House Flipping: Time to Cut Your Losses?

So, the market where you are is softening and you're wondering about that investment property you've got? In some cases, investors will try to convert their strategy from a quick flip at a profit, to renting out a property. Frankly, if you bail out, it could mean a loss. What to do?

If you've been caught by the real estate bug, and you are now under financial pressure, you have no choice but to sell. If the market is softening, then you are best to sell quickly to try to reduce the amount of loss that you will take.

The question is: how do you know if you don't have a choice about selling? Well, you'll have to calculate some numbers. Here's the easiest way to find out: start with the rental income on the property and subtract all your costs. That should be at least the mortgage, property taxes, insurance and maintenance, although you may also have condominium fees depending on the property. If you end up with a sizable negative number and you don't have the finances to keep paying out the difference, you have to sell. It's that simple.

Keep in mind that if you have a problem now, it could easily get worse. Your tenants could be unreliable or you might have trouble finding tenants at all. The interest rate on your mortgage could heal up. Your interest only loan could come due.

While it is possible that the housing market may heat up again, there are no guarantees.

Keep in mind: a slowdown in home sales typically precedes a price decline. This tends to happen because people are holding onto properties that they don't want to sell at a loss so the inventory of properties gets smaller. Interestingly enough, slowdowns are happening in a lot of markets right now. You'll have to decide if you can afford to follow the market down.

Michael

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