The #1 reason is taxes.
As most flips are owned less than one year, upon sale, the profit will subject to the short-term capital gains tax rate which equals your ordinary income tax rate. For most of us this will be in the 22-24% tax bracket. If the asset is owned longer than 12 months, the profit would be taxed at the long-term capital gains tax of 15%.
Is it possible to not pay taxes at all?
It is a massive tax benefit specific to real estate investments owned more than 12 months. So, again, it won’t apply to flipping houses. It’s called the 1031 Exchange and is utilized almost every time an apartment complex is sold.
#2 Holding costs.
During a single-family flip, you have 100% vacancy, zero income, and multiple expenses cutting into your profits by the day. Property taxes, insurance, utilities, and loan payments.
I recently remodeled a 20-unit apartment complex. We remodeled 1 unit per month and maintained 95% occupancy. The rental income from the other 19 units more than paid for all the expenses associated with running the property and generated monthly cash flow.
#3 Economies of scale.
Take our 20-unit property for example. We ordered 20 of everything. Appliances, cabinets, vanities, flooring, etc. By doing so we get bulk pricing. Then, we had contractor bids incorporate all 20 units as one job versus bidding one unit at a time. Because of these economies of scale, we were able to cut our costs almost $2,000 per unit.
But I can’t afford a $2,000,000 property. Not many people can. This is why most apartment owners pool their money with friends, family, or investors to buy these larger assets.
Reap Capital specializes in sourcing passive investments with a value-add component. Learn how we increased our properties valuation by over $600,000 by adding value.
Think I’m wrong? Comment below and tell me some benefits that are unique to flipping houses.