Just two months ago, my wife and I made a $27,400 profit from a flip house. Then we vowed to never flip another house again in our lives…
6 Reasons Why We’ll Never Flip Another House
Okay, sure, it was fun to make the house purchase, fix everything up with our bare hands, sell the property, and then put a huge lump of cash in the bank…but those were about the only positives. Plenty of other negatives came along for the ride, which is why we feel as strongly as we do to never flip another house.
When we took on this house flip, I made a promise to myself that I wouldn’t let this work take over my life and take me away from my family. Overall, I thought I did a pretty good job.
- I worked at the house during my lunch breaks,
- in the evenings after eating dinner at home, playing with my daughter, and putting her to bed, and
- I only occasionally worked on the weekends (this was always solid family time)
Looking back though…the project house absolutely impacted my family in a negative way.
- When my two year old daughter wanted to play games, she suggested that we play the “night-night” game because she knew I’d be more willing to play that one than any other (this was basically us snuggling up and pretending to sleep…because I was exhausted). If I weren’t working all the extra hours, we’d be playing “chase me!”.
- I left for the house almost every day at 7pm…and spent no time with my wife. She was stuck at home with a kid in bed and nothing to do. This obviously wasn’t ideal for our relationship and our family.
For this reason alone, we’ll never flip another house…but there are still five other reasons…
Related: Your Money or Your Wife
2) No Money If You Contract Out All the Work
You might be thinking,
“Hey dummy! Why did you do everything yourself? Why not contract out the majority of the work and save yourself hundreds of hours of work?”
Yeah…I thought about that, but…
- The more projects you hire out, the less money you make. Sure, you might get the house completed faster so you have the opportunity to re-invest quicker, but the reality is, you still make less money overall.
- Plus, I’m a control freak and just wanted to do it all myself…
Instead of a $27,400 profit, we probably would have made only $5,000-$10,000 if we contracted out the majority of the work.
3) Need to Spend More to Sell vs. Rent
When we bought this project house, we were 99% certain that we were going to fix it up, rent it out, and enjoy the rental income for decades to come… but then we realized how long it would take us to save up $300,000 for our next “forever house”…roughly 6+ years – way longer than we wanted to wait.
So, mid-way through the fix-up, we made the decision to flip the house instead of keeping it for a rental.
I didn’t think it would be a bid deal, but suddenly…
- The kitchen looked like crap (old cabinets that we simply painted),
- the brownish shower surround looked even worse, and
- refinishing the mismatched hardwood floors just wasn’t going to cut it.
For renters, all of our updates would have been seen as positives…but for buyers, they would have looked at our work and labeled them as “cheap updates” that they would have to fix later on (and therefore…not a positive whatsoever!). With the decision to sell the house, we have to make changes…
So, we bought a brand-new fridge, replaced the drip-pans in the stove, and put all new laminate interlocking flooring in the living room, dining room and kitchen. These updates put us about $4,000 over budget.
Flipping simply costs too much to appeal to picky buyers, which is yet another reason why we’ll never flip another house.
We bought our flip house in October and finished it in May. It sold in mid-June.
Since we bought and sold the house within a year, it was considered a short-term capital gain…which simply means that you have to pay your income tax rate instead of just 15% (or possibly 20% if you earn more than $428k a year). Unless you plan on renting out the house for six months before selling, you’re almost always going to finish a flip in less than a year and therefore likely to pay 22% or more on your flip (and possibly as high as 37%).
5) Screws Up Our Tax Plans
Let’s say we planned to earn $70,000 in 2018, and we had all our taxes set up perfectly for that amount…Then, we sold a flip house and earned an additional $27,400. Suddenly, our income went from $70,000 to $97,400.
So, instead of being in the 12% tax bracket (as married filing jointly), we’d suddenly be pushed into the 22% tax bracket. So, not only did we not plan on paying taxes on the flip house gains when we started the year, now we’re paying 22% on those profits instead of a much lower 12%!
To combat the increased tax bill, my wife and I decided to:
- Move our retirement contributions from a Roth 401k to a Traditional (tax-deferred) 401k,
- Increase our contribution rate from 7% to 30% to quickly ramp up the tax-deferred contributions before the end of the year
- Contribute $500 per paycheck to our HSA instead of the $50 we had set up initially
- Invest more money into my website (to hopefully gain more money later…but to defer the actual earnings in 2018)
Sure, I could just suck it up and pay the taxes, but that 10% in tax rate is a tough pill to swallow. Instead of pay 22% on every penny we earn over $77k, I’d much rather just invest a bunch of money and bring down our adjusted gross income.
6) Rental Wins by a Landslide in the Long-Term
We flipped a house and earned $27,400. Pretty cool, but you know what? We could have kept the property and saved $11,000 in selling costs (realtor fees and closing costs) and actually had an unrealized gain of $38,400. PLUS, we would have earned $12,000 in profits each year by renting it out for $1,250 a month.
After five years, the rental would be worth approximately $160,000 ($65,000 over our total costs in the place) AND we would have earned an additional $60,000 from the consistent rent checks that come in each month. This totals an earnings of $125,000 by holding onto the rental property.
By flipping the property….we made $27,400. Womp wommmmmm….. So basically, by flipping the property, we threw away $100,000 over the course of just 5 years. If we ever buy another project house, we’re definitely renting it out next time.
That’s Why We’ll Never Flip Another House – How About You?
Those are our 6 solids reasons why we’ll never flip another house. It just doesn’t make sense for us.
- It hurts our family dynamic,
- the margins are too thin to hire out all the work,
- you end up spending too much to make it sellable,
- you’ll get hit with capital gains,
- your tax plan gets screwed up,
- the rental could earn far more money in the long-run.
So what about for you? Have you ever flipped a house? Are you looking to flip houses in the future? Why or why not??
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.