The market’s never been better for house-flippers. That’s the word from a recent report from real estate data and information clearinghouse Realty Trac.
Flippers, which Realty Trac defines as those who purchase and sell homes again within 12 months of the purchase, accounted for 26,947 home sales in the 3rd quarter of 2014. That represents roughly 4 percent of all single-family home sales in the U.S., according to Realty Trace – a five-year low and close to the long-term average historic levels. Those figures are down somewhat from 4.6 percent in the preceding quarter, and even more from the 5.6 percent of single family residential home sales accounted for by fix-and-flippers in the year-ago period, according to the Realty Trace U.S. Home Flipping Report.
So flippers represent a somewhat smaller percentage of the market than they used to. But they’re getting their prices: The average fix-and-flip deal averaged a gross profit of nearly $76,000 per home. That’s the highest average profit per flip in history.
Breaking the numbers down a bit further:
The average gross percentage return on the purchase price was 36 percent for each property surveyed. The cities with the highest gross margins (excluding transactions, remodeling and repair costs) included:
- Baltimore (88 percent)
- Pittsburgh (79 percent)
- Detroit (61 percent)
- Richmond, Va. (60 percent)
- Mobile, Ala. (59 percent)
What’s behind the rise in profitability? There are a few factors at work:
- The broad market is rising. As a rising tide lifts all boats, it also makes it a lot easier even for unskilled flippers to make money. Yes, flipping is a market-neutral strategy, if you can get a good price at the purchase. But the broad-based increase in house prices makes it possible even for a poor flipper to make money just by sitting on the property long enough.
- Darwinism at work. The weaker flippers didn’t survive the 2008 crash. The ones still in the game are a much smarter, nimbler, more capable breed than the flippers of the 2000s, on average. The survivorship bias effect is strong.
- There are fewer flippers competing for each deal.
- Flippers are becoming choosier about the deals they become involved in.
“Flipping returned to its historic norm of 4% in the third quarter as home price appreciation cooled in many of the hot flipping markets across the country,” said Daren Blomquist, vice president at Realty Trac. “Meanwhile, the record-high average profits per flip in the quarter demonstrate that flippers are still filling an important niche in an aging housing market with historically low levels of new homes being built. The most successful flippers are buying older, outdated homes in established neighborhoods and rehabbing them extensively to appeal to modern tastes.”
Why consider flipping within a Real Estate IRA
Holding fix-and-flip real estate within a Real Estate IRA has a number of advantages:
- You can buy an unlimited number of properties tax-deferred. You will not pay capital gains tax on the transaction. If you flip within a Roth IRA, you will not pay capital gains or income tax at all.
- The ‘dealer’ tax rules that require frequent flippers to treat houses as inventory and pay ordinary income tax rather than capital gains tax on profits does not apply to properties in a Real Estate IRA.
- IRAs provide substantial creditor protection under federal law, as well as in most states.
Can I get a mortgage within my Real Estate IRA?
Yes, it is perfectly legal to get a mortgage to help you buy investment properties within your Real Estate IRA. You must take out the loan on a non-recourse basis. Which means you may not secure the loan with any asset outside the IRA. You can’t pledge your taxable portfolios, assets in other retirement accounts or your own personal assets, nor can you sign a personal guarantee for the mortgage. You can, however, secure the loan with the property you’re buying within the IRA. The property must be held in the IRA’s name, not yours.
Generally, lenders will lend up to about 65 percent of the total price of a given real estate purchase, so your maximum leverage within a real-estate portfolio. You may have to pay a special tax, called the unrelated debt-financed income tax, on any profits attributable to leverage within your real estate IRA, however.
We also suggest you download our exclusive guide to Real Estate IRAs. It’s absolutely free, with no obligation on your part whatsoever. Just visit us at www.americanira.com, or call us at 866-7500-IRA(472).
We look forward to working with you.