Is House Flipping A Bubble?

Can You Earn Profits With Flipping Of Properties?

Even though house flipping sounds to be easy and is highly lucrative, it is a risky business to venture intorequiring aconsiderable amount of knowledge and experience. The realtor has to deal with high level of uncertainty and stress from the time of origination of a deal until its completion. Sometimes, it becomes difficult to execute a flip. This may be because:

Sometimes it is tough to find the right property to flip
Also, an investor could get stuck with a wrong decision and a difficult property to sell
Too many players in the market and fierce competition in the broker market for a particular property deal
Undervalued properties are hard to find in the market
Unanticipated delays in property repairs and approvals and increase in expenses that were not budgeted
Holding costs that include mortgage, taxes and insurance payments which also means that the longer you hold the property, the more money you loose

Tax Consequences Of Flipping A Property

Capital gains from the sale of real estate are taxed at two levels. If you hold the property for a year or less,youwill have to pay short-term gains tax of about 35%. However, if your holding period is lengthier and the property is sold after 1 year of its purchase or longer the capital gains tax could go down to 15%.However, no investor is ready to wait long and tries to make aquick exit from a property even it means paying higher taxes.

Also after several transactions in property flipping, an investor may be subjected to paying ordinary income taxes that include self-employment taxes if the Government decidesit to be so which eventually reduces the investor's profit margins.

Risk Of Market Manipulation And Price Spiral

In 2008 the subprime lending crisis burst the housing market bubble bringing the prices of properties down and leading to foreclosures and financial bankruptcy. Due to relaxed norms in mortgage market then and low-interest rates it was easy to borrow loans for purchase in the property market as a result of which investors bought properties not to live in them but to speculate in the market. An inflationary spiral of property prices was created due to high demand over supply available until there was a nationwide banking emergency in the US market. So the risk of manipulative and malicious practices in this market always remains.

An Honest Approach To Success

Success in property flipping only comes after thorough research and with property consulting experience. One should never manipulate or hide facts about a property. Maintaining capital reserves and escrows against a property mitigates its risk.Using financial templates and budgeting tools will helpin determining the cash flows of property.The investor needs to have complete awareness and understanding of the property market, existing legal and financial norms and regulations and the fundamentals of property appraisal and valuations. He needs to be well networked inthe brokers market and needs to have enough confidence to execute a flip in the property market.

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