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Flipping houses for a living is a real trick
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"In a business with zero income until liquidation, what are your resources?" Kring says. "What are your abilities to borrow? Without that, you'll never make it."

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Access to large amounts of cash is the hardest part -- and one of the biggest misconceptions -- of the business, says Raphael Isaac, who has been rehabbing and reselling houses in the metro New York market for 14 years. For most of his deals, he puts at least 10 percent down and then has a month to close.

"If you don't close in 30 days, they keep your money," he says. "Then you need more cash to carry the house, the insurance, the utilities and the maintenance. You won't get a contractor to renovate a house for no money. People go to trade shows and buy these books and tapes on how to buy a house with no money down. I've never seen someone actually do that."

Working against you
Another reason that access to cash is so important is that you'll probably need to hold on to the house for at least three months because of Federal Housing Administration (FHA) anti-flipping regulations. Houses sold less than 90 days after they were purchased aren't eligible for FHA mortgage insurance; those sold between 91 and 180 days are okay but require an additional, independent appraisal to make sure the sales price is justified.

What that means for you as the owner is additional carrying costs. Every day you own the house costs you money in interest, utilities, taxes and insurance.

If you're taking out a mortgage to buy the house, talk to your banker about pre-payment penalties. "We make money when people hold loans; we lose money when they pre-pay," says St. Petersburg, Fla.-based banker Mark Dannenmiller. A typical pre-payment penalty, he says, is 80 percent of the balance of the first mortgage, times the interest rate, divided by 2. So, if you borrow $100,000 and get a mortgage for 5.75 percent, your pre-payment penalty would be $2,300 ($80,000 times 5.75 percent, divided by 2).

Dannenmiller's advice to individuals who are considering going full-time is to keep your job, make a little bit of money and pay yourself back, building up your cash reserves.

"Hopefully, by the fifth or sixth house, you don't need me anymore and you're buying houses for cash. That's important because as soon as you (quit) your job, you can't get a loan."

To Joseph Patton, getting cash is the easy part. The hard part is finding the properties to buy.

"These properties are not for sale through Realtors and they're barely available through auctions," says Patton, who buys primarily in Philadelphia. "(Finding them) is very time-intensive. You have to be out there on the street. It's almost banging on doors ... It's not an insider's game but you need to put in time to build the network."

 
 
Next: Who cares if it's an investment or a business? Uncle Sam, for one
Page | 1 | 2 | 3 |
 
 RESOURCES
The tax consequences of flipping
Anti-flipping rules can hurt investors
Real estate investing can be risky
 TOP REAL ESTATE STORIES
How to lower your property taxes
Forged signature puts kibosh on home sale
Will mortgage assumption solve crisis?
 

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