Lots of people have thought about flipping houses but like all projects, there are hidden issues that you need to know about. Many people that consider flipping are thinking about how they can ‘flip’ out of having a job. The idea of being self-employed and creative is very enticing.
When considering flipping you need to first know your own ability. Clearly developing a site is complex so that would not be a first attempt. It is wise to start small with say, a makeover. The smaller job has fewer risks as it is more cosmetic than structural. This way you will begin to see some of the issues you will encounter but it is more manageable and will affect you less financially.
Where to start
A cosmetic flip is a great start because you can determine whether flipping is what you want to do. Simple work like kitchens, bathrooms, floors, paint, minor gyprock and replacing old fixtures and fittings is very achievable. Most people are comfortable doing these things and the important elements are time and cost. Lots of savings are made in doing work yourself but the false economy of not using trades for more complex work should be avoided.
Talk to agents and look around
Speaking with agents is really helpful because they have the real estate intelligence you need. It is important you are objective and not assume your taste is universal. Speaking with several agents will confirm trends buyers want like colours, fittings and creature comforts. Remember this flip is not for you so you must give the market what it wants. This is a problem for many flippers as they may assume the high-end is what is needed or that the new owner will rent the property out, so the low-end options are enough. First rule – no assumptions – find out from the agents. You should also go and see many both before and after properties to gauge the cost and type of improvements that buyers want.
Agents will also give you an idea of what prices are attained and what buyers don’t need. For example, you might need to put a driveway in and clean it up to earn an excellent profit as car accommodation is in high demand. Not all flips are complete overhauls, the buyers always drive the flip.
The money is in the buy, not the sale
Flipping property means you need to make a profit so you need to know what the flip will cost and the potential sale price before you buy. Again, ask the agents don’t assume you will get a price without information. When flipping property, you must accept it is not a personal possession. Flipping is an arms-length transaction so your feelings need to be sidelined.
A great tip is to look up the estimated price of a lovely property in the street. You can find this info on one of the property search engines, then compare your choice to that property. This will give you a guide to the costs you may be in for. For example, if you are looking to buy an unkept house on a street where there the lovely home is $200,000 more, you need to decide whether your $50,000 budget will allow you to sell at that finished home price.
It is important to make financial, building/trade and income plans. Being prepared is essential for successful flipping because these plans ALWAYS blow out and come with hidden issues.
You have decided to do your first flip on a property that needs a cosmetic make over and you know what comparable finished properties are selling for. You have chosen a small flip within your current capabilities. You also know how much you want to spend and how long it will take. The key money issues are:
- Cost of property – that price compared to a finished comparable;
- Professional inspections;
- Stamp duty and legal costs;
- Cost of mortgage repayments over the time of the flip;
- Loss of any work income you may experience;
- Cost of works – ask trades and make inquiries well before time;
- Contingent budget – typically 10% of overall budget;
- Landscaping and
- Selling fees.
You must hunt for the best most competitive prices for all materials, trades and fittings. It is wise to have several options and a mix and match of materials is essential too. For example, bathroom walls have more square meterage than bathroom floors. So, it may be wise to use a cheaper wall tile and spend money to get a wow on the floor.
You need to find reliable tradespeople. Many flippers use the same people over and over because the work will be completed on time and within budget. That said sometimes trades cannot predict what is behind a wall or underground. Costs can blow out and often do, so that is why you must have a contingency budget. Make inquiries with agents – they use trades extensively – and that can be a great place to start.
Don’t pay for anything in full before it is completed – EVER! Should you be unlucky with a trade they are more likely to complete if they are owed money. Always check insurance and licenses because problems could impact you well beyond the flip.
There are tax implications to flipping property. Should you choose to set up a business you will need to register for GST. Capital gains tax will not apply but your yearly tax bracket percentage will be applied to profit after deductions. Many people don’t like the taxes but you should look at it from the perspective of if you make a lot, you pay a lot. Successful flipping is still more than you would make as a Pay as You Go taxpayer.
It is wise to make an appointment with your accountant and ask what tax you would pay on a prescribed flip. For example, if you bought a house for $850,000 and spent $50,000 then sold for $1,100,000 what is the potential tax? The accountant will factor in your stamp duty and building costs to give you an indication. Again, the more research and planning the more successful the flip.
Potential risks to be aware of with house flipping
All investments have risks and the success largely comes from mitigation. The more you consider the problems the better prepared you are. As well as the risks stated other risks associated with flipping houses could include:
Market conditions: if house prices across the market fall, selling your property at a higher price in the short term may be a challenge even if it is excellent.
Interest rates: if rates rise this could mean higher loan repayments and pressure on your budget.
Having difficulty selling: if you need to hold onto the property for longer than expected, the costs can quickly rack up and eat into any eventual profit you might make. Again agents will tell what is in constant demand in the market – access to transport, car space, number of beds etc.
Unexpected costs: renovation costs you hadn’t anticipated can derail even the most carefully planned budget. Having a building inspection carried out before buying a property may help you avoid some nasty surprises.
Flipping can be a great business opportunity for many but there is a caveat – Flippers beware. Make sure you do your due diligence and create a business plan that focuses on both the internal and external markets. Be prepared and you will be happy flipping.