At just 27 years Lily Adrianne, a model from New Zealand, owns 11 properties. After buying her first house in Auckland at 24 years she was motivated to buy even more property. Life wasn’t always so easy. Before she found success, she was broke with a destructive boyfriend. It wasn’t until she had the courage to try modeling that she was able to break free from her boyfriend and earn her freedom.
However, Lily explains she plans to embark on a new venture in the property investment called house flipping. The practice has over a decade's long history, with many investors assuming it’s an easy way to make a quick buck. Is it true? Here we demystify the myths.
What is House Flipping?
It’s a real estate investment strategy that allows the investor to purchase property, not in use, to sell it for a profit. The profit results from price appreciation from a booming real estate market or capital improvements made on the property. For example, an investor may purchase a property in a high-end neighborhood, make renovations, and offer it at a price that reflects the new upgrades. Investors who use this strategy generate a steady flow of income by performing frequent flips.
Myths about House Flipping
It’s easy to Flip Houses
The truth is that if you don’t know what you’re doing flipping houses can be a big challenge. According to new research, only 3% of homes sold during the recent New Zealand property market boom were flipped with 14,588 properties being resold within six months out of the 647,133 homes sold between 2013-2018.
In addition to fluctuating housing prices, the investor has to find trustworthy contractors to do the work on time and sometimes even insurance claims experts. If the work isn’t done correctly or on-time it can derail the entire project.
House Flipping is a Get Rich Quick Scheme
While the practice can help build wealth, you may not realize profits immediately. Many investors overlook costs such as interest costs, legal fees, renovation costs, and real estate fees, which have to be factored in the final selling price.
Income Earned is Not Taxed
This is another myth that lures first-time investors into the practice. On the contrary, any investor trading properties on a large scale is liable to pay income tax. The government has also imposed another tax called bright-line tax on properties sold within five year of purchase. What’s more, if you have a history of buying and selling properties, you may be liable for other types of tax.
House Flips can be Done Quickly
Many investors assume that home improvement projects can be done in a month or less. On the contrary, house flipping is a complicated process that can be extremely time-consuming. You have to deal with permits, homeowners insurance, title insurance, taxes, closing costs, special assessments, and more sometimes. Experts who can flip a house in a month have plenty of experience and knowledge.
High-end Properties Generate More Profit
On average, an investor can only make $30,000 from a house flip. This means flipping a more expensive house doesn't always mean more profits. Conversely, such properties incur higher holding costs because you have a limited target demographic.
Lily has shown that it’s possible to reinvent yourself and property investment is still a booming business. Avoid the myths above and you will be well on your way to earning a good living from flipping houses.