ahead of time to do it right and legit. Trying to do after the fact is tough. If you end up paying the taxes just remember you are a business and not employee so you can take all the deductions to run the flips.
Keep up the great job and keep finding yourself great deals that you can make money from.
L
