The real estate strategy of flipping houses in Pennsylvania may seem simple thanks to reality TV that fix and flips homes all throughout the state. However, there is a lot more than meets the eye. To make any type of return on investment in the Pennsylvania housing market, you will need to do extensive research and calculations on the neighborhood, taxes, median property price, demand, and other factors.
While the Pennsylvania real estate market continues to be projected as a seller’s market, it is quite easy for novice and even long-time investors to get caught up in the trend of house flipping without really considering the ins and outs of the investment as a whole. If done correctly, Pennsylvania could be a great place to house flip and see substantial returns on your house flipping investment. For more information on the real estate climate of Pennsylvania, here is a complete guide to the state’s housing market.
Pennsylvania Real Estate Market
Before getting into the best places to invest, let’s take a look at the climate of the Pennsylvania real estate market. While the state remains to be one of the most affordable places to buy a home, projections have shown an $30,000 increase in home value this year, taking the average price up to almost $250,000 per property. While this may be good for sellers who already have a property and are looking for a return on investment this year, for house flipping, you will need to know both the buyer’s market and seller’s market to make a profit. With flipping homes, you will have to take this into account as you will need to buy a fixer-upper home prior to anything else in your investment strategy.
With Pennsylvania home prices, rising you may think that people will stray away from buying this year. However, property availability has increased with only around 19,970 listed properties for sale. This is a good indicator that though there is a price increase, there is more demand than supply, making Pennsylvania’s housing market a seller’s market, wherein you will have more negotiating power when it comes time to sell.
While there are many factors that play into the strong real estate market of Pennsylvania as a state, experts are saying that it could be directly related to their recovering employment rate. From an unemployment rate of 2.9% to 2.3%, not only are in-state people benefiting but with the demand for out-of-state employment rising as well, more people are looking into buying or renting real estate in Pennsylvania. Though not a primary concern when house flipping, you may want to consider this when finding a location and neighborhood as demand may be higher in areas closer to business districts.
Best Places to Flip Houses in PA
Though the real estate market of Pennsylvania looks promising, you will still need to decide which city to invest in. When it comes to real estate, location is everything, and while the state itself has proven to be an excellent real estate location, you will need to zero in on which neighborhood fits into your budget and could offer you the best returns. While some people have the time to research the real estate climate of every city, an investment tool could help you find the perfect investment property in a fraction of the time.
Related: How to Find Houses to Flip: 4 Different Ways
To help you narrow down the most profitable neighborhoods in Pennsylvania, use the Mashvisor Real Estate Heatmap investment tool to get accurate and reliable real estate data including the median property price, rental income, and cash on cash return that can help you determine the best property to invest in.
Here are the top 5 cities in Pennsylvania to flip homes in according to Mashvisor’s investment data:
1. Philadelphia Real Estate Market
If you are flipping houses in Pennsylvania, you may want to consider Philadelphia as it is one of the more popular cities in the state. While Philadelphia real estate may not sell for the most money in Pennsylvania, it does offer a good median price for investors to buy at, while still maintaining a decent profit margin when it’s time to sell. Currently, the median price of homes in Philadelphia is at $563,535 per home, which is higher than the state’s average but is still in the mid-range when it comes to home prices. With this Philadelphia offers investors lower capital needs while still being able to see a return on investment.
2. Pittsburg Real Estate Market
Flipping houses in Pittsburgh can yield a high return in 2022
Flipping houses in Pittsburgh could also be a great option for investors looking to buy property in Pennsylvania. With a median price of $468,275 and the second-largest city in Pennsylvania, Pittsburg requires a smaller initial investment and capital while still maintaining high demand for properties in the area. In fact, the year-over-year property value in the city has risen to about 3.5%
With minimal starting costs of Pittsburg, house flippers will be able to buy a property and invest a lot more into the renovations while still maintaining their bottom line.
Related: 8 Pittsburgh Neighborhoods with High Cap Rates
3. New Hope City Real Estate Market
While not one of the more common places to flip houses in Pennsylvania, New Hope city has one of the more lucrative and expensive real east market values in Pennsylvania. At a median price of $1,394,635, you could make a huge profit from house flipping in this city if done correctly. It would be advisable to buy the cheapest home you could find in the city and set a decent remodeling budget for the property. While a relatively modern house may go for $1.4 million, you may be able to find a fixer-upper for under a million and spend a couple extra thousand on renovations and appliances. Even if you spend $100,000 on renovations, you could still earn $300,000 by selling it at the city’s median price.
