Welcome back to Curbed University! We guarantee it to be the most non-boring expert advice you have ever gotten about buying and renting a home in the Hub (not a guarantee). Additional questions as well as topic suggestions welcomed through the ever-trusty tipline.
'Tis undoubtedly one of the hottest Hub real estate markets in living memory, and there are buyers flipping their houses. Still, no matter what reality TV tells you, flipping is rather rare in Greater Boston and—again, no matter what reality TV tells you—it's not as easy as it looks nor as instantly profitable.
Don't believe us? Let's point out the difficulties inherent in home-flipping before we tantalize you with the benefits (such as they are).
It Costs a Lot Upfront and You Still Have to Live.
Flipping is buying a residential property—a condo, a single-family home, a triple-decker, a group of apartments—and fixing it up and selling it quickly, hopefully at a profit. But, while you're fixing it up, spending thousands on contractors, you still have to live, no? One of the things you would have to ask yourself before you became a flipper is whether you have adequate enough savings to hemorrhage money on repairs and renovations. If the answer's no, then guess what? You're not a flipper.
Speaking of Hemorrhaging Money, It's a Good Time to Remind You That "Flipping" Is Another Word for "Homebuying."
The usual rules apply: pre-approval for a mortgage (unless you're paying cash); money for a downpayment (unless you're paying ash); closing costs; possible broker fees; homeowners insurance; and other miscellany. You're buying a property; the property doesn't know that you're buying it to flip.
Um, Can You Flip?
The short answer is yes. The long answer—and this goes back to the first two questions here—is yes, but, unless you act relatively soon, you may have to wait at least three months. Properties sold less than 90 days after purchase aren't eligible for Federal Housing Authority mortgage insurance (this rule is deliberately in place to curb flipping); properties sold between 91 and 180 days are eligible. But! They then require an additional, independent appraisal to make sure the sales price is justified. So slap on some more costs to carry the property for these months, including utilities, property taxes and insurance.
Now! Having said all that, the FHA has waived this no-flipping rule through 2014, in an attempt to clear out the backlog of foreclosed properties in markets nationwide. That means, should you want to flip, this year and next would be the years to do it.
Anything Else Money-Wise You Should Know About?
Pre-payment penalties! A lender makes money by holding a loan, and loses money when a borrower pre-pays. So... you're going to want to ask a lender if there is a pre-payment penalty, which can be 80 percent of the balance on the first mortgage multiplied by the interest rate and then divided by two. Here's an example via BankRate.com: If you borrow $100,000 and get a mortgage for 5.75 percent, your pre-payment penalty would be $2,300. (Again, all this is precluded if you're paying cash.)
And Taxes! You Need to Know About Taxes!
To the IRS, if you have a full-time day job and you trade properties on the side, good on you: Your income from the property trades is taxed as investment income and investment income is taxed at a lower rate than ordinary income (just ask Mitt Romney). According to the new tax laws that took effect after the fiscal cliff (remember that?), investment income (e.g. capital gains) is taxed at 20 percent, but only for individuals making more than $400,000 in adjusted gross income, or AGI (for married couples, the threshold is $450,000); for everybody else, it's a sliding scale from 20 percent, depending on AGI.
Investment income, including capital gains through real estate trades, is also now subject to a 3.8 percent Medicare surcharge (for Obamacare), depending on various modified AGI thresholds, including $250,000 for married couples filing jointly.
But suppose you get so good at flipping that it becomes your primary gig? Then the IRS considers that gig your business and the tax rules change. You'll be taxed at the higher ordinary-income rates, depending, again, on your AGI; plus, you'll have to pay a self-employment tax of 15.3 percent and to report property taxes and interest as expenses.
And, by the way, any federal tax breaks re: primary-residence trades obviously don't apply to properties you hold for flipping.
So Now You Know the Expenses and the Risks. Are They Worth the Rewards?
In the Hub, we say no. We also say it depends (we're hot-and-cold-running like that). Generally, in core neighborhoods like in downtown Boston or through most of Cambridge, Brookline and Newton, it simply doesn't pay to hunt down some of the most expensive residential real estate in the nation for flipping. Unless you have hundreds of thousands of banked savings, it will get real expensive real fast.
However! There are areas teeming with properties ripe for quick turnarounds. Plenty of smaller-scale landlords, in particular, have sprung up since the Great Recession, trading in triple-deckers and other smaller apartment buildings, though not necessarily for flipping. To put it bluntly and succinctly: the Hub's real estate is too healthy right now to make flipping a viable option for most investors. We're not Detroit, where there are cheap, empty properties everywhere; or Vegas, where there are stalled, empty projects everywhere.
If you have the banked savings, go for it. The returns per property can easily be in the thousands; and, after a few flips, you'll (and this is key) find yourself within the network of real estate lenders, traders and marketers that fuels the home-flipping engine.
A Final Caveat, Though.
You might just get lucky. Who says you can't buy a primary Hub residence with the intention of living there and then end up selling it relatively fast for beaucoup bucks without even really trying?
· The Taxman Cometh [The Real Deal]
· Flipping Homes Harder Than It Looks [MSN]
· Rent Effect: Triple-Decker Trading Heats Up [Curbed Boston]
· Extreme Re-Sales in Back Bay [Curbed Boston]
· Our Curbed University archive [Curbed Boston]