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The return of home-flipping: 3 secrets from experts
The housing market is back and the flip is on
 
Evaluate a possible flip much like you would if you were buying it for yourself.
Evaluate a possible flip much like you would if you were buying it for yourself. Justin Sullivan/Getty Images

Flip This House, Flip That House and other home-flipping reality-TV shows went dark when the housing boom went bust.

But home flippers — investors who buy a property, make some repairs and sell it quickly in hopes of a profit — never really left the scene.

Now the housing market is back and the flip is on. Sales of new homes in May rose to the highest level since July 2008, according to Commerce Department data. The Standard & Poor's national housing price index, which tracks existing home sales in 20 major markets, was up 12.1 percent in April compared with a year earlier. That's the biggest gain the index has recorded since it started in 2006.

We checked in with three experienced home flippers to find out how they got their start, why they do it — and what you need to know about the ins, outs (and ups and downs) of flipping.

Rule of flipping #1: Find the sweet spot

Rob Berger, 46, works as an attorney in Columbus, Ohio, by day, and a home flipper by night. He's been doing it since 2005, when he and his high school best friend started investing in real estate as a means of diversifying their portfolios.

They also go in on deals with Berger's sister, who owns a home design business and is easily able to oversee repairs, which saves them cash and boosts their profitability.

Their latest flip is a three-bedroom, one-bathroom house in Columbus, and he estimates that, all together, the trio will make $110,000 after the house is sold, a profit of nearly $37,000 each, "which isn't bad for a three-month effort," says Berger.

The crew bought the house in February and plan to sell it this month. They evaluated it in much the same way they would if they were buying a home for themselves. "We liked the property because we know the area, it's in a good school district and the price was right," Berger says. They have since gutted the bathroom and kitchen, replaced the exterior siding, painted and added new doors and fixtures.

Berger's no. 1 rule of thumb? "Never overimprove a house." He aims to find the "sweet spot," he says, "where you can get a good price on the sale, without overspending on the renovations."

It's a sage piece of advice for any homeowner who's eventually looking to resell. Berger applies it to everything from the grade of carpet to the roof titles he chooses.

For example, in the process of a recent flip, he and his partners considered tearing down the house's carport and putting up a garage instead. But after driving around the neighborhood, he saw that most of the homes still had carports. "The improvement wouldn't stand out," he concluded, a decision that saved him and his partners thousands of dollars.

Of course, not every flip is a success: He had to hold onto four houses that didn't sell during the downturn. He rented them out to keep the cash flowing, a common way for flippers to bide their time while they're waiting, because, he says, "We knew that the market would eventually turn around."

Rule of flipping #2: Crunch the numbers

Krista Pape, 45, a real estate agent in Boise, Idaho, says her method for flipping houses comes down to a formula spelled out on a spreadsheet. On the current home she hopes to sell, she plans to spend no more than $30,000 on repairs and expects a return on investment of about 40 percent based on her selling price.

"When you're doing these deals, it's not about falling in love with the drapes — it's a math problem," she says. "If the numbers work, it seems less risky."

Her formula has worked out so far, even with such a high expected return. She just did a flip on a home she bought for $100,000 with $30,000 down and $10,000 in improvements. She sold it for $137,000. After paying back the mortgage for the house, she made $17,000 on the sale, which is a 43 percent return on her $40,000 investment.

Pape, previously a pharmaceutical representative for a generic drug company, was laid off in 2011. Using her severance package, she bought her first home to flip. She says the real estate market in Boise is going so well that houses are appreciating by 18 percent a year. While she earns most of her income as a real estate agent, home flipping has become a lucrative side business.

What's changed from the last housing boom is that most flippers are now unable to buy homes with 0 percent down. Banks will not finance a deal without 25 percent down, Pape says. She puts down 30 percent or more for her purchases.

Pape plans to stick to her formula, using the earnings from one deal to fund the next. "If you're going to flip in three months, you're going to get such a good buy on it, you can make a nice profit in a short period of time," she says.

Rule of flipping #3: Have plenty of cash

Mark Mlakar, 34, owner of Washington, D.C.–based brokerage M Squared Real Estate, likes to tell people he earned four MBAs because of how much he has learned from his mistakes flipping houses.

In the last housing boom, he helped people buy houses and sell them again quickly, usually within three to six months of purchase.

Watching from the sidelines, he became interested in flipping homes himself, but he knew that to do it successfully, he had to have enough cash.

Then, in 2010, he sold an insurance business, and finally had enough cash to get in the game himself.

Unlike Pape, above, Mlakar pays for all houses he intends to flip with cash and says it's actually one of the keys to his success: "If I get into a problem, it doesn't cost me anything to sit on a property," he says. "For example, if I have a mold issue, it might be two months late getting to market."

In the meantime, he has no mortgage to pay.

Plus, he adds, most banks typically won't lend money to buy a dilapidated property. If they do, a bank will charge higher interest rates than they would with a standard mortgage.

On his first deal, he bought a fixer-upper for $200,000 and spent $90,000 on repairs. He made sure he had enough cash on hand to pay for the property, plus the renovations, something he recommends for all first-time flippers. He then sold the house a few months later for $540,000, earning an 86 percent return on a $290,000 investment. He's been hooked ever since.

"[It's] probably the best thing I've ever done. It's satisfying to take something ugly and make it great," he says.

What to know before you flip

While the flippers above have each employed their own strategies, and often met with success, home flipping is a risky business dependent on rising real estate prices and low mortgage rates. In short, it's not as easy as it looks.

Flippers must also be careful of the tax consequences in their quest for a quick buck. If you sell a property in less than a year, which most flippers do, profits are taxed as short-term capital gains, which are taxed at the same rates as regular income. (If you were to hold on to the property for a year or more, you would typically be taxed at a lower rate on those capital gains.) Plus, the Internal Revenue Service may consider you a real estate dealer, instead of an investor, if you are successful enough at flipping. That means your profits would be taxed at the same rates as ordinary income and you'll have to pay Social Security and Medicare taxes on those earnings.

So before you start a flipping empire — or decide to spring for even one investment property — make sure you have an adequate emergency fund and are maxing out your retirement account. It will make things easier if the red-hot real estate market starts to chill.

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