The art of flipping houses Part 5
Transportation costs and what they mean for you
If you got financing for your flip property, then you have maintenance costs. What this means in a nutshell is what it costs you on a monthly basis to keep that property. This is why you want to get in and out of your flip as quickly as possible.
Let’s look at an example of how this works. You have bought a house for, say, $200,000 dollars. Allow $20,000 for your budget, in an 8-week time frame. Your monthly mortgage on this house is, say, $1,000 per month. Now we have all our facts.
House cost $200,000 Budget for repairs 20,000 Mortgage for 8 weeks _2,000 Total $222,000
Let’s say you are asking $300,000 for the property. OKAY? IF you complete the renovations on time and on budget, and are able to sell the property immediately, you will make a profit of $78,000. If your house is overpriced, say $20,000, especially in a weak market, your house will not sell. You will continue to pay that mortgage (maintenance costs) until it is sold. And what about the credit card you loaded your materials onto? The finance charge is another maintenance cost. And let’s not forget property taxes. You may be better off selling your property quickly, ie price it 2-3% below market in your area.
Make sure when you buy a home that you know what the market is doing in your neighborhood.
I have used the term “soft market” a couple of times. I’m sure you’re wondering what the heck I mean by that, huh? A weak market is when you have multiple homes on the market, with fewer buyers. Buyers are now being very picky about what they buy. This is, however, a great time to find motivated sellers who can’t wait for the market to heat up again.
Do yourself a favor and be patient right now. Buyers shouldn’t jump to the first or second home they look at. There are a LOT of houses on the market, and you have to weigh each one separately. Which will give you “more value for money”? Make sure you are looking in a DESIRABLE location! Look for houses with character, and also choose a house that you can easily turn around in the time you have allotted. Price the house to sell quickly to avoid maintenance costs. Every month that your house is on the market, you are losing money and you are not in business to do that.
Do I need a permit?
Each county in the United States has a different answer to this. You’d better find out what your county or state requires.
If your county requires a permit for a particular job and you decide not to get one, a number of things can jump out and bite you. A building inspector might be traveling down your street on a given day and notice a dumpster in your driveway, full of trash that he removed during demolition. He can (and has every right to) stop and ask for your building permit. If he doesn’t have a permit, he can, and in most cases will, shut down your site until he has the permissions. This can also come with a fine. Money sure you didn’t budget it. It also slows down the renewal process. The permissions are there for a reason. They are there to protect you or anyone who wants to buy your home in the future. If it’s not built to code, it won’t pass inspection, because there may be safety issues. Safety is the reason building codes and permits exist.
If you decide to build an addition to your home, it is worthless without a permit. He’s going to spend that money and do all that work, and then find out that the square footage he just added is worthless. Let’s say you have a 1,200 square foot home. He wants to add 400 more square feet. After all is said and done, without a permit, you still legally have a 1200 square foot house, because you didn’t acquire a permit, and a building inspector checks it out. Lenders will only lend on the appraiser’s records, and a permit is the only way to change the appraiser’s records.
Do you have any doubts about my position on the issue of permissions? Good.
Do I need an accountant?
I, personally, would be lost without my accountant. I don’t have time to keep up with the new tax laws and set up corporations and the like. A good accountant can be your best asset.
If I took all the time to learn what they know, I wouldn’t have time to flip houses. All I have to do is save all my receipts, show him what I did and he does the rest.
There is one thing your accountant will love you for. If you keep the proper books…that is, all of your WORK income and any receipts or cash disbursements you’ve made, his job will be easier and the cost of doing your taxes won’t be as high. tall. It can be a nightmare for an accountant if you let him itemize every receipt, and it will cost you a LOT more. It all depends on how long it will take your accountant to find out what he has done. He can submit his paperwork to his accountant however he sees fit, once a month, once a quarter, and so on.
They can also help you incorporate and tell you which one is right for you. They can give you a plan for what you should think about achieving in the coming year, such as an IRA or some type of retirement income.
Accountants aren’t just number mongers. They have tons of knowledge and are eager to help you. Do you need one?? YES!
In the record keeping department, keep ALL receipts related to your business. Keep records of mileage and receipts for gas, oil changes, maintenance, and repairs. If you have a home office, you can pay off part of your mortgage. Your car payments may be canceled if it is ONLY used for business, along with insurance. These things are necessary for your business and are legal cancellations. If you need a cell phone that is used for business, that’s a write off. Other cancellations I haven’t mentioned are, office supplies and equipment, business cards, advertising like brochures, postcards, and holiday greeting cards for your clients, any commission paid to realtors for selling your flip. ANY cash outlay will go against capital gains tax. Yes, they will take you there too. I’m not an expert in 1031 exchanges or any other legal way to postpone paying capital gains, but my accountant is. Ask your accountant what he recommends.