The best kind of flip depends on your personality and resources. People who are good at doing research regarding property values and repair costs would do well with fixer-uppers and crisis flips. This strategy also requires someone who is comfortable with taking risks and has the ability to overcome surprises and obstacles. If you have resources consisting of cash, the ability to borrow, or personal time you can invest, these are also good flips for you. Someone who has a full-time job and a full plate of other responsibilities may not have the time necessary for fixer-uppers. These people should concentrate on crisis flips instead.
People with plenty of time, but little cash or borrowing power and little stomach for risk, would do best with the options route. Options can require almost no cash at all, absolutely no need for borrowed funds, and no risk except the loss of the option money. They do require large amounts of time to locate another buyer. Normally, property owners willing to grant options do not want you putting “For Sale” signs on their properties or doing any advertising at all. You will have to track down potential buyers and approach them about their interest in buying. If you are shy, afraid of rejection, or not very good at meeting new people, then option flips are probably not for you.
There are four simple rules for safe flipping.
1. Learn as much as possible about flipping - not just through television shows that show decorating and remodeling decisions, but also through good solid advice about what can go wrong and how to avoid it. Beware of seminars until you have enough background knowledge to separate true value from hype and fluff. Quality varies widely, so be careful.
2. Know your market extremely well, so you can confidently predict future property values.
3. Do not get greedy. Never make snap decisions because you are afraid an opportunity might otherwise disappear.
4. Always, always, always have a Plan B. It is your escape route. Think about what might go wrong, such as a market downturn, unexpected expenses, or an injury that prevents you from working on property yourself. What will you do if something goes wrong? That is your Plan B. If you cannot think of a Plan B that results in you surviving with minimal financial damage, then do not do the deal.
Usually you will not be eligible for the cheaper long-term capital gains rates when you flip properties. One reason is the time period of ownership. In order to obtain the beneficial rates, you must hold property for longer than one year. That long of a time generally does not happen with a flip unless someone miscalculated. In addition, people who buy properties with the intention of reselling them are considered dealers in the eyes of the IRS.We all, of course, intend to resell our properties eventually, if someone offers us enough money. It comes down to questions of timing with the IRS - how often you buy and sell, how quickly you turn the properties, how much profit you make compared to your other sources of income, and other such issues. There are no hard and fast rules, which is always a little nerve-wracking when dealing with the IRS.
The bad thing about dealers is that the IRS does not allow them many tax advantages given to investors or others. Dealers are not eligible for long-term capital gains. Instead, the IRS considers them as people who sell inventory, just like Wal-Mart. All income is taxed at ordinary income rates. Plus, the dealer will have to pay selfemployment taxes on his or her income. Finally, the dealer who sells property and holds the financing will have to declare all the profit in the year of sale and pay taxes on it, even though the actual cash will trickle in over many years. Non-dealers declare income each year of the mortgage payments, and only in proportion to the money they actually receive from the buyer. The bottom line is, flipping may be a good thing for some people. Too much flipping, however, could cost you important tax benefits. Do not let that discourage you if you are good at it. No tax is 100% - you will still be making a profit.
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1. Investing In Commercial Real Estate
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