4. Chester Spring Real Estate Market
Chester Spring is a neighboring city of Philadelphia that has had quite a promising real estate market for some time now. While primarily a renters city in previous years, professionals and other homebuyers have become more interested in investing in the city. With a median price of $1,066,668 Chester Spring may require a bigger investment capital, but it is still considered a seller’s market, meaning you would have more room to negotiate when it’s time to sell.
5. Wayne City Real Estate Market
Like Chester Spring, Wayne City is close to the city proper of Philadelphia and has a strong real estate market. With a median price of $1,233,630, Wayne City is definitely a higher-end investment that will need investors to invest more upfront. Like New Hope City, it is advisable for investors to purchase a cheaper home in the area with the intention of renovating it before putting it back on the market. With a $1.3 million median price, any fixer-upper worth less than $1 million could offer huge returns for the investor once renovated.
Taxes and Return on Investment from Flipping Houses in Pennsylvania
As with every return on investment, you will have to take into account taxes when calculating your bottom line. While you may think that taxes for house flipping is the same as any regular real estate purchase, there are a few additional things you will need to consider with this real estate investment strategy in particular. Here are a few taxes to take note of when house flipping in Pennsylvania:
1. Short-Term Capital Gains vs. Long-Term Capital Gains
In Pennsylvania and neighboring states, when you acquire your property and when you sell it could determine the amount of taxes you need to pay and how it will affect your profit margins. According to the Philadelphia Inquirer, if you buy a property, flip it, and sell it all in the same year, you will most likely get charged for short-term capital gains. This means that you will be taxed at the regular income tax rates, which in some cases can take up to 39% of your profits.
On the other hand, if you retain ownership of the property for at least a year, you will be taxed for long-term capital gains. Depending on your tax bracket, long-term capital gains take anywhere from 0% of your profits to 20% at most.
While looking at the tax percentages, you may want to consider holding on to the property for at least a year. However, even if you stretch out renovations when flipping houses in Pennsylvania, most renovations take 6 months at most. With this, you will have to shoulder maintaining costs like mortgage and homeowner associations dues for the time being until you can put the property back on the market. If you don’t think you can cover these expenses or calculations show that they amount to roughly the same as short-term capital gains taxes, you should consider selling the property sooner rather than later.
Related: Real Estate Taxes: Everything a Beginner Investor Needs to Know
2. Business vs. Investment Taxes
In addition to short-term and long-term capital gains taxes, the government will also take into account if the house you flipped is to be considered as just an investment property or a business venture. If you have flipped multiple houses in the span of a year, there is a large chance that your sale will be taxed as a business rather than an investment. While there isn’t an exact number of houses you can flip and still be taxed for investments only, the more often you do it, the more likely the IRS will consider it as a business.
If considered as a business, your profits and taxes will be calculated differently. In the State of Pennsylvania, business income tax is calculated at 9.99%. This means that if your property sold at $200,000 and is considered as a business, you will pay a little under $20,000 in taxes. On the other hand, property sales that are considered as investments could acquire taxes as low as 3.87% in certain cities of Pennsylvania. This means that rather than paying $20,000 in taxes, you will only need to pay around $7,700 for your real estate property. Moreover, if your strategy of flipping houses in Pennsylvania is considered a business, you may also be taxed an additional self-employment tax, further eating into your profits.
3. Tax Cuts for Primary Residence
While you may only see the property as an investment, there are quite a few tax benefits of listing it as your primary residence. If you have the ability to stretch out renovations for at least 2 years and have it as your primary residence, when it comes time to sell, you should see substantial tax cuts, leading to higher profits. If you are a single homeowner, federal laws allow you to deduct up to $250,000 from your taxes and even double that amount for married couples. In addition to federal tax cuts for primary residences, the State of Pennsylvania does not tax sales of primary residences on a state level. With minimal taxes needing to be paid at both a federal and state level, claiming the property as a primary residence and flipping houses in Pennsylvania could boost your bottom line significantly.
Start Flipping Houses in Pennsylvania Today!
Whether you choose to start flipping houses in Pennsylvania or buy a home that is ready for occupancy, listed above are the best places to invest in Pennsylvania according to Mashvisor’s real estate data analysis. Depending on your real estate investment strategy, you may want to look into what each city has to offer and which investment property is right for you. For an accurate real estate market analysis and investment property analysis, use Mashvisor’s investment property calculator for profit estimate, median prices, and other crucial data points contributing to your possible return on investment. Whether you are a novice or serial house flipper, making a profitable investment should be a relatively simple task with the right real estate investment tools.
To start looking for the best place to flip houses in Pennsylvania, sign up for Mashvisor with 15% off and gain access to all of our investment property analysis tools today!