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December 11 05:44 PM
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Reality TV not necessarily reality



shadow
shadow
June 13, 2007
Alex,

I have watched these TV shows where they flip houses and they all seem to make serious profit. Should I get started in this?

— D.W., Metamora

D.W., Didn't your parents ever tell you "don't believe everything you see on TV." These shows make real estate investing look easy. It is anything but easy. One of the biggest flaws with these shows is that they were filmed a long time ago before the market dropped. Secondly most of these TV shows showcase people in other states where the market is significantly different than in Michigan. I have yet to see one showcasing a flip done in Michigan. Often times these shows only show you the original purchase price plus the total cost in improvements as the only costs involved with the investment. Just because they buy a house for $500,000 and put $100,000 into it and then sell it for $700,000 doesn't mean they profited $100,000. The show does not tell you the costs of obtaining the mortgage, the interest paid while they tried to sell, the real estate taxes, insurance, the cost of selling the home, and any capital gain taxes due from the sale. In our example let's assume they sold it 4 months after they bought it--(a quick sale by Michigan standards). That would be approximately an additional $15,000 in interest paid on the $600,000 they have into the home mortgage. Let's include about $5000 in real estate taxes and insurance as well. They would also have to pay about $45,000 in costs to sell when you consider commission, closing costs, and transfer taxes. This leaves them a true net profit of about $35,000 on an investment of $600,000. But wait then good 'ole Uncle Sam beckons with his 25% short term capital gain tax of about $10,000. So even though reality TV makes it appear as though they made $100,000 the reality is they only profited $25,000. Keep in mind, the owners do all the work of improvements and take the risk of a $600,000 mortgage. This is also assuming they sell the home in 4 months. What happens if you can't sell the home and have to pay interest on the mortgage for 12 months? All your profit disappears. This is not meant to imply that you cannot profit on flips in Michigan. You can flip in Michigan but it is a risk I would not recommend except to those with extremely deep pockets. With the way Michigan's economy and real estate market is right now renting out is a much smarter and less risky investment. You would be better served to buy, fix and rent than to buy, fix and flip.

Alex Lengemann is a licensed Real Estate Broker who operates RealtyVolution.com, a local real estate company. You can Ask Alex your real estate or mortgage questions by phone 810-664-1819 or by email Alex@RealtyVolution.com.

— ADV

Castle Creek
12 - 11 - 17
05:44
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