Taxes

• In the United States you have to pay capital gains tax on the money that you generate from investing. If you hold onto an investment for at least 12 months, then you pay long-term capital gains tax, which as of 2011 amounts to 15 percent. People who flip houses often attempt to buy and sell the home within a matter of months. Profits from these sales are classified as short-term capital gains and you have to pay ordinary income tax on short-term gains. For some high earners, federal income tax amounts to 35 percent so you could lose over a third of your profits to taxation. You can reduce your tax bill by claiming deductions for money spent on the home. However, if you spend so much money that your investment offsets your gains, then you still end up with little or no profit.
  
  

Financing

• Lenders require you to make larger down payments when you buy an investment property as opposed to a primary home. You may find it difficult to finance a flip home if you cannot afford to make a down payment of at least 15 percent.
  
  The Federal Housing Administration insures low down payment purchase loans but you cannot buy a home with an FHA-backed loan if the current seller has held the home for less than 90 days. The FHA temporarily dropped this anti-flipping rule for 2011, but in the normal course of events this means that prospective buyers cannot use FHA loans to buy quickly flipped homes. This could make it much harder for you to sell the home.
  
  

Cost

• Real estate investors usually attempt to buy investment properties at rock bottom prices but inexpensive homes often require extensive repairs. You can order a home inspection before you buy a home but other issues could emerge once you start renovating the property and these costs could cause you to exceed your budget. Furthermore, real estate prices fluctuate, especially during recessions, so you may have to lower your asking price if you want to sell the home. A lower sale price means lower profits and in a worst-case scenario you may even lose money on the home.
  
  

Considerations

• Real estate investments, like other types of investment, expose you to various risks including the risk that you could lose your principal. Even after you cover the cost of home repairs and taxes, you also have to contend with real estate agent fees because these fees are usually paid by the seller rather than the buyer. Typically, agent fees amount to 6 percent of the sale price. This means that you could lose half of your profits to taxes and agent fees, which does not leave you much room to manoeuvre between the purchase price and the sale price.