When it comes to investing in real estate, the most popular options are often with a Real Estate Investment Trust (REITs), House Wholesaling, and Real Estate Mutual Funds. Investing in real estate is not a walk in the park because the investor might only be able to get his gains and profits after a long time. A real estate investment is also known for being an expensive investment. However, there is an exception to every rule and real estate flipping is one of them.
Flipping is a term in real estate that describes the buying and selling of a revenue-generating asset for quick profit. The property is often held only for a short time, no more than one year after the acquisition. Renovations are often added in order to make the property more profitable and thus increasing its selling value. You need to be aware of capital gains tax after you sell the property.
If you have an extra change in your recent investments and want to put them into something real quick, property flipping might be the one for you. Here are the reasons why flipping is one of the best ways to invest in real estate.
1. Chance of Quick Gain or Profit
The first and the most attractive prospect of flipping is the potential of it to make a quick large profit. According to The Balance SMB, if flipping is done the right way, the flipper can make profits well above the annual U.S. median salary. If you have the extra time and can make the repairs done in a short period of time, then the time you’ll have to wait to reap the profits will even be shorter.
2. Stockpiling Experience
If you want to test the waters for real estate investing, flipping will help you learn the basic fundamentals. You’re going to be exposed to the variety of areas related to the whole real-estate market. Included in this benefit is acquiring experience and learning about the different types of customers, different types of areas, and different types of investors. You’ll also likely gather a lot of experience in construction because of the repairs that you’ll be supervising (or making) in the property. Flipping will also help you get the basic information about the process of buying and selling assets, especially in the real estate market.
Flipping is also a great way to know if there is a great change coming when it comes to property acquisition and other things that might affect the real estate market. In addition, you’re likely to have a greater insight into how things are going for future clients.
3. Short-term Capital Gains Taxes
You’ll get a short-term capital gains tax on your transactions. Capital gains tax is the tax that is imposed on profit from a sale of a property or an investment. There are two types of real estate investors according to the IRS: “investor” and a “dealer.” A lot of flippers are categorized in a dealer category because they do flipping for a living and are taxed at their ordinary income tax rate. However, if you’re one of the investors that sell houses within or less than one year after the acquisition, you’ll be taxed with a higher capital gains rate.
There are also chances when a long-term capital gains taxes are possible. If you’re not classified as a dealer, and if you held the property for more than a year, the profit will also be taxed at a lower rate. The rate is as low as 0% to 20% for most people.
4. Network Building
In making real-estate transactions, it is likely that you’ll meet a lot of people. You’ll likely be adding a lot of people to your contact list, a lot of them will likely be able to help you in your investing endeavors. Some of the people that you’ll meet would be realtors, contractors, building investors, insurance brokers, attorneys, and other people who thrive in this industry. Your past clients might also help you in the future if they give your name as a reference to other people. You might have flipping projects from your former clients.