Flipping properties in California can be extremely lucrative but comes with no shortage of traps and challenges.
The Golden State is a land of vast contrasts and opportunities but there are countless pitfalls for the naive flipper or property developer.
The third-largest state by area, California boasts some of the most diverse geography, climates and demographics in the country.
It is also known for having one of the hottest real estate markets in the country.
There is the rare air of Malibu and Beverley Hills, Pacific Heights and Presidio Heights to more affordable and emerging cities like Clearlake, Bakersfield, Fresno, Stockton and even the capital, Sacramento.
Local economic factors and markets vary appreciably from north to south.
California also has the unenviable reputation as the most expensive state.
Loans are harder to acquire, development costs are higher and then there is the raft of development laws and taxes peculiar to California.
It makes preparing a foolproof funding strategy absolutely critical.
Here’s what you need to know about flipping properties in California.
Higher property prices
The median house price in California (by June, 2024) was $806,674 – second only to Hawaii and nearly twice the national median value.
While it means there are potentially higher profits for investors, it also demands greater initial capital investment.
It means many flippers will need hard money loans to finance their projects.
Strict laws, regulations and building codes
While real estate developers are required to hold contractor’s licences in California, it does not apply to flippers as long as they are working for themselves rather than others.
However, new laws seeking greater transparency require anyone flipping a home to provide detailed disclosures about the work undertaken including evidence of proper permits obtained.
This includes the existence of mold, lead paint and water damage as well as any new work undertaken such as rewiring, plumbing and changes to the structure of the building if the seller has owned the house for less than 18 months.
Properties built prior to 1978 may also contain asbestos which requires expensive remediation.
It all potentially amounts to more time and money spent on outstanding loans which could encourage flippers to lean towards properties needing only minor cosmetic changes rather than major overhauls.
Taxes
A gamut of real estate taxes are applicable throughout California and various counties including:
Capital gains tax – Flipped properties sold within a year attract a tax which can rise to as high as 13.3 per cent for high-income earners. This is exclusive of federal capital gains tax. Holding properties beyond a year is an option but must be weighed up against the cost.
Mansion luxury tax – Buyers in California pay a four per cent tax on properties listed at $5,000,000 and 5.5 per cent on properties beyond $10,000,000.
Property tax – flipped properties are taxed at their new sale price, making them a more expensive proposition for buyers. This rate averages around 0.71 per cent.
Property transfer tax – some Californian cities such as San Francisco charge property transfer taxes at the time of sale which needs to be factored into any budget.
Competitive market
Parts of California boast some of the most competitive real estate markets in the country.
Numerous investors and developers are active in areas such as the Bay Area, Orange County and along many coastal cities.
It means many potential targets for flippers become the subject of bidding wars.
This also applies to distressed properties where quick cash offers are sometimes needed to secure a deal.
Market timing and trends
Aspects of California’s property market can be highly cyclical with booms and busts.
Flippers need to assess economic forces closely to maximize their returns.
Focus on cities and neighborhoods that show potential for growth, are undergoing gentrification or regions with significant infrastructure development.
These regions tend to be the most affordable with the highest potential for growth.
High cost of labor and materials
The ever rising cost of living in California is being reflected in rising building, material and labor costs, significantly impacting the bottom line for flippers.
Expect to pay a premium for energy-efficient or environmentally friendly upgrades required by law.
Natural disaster risk
California is no stranger to wildfires and earthquakes.
Both are relatively common with the potential to be devastating for owners of affected properties.
Specific fire or earthquake insurance tends to be extremely expensive.
Properties in vulnerable areas may also require fire-resistant materials and protective landscaping or have to meet seismic retrofitting standards.
Failure to do so can result in fines as well as reducing the value of the property.
Get advice today
There is so much to consider when flipping properties in California.
Local knowledge is critical.
Experts who know the market and how it is likely to shift can help you choose the right property.
Contractors who are familiar with local laws and regulations can ensure your renovations meet the standards required.
Then you need to find the right loan and sometimes fast!
Hard money loans are ideally suited for flipping properties in California because they can be acquired quickly, have minimal red tape and don’t rely on a borrower’s faultless credit history.
Fortunately for flippers, it is just part of the service that Equidy offers.
Equidy is a one-stop shop for the finance needs of flippers and property developers in California.
Our founders have an intimate and personal history in property, covering all aspects of real estate and property development in California for more than four decades.
We believe anything is possible and we strive to prove it every single day.
We want to celebrate and reward your entrepreneurship by turning your wealth creation dreams into reality.
But we are so much more than a facilitator of finance.
We will work creatively with you every step of the way, providing our extensive knowledge and support to help your project take shape.
We enjoy long and established relationships with serious investors, sellers and real estate professionals while leveraging our reputation and trust and using clear communication to minimise the risk to all parties.
Contact Equidy today to book your free strategy call.
