Three Tips for Valuating a Fix and Flip Property
Experienced real estate investors who know how to correctly value fix and flip properties to make large and quick profits. Finding a property to buy involves careful consideration of various factors, including the neighborhood’s desirability, access to public transportation and schools, and the types of repairs it needs. Although many factors contribute to a property’s investment value, it is always necessary to consider the following.
1. Cost of Necessary Repairs
Before finalizing a property purchase, a buyer must establish a maximum renovation budget and know the cost of the required repairs for a given property. Consulting with several reputable contractors who can provide separate estimates is the best way to know if repair costs will coincide with the allotted budget. Some work might be optional or left to the discretion of the buyer. Undertaking optional improvements may depend on the property’s purchase price. It is prudent to reserve some funds for unexpected issues that arise during the course of a renovation.
2. After Repair Value
An investor must determine the value of a fix and flip property after completing all its necessary repairs. It is possible to assess an after repair value (ARV) by looking at the sale prices of three or four similar homes in the same area and averaging them. It is crucial to remember that volatility in the housing market can affect the ARV. An investor’s ability to negotiate the final selling price is also a significant determinant for a property’s ultimate sale price. It is wise to cushion the asking price to account for any unplanned expenses.
3. Tax Calculations
When calculating the investment value of a property, taxes are a necessary consideration. Investors who own properties for less than one year before selling them are considered dealers by the IRS, which taxes them at the standard income tax rate of anywhere from 10% to 37% for anyone receiving active income. Dealers must also pay a self-employment tax of 15.3%, which further eats into their profit. Alternatively, investors who hold on to properties for more than one year are not considered dealers receiving active income. Instead, they are investors who are not required to pay an employment tax; however, they must still pay capital gains taxes, usually 15% of the profit, which is less than that of most properties bought and sold within one year.
When valuating a fix and flip property, a conservative estimate of the out of pocket costs is advisable.