Flip out: Does it make sense to buy, renovate and sell for profit?
If TV is anything to believe (and that’s a big if!) people the world over are making a fortune buying run-down houses, doing them up into beautiful display-style homes, and selling them to an enthusiastic market for heaps of money. From local reno shows to those ‘flip or flop’ programs from the US, the whole process looks pretty simple, and only takes 30 minutes, minus commercial breaks.
While it’s true that some people do renovate for profit it’s certainly not for everyone. But is it for you? Read on for some insights into the risk and benefits of this flipping phenomenon.
Understand the flipping risks
The property market
For most people, buying property is so expensive and so stressful, we only want to do it a small handful of times in our lives. And – for the most part – taking this long-term view of real estate pays handsome dividends. Property has a habit of increasing in value over time.
In periods when the real estate market is going gangbusters, people with the nerve – and skill – to flip properties are in a great position: the value of a property is likely to rise over the time it takes to renovate anyhow, and adding value will be rewarded by the market when it comes time to sell.
In a softer market, it’s more difficult to make a flip work, as you can’t rely on the property increasing in value just by sitting still. Lending policies might tighten – fewer people looking to purchase may mean your place takes longer to sell, or there’s less competition out there driving up prices.’
The risk is real that the market might turn bad on you, leaving you with an asset worth less than the combined cost of purchase and renovation. Bad.
Don’t forget to factor in buying and selling costs to your plan!
Money and time
Costs:
Not many renovations go exactly to plan … even on TV. And some surprises can be very expensive. Remember that buyers don’t pay any extra for some of the hidden features of a property (good stumps, safe electrical work, reliable plumbing, a roof that doesn’t leak). But these hidden items all cost money, and can easily derail a flip project.
With this in mind, flippers need to do two things:
- Arrange pre-purchase inspections to ensure the property is in good condition, or that any problems are understood and budgeted for;
- Create a shortlist of the most important cosmetic work needed to bring the place up to a sellable condition, and prioritise this work in the renovation. Don’t forget the garden!
Finances:
Make sure you’re able to comfortably cover the budget for the work; you don’t want to be relying on a super-fast sale. There’ll be loan fees and interest while you’re working on the property. And remember that you still have to live somewhere while the renovation is happening, and those costs don’t go away. Once the place is ready to sell, you’ll need to have money for agent fees, conveyancing and more.
Also make sure you’re across the tax implications of the flip. Any profit you make may incur capital gains tax (CGT), please seek the advice of a suitable industry professional regarding your individual circumstances.
Project management:
Will you be comfortable coordinating the trades involved in a renovation? These can be complicated projects, and you can either hire a project manager (expensive) or do it yourself (time consuming and complex). This is where your flip can easily turn sour: make sure you’re up for the challenges and frustrations of having people, materials and the weather all on their own schedules.
If you’re embarking on a flip project, it’s important that you’re in a secure financial position. Flipping properties is not a get-rich-quick option for people hoping to get on their feet financially!
Flipping the right property
Right, you’ve decided that a flip is on the cards: your finance are sorted, and you’re prepared for the project management challenges. It’s time to find a property to flip.
It’s a cliché, but the ideal flip candidate is the worst house on the best street in the area. While that’s an ideal, you certainly want something with ‘fixer-upper’ written all over it, but with enough structural soundness to keep the wrecking ball away.
You want a property that will appeal to the dominant demographic group in the area (young professionals, older families, etc.). And obviously, you want to make sure that comparable sales in the area are high enough to cover all of your costs, and leave you profit in the end.
Ask for advice
Talk to lots of people before you start: accountant for tax advice, local agents can alert you to suitable properties, tradespeople can quote on work, and – of course – here at Mortgage Broker Melbourne we can give you advice on costs, loans, mortgages and other financing options. Get your financial house in order, then get busy flipping your real house.
For more info on the costs and financing options available for your big property flip, talk to us today.
Marc has been a professional lender for 28 years. After beginning his career in 1990 with a UK Building Society, he moved to Australia where he held several different retail banking roles. In 1999 it became clear to him that a mortgage broker would eventually become an obvious choice for someone looking for a home loan so he took the plunge and became an independent broker. He hasn’t looked back since!