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To Flip Or Not To Flip?

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Posted On: 01/14/2015

Question: I am 58 years old, and have always been interested in looking at flipping a few houses to supplement my retirement. I have not flipped a house before. I would pull money out of a retirement fund to initially make a down payment and pay for repairs/updates to the house. My question to you is: How does a person get started in this endeavor, and at this stage in my life would it be too risky?

Answer: Flipping real estate has long been an alluring way to make money, but flipping is hardly a sure thing.

“Investors averaged a gross profit of $75,990 per flip on homes flipped in the third quarter of 2014,” said RealtyTrac, a national supplier of real estate data and information, “a 36 percent gross return on the initial investment — not including rehab costs and other expenses. The average gross return was up from 35 percent in the second quarter but down from 37 percent a year ago.” (Disclosure: I write editorial content for RealtyTrac.)

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Given that certificates of deposit (CDs) and savings accounts now have returns, which are often close to zero, the idea of a 36 percent return seems enticing. However, the report correctly refers to the “gross return,” the profit before expenses.

Imagine that you want to buy a property for $135,000 and hope to sell for $210,000. Let’s look at some questions:

Will the local neighborhood support the higher price? What if interest rates rise?

If you don’t sell the property can it be rented? For how much?

If a good candidate property becomes available who will get it – you or well established developers and contractors?

Who will do the repair work, you or someone you pay? If you do the work what’s the value of your time? Do you have the skills do rehab a home? Do you have a realistic repair budget -- and reserves if something goes wrong?

The money used to acquire the home and pay for repairs has a real cost, the return not being earned elsewhere. Another cost is the potential for a loss of capital if the flip does not work out. How long will it take to acquire, repair, sell and close the property?

How much will it cost to sell the property? Think of brokerage fees and closing costs.

If you do make a profit how much will you pay in taxes?

Flips today represent about 4 percent of all existing home sales according to RealtyTrac, but they’re not for everyone. It takes a lot of practical skills plus marketplace savvy to make flips work. Some luck doesn’t hurt, either.

I cannot suggest that you enter the flipping marketplace without substantial home improvement and real estate experience, especially if your idea is to fund such projects with retirement money. The risk for professionals is large; the risk for non-professionals is enormous.

For a better understanding of your marketplace speak with local brokers as well as attorneys who do closing work. And if anyone tells you that big profits from real estate flipping are a sure thing, run.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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