If you are planning to flip your recently purchased property, it sounds like a fast path to profit. But the reality is that the overall journey can turn into a financial trap if you underestimate some major factors.
You should have the proper knowledge of the actual timing for selling, the right strategy to stay ahead of the market competition, and some unexpected costs relating to repair or renovation. Today’s discussion is all about these. Read on to find out all the major considerations you have to take to make your flip actually succeed.
What Are the Major Things to Know Before Flipping a Recently Purchased Property?
1. Consider Tax Implications
Tax is the core of any profitable flip. And a single wrong assumption on the tax rules could turn a profitable flip into a loss. In case the IRS considers you a real estate dealer, chances are your profit will be taxed as ordinary income instead of lower capital gains rates.
You would also owe self-employment tax and can’t take advantage of the capital gains. Like long-term capital gains treatment, certain deductions, and deferrals. Also, review your state’s seasoning periods. If you sell a property you’ve owned for less than 12 months, you might pay extra transfer taxes.
2. Estimate the ARV (After-Repair Value) Carefully
ARV is mainly the expected sale once renovations are complete. It is the major number through which you will get a clear estimation of how much you should pay on day one, to how much you’ll profit after renovations. Here is how to arrive at a rea
listic ARV:
- Find the similar homes sold in the past 60–90 days in the same small area.
- Now just compare them with the same size, beds/baths, layout, age, and finish quality.
- In case your home has better upgrades, add value. And if low, just subtract the value.
- Next, adjust at least three comparable sales and use the median price as your ARV.
- While doing so, don’t forget to check market conditions.
3. Choose the Right Renovations
When you flip a property, choosing the right renovation is another factor to consider. For this, focus on upgrades that buyers in your specific price range are willing to pay extra for. Just look at the local MLS data and find out which features increase the price per square foot.
Some resources show that even small or modest kitchen renovations can add up to 70–80% of what you spent when you sell the home.
Fort Worth realtor Brady Bridges said, “The best part is that you can review inspection issues common in nearby sales. This way, you can fix major problems up front and avoid deals falling apart, especially in the older homes. Focus on materials that appraisers view as higher-end. This could be full quartz countertops or soft-close cabinets.”
4. Understand the Timeline
The timeline you are planning to flip your recently purchased home is another factor you must know about. Nationally, the average flip takes about 160–170 days from purchase to sale. To estimate your timeline:
- Research & acquisition: Many lenders and investors allocate 1–3 months for research and acquisition.
- Financing & permits: It will take about 2–4 weeks for approvals.
- Renovation: It usually takes 1–3 months, but varies based on the contractor’s availability.
- Marketing & closing: Allocate around 30–60 days for listing, appraisal, and final sale.
5. The Actual Selling Cost and Strategy
While flipping your property, it will come with significant costs that homeowners often underestimate. On average in the U.S., sellers spend about 8–10% of the sale price.
It is often on the commissions, closing costs, and other selling expenses. Agent commissions are usually the largest chunk. It is around 5–6% of the sale price.
There is no legal requirement in many states, highlighting the specific amount of time before selling their property. But certain types of mortgages, like FHA-backed loans, have set rules to live in the house for at least 12 months before you can sell or rent it.
6. Plan for Financing and Cash Flow
When you are flipping your property, careful financing and cash flow management are a must-have to keep the project on track. Loans you will get from private lenders don’t give you all the money at once. Instead, they release funds in installments, often once certain milestones are completed.
Keep the extra cash to handle unexpected delays or problems. Also, delays can occur from inspections, contractor problems, or supply shortages, so plan holding costs in advance.
Common Mistakes to Avoid for Homeowners When Flipping for the First Time
Some common mistakes that most homeowners make while flipping for the first time include:
- Under-estimating rehab costs and hidden work.
- Lack of a clear exit strategy and holding the property too long.
- If you miss the early track of the budget, timeline, and cash flow.
- Not focusing on the soft costs like permits, utilities, insurance, and carrying costs.
- Not evaluating the overall market trends and jumping into flipping.
- Hiring unqualified contractors or doing all the tasks on your own.
- Skipping inspections and ignoring the structural system.
To Conclude
To make your recent property purchase result profitable while flipping, all you need is careful planning. Set an accurate budget, conduct an in-depth analysis of the market demand, and maintain a healthy cash flow overall. By approaching each step strategically, you will get strong returns while minimizing financial surprises.
