Flipping houses is a property investment strategy that involves purchasing a property then selling it quickly for more than you paid for it. This typically means renovation work, or moving quickly in a rising market (or both).
It's a risky strategy, but could it be a good option for you? That depends on your strategy and overall goals.
Best suited to a hands-on or active investor, house flipping can see investors reap rewards or face excessive costs and taxes, not to mention pressure on their time. Once taking into account what opportunities exist in the market, your abilities and the input required, you may decide on property flipping for your own strategic investment plan.
What is house flipping?
House flipping is gaining popularity, especially with the influx of home renovation shows on our screens. Buying an old property, fixing it up and selling it on for a healthy profit seems like a no-brainer.
The reality is that house flipping is a pretty major undertaking that can involve a lot of work – from the physical labour put into the house or even just project managing tradies to complete the work on your behalf.
Generally speaking there are two types of properties to flip:
Properties purchased below market value due to financial distress. Could be an apartment or a house.
The "fixer-uppers" or renovator's delight which after a cosmetic or structural facelift can be sold for a profit.
Consistently finding fixer-uppers can be challenging, with most investors using this approach as a tactical strategy rather than a long-term plan.
How does house flipping work?
The first step in flipping is to find and purchase a house suitable for flipping. For strategy 1, this might be a property whose owner is struggling to repay their mortgage or is forced to sell quickly for various reasons. For strategy 2, it's buying the worst house on the best street at a great price.
Following on strategy two, you will need to renovate, aiming to double your profit on every dollar spent renovating. After a stunning facelift, new appliances, fresh paint and maybe a redesign with an open plan kitchen living area, you're ready to sell. A flip needs to happen relatively quickly to give you a cash injection to fund your next flip.
Assuming there are no hidden damages, no blow-out costs to your renovation budget and enough interest in the market to sell, you might be able to make a healthy profit. After all taxes and sales costs of course.
What is the 70% rule in house flipping?
The 70% house flipping rule suggests that you should pay a maximum of 70% of the after-repair value (ARV) of a property, minus the cost of repairs and improvements.
In more simple terms, this means you should consider a property's post renovation value; calculate how much you'll spend on renovations; and use these figures to help you work out the maximum amount you show pay for a property.
By using the rule, you build a 30% profit margin into the project.
For instance, say you find a home to flip that you believe will be worth $750,000 after renovating.
$750,000 x 70% = $525,000.
You expect to spend $75,000 in renovation and repairs, so you subtract $75k from $525k.
Therefore, the maximum amount you should pay for this property under the 70% rule is $450,000.
This is a guide only and not alway a realistic figure you can achieve when purchasing a property, but it's a good guideline to keep in mind when doing your base calculations.
How much experience do I need to do a house flip?
Renovating a home is not something you should attempt if you have little experience owning a home, attending to handyman jobs and/or have general problem solving skills.
Many a would-be home flipper has lost money on a home renovation project that went off track. Unexpected expenses can crop up, and these are often renovations and upgrades that don't make a noticeable difference or add any value or amenity. They can include surprises like:
Electrical work, where wiring is found to be faulty
Repairing hidden leaks and poor water-proofing
Ripping up tiles or carpet and finding hidden rot, damp or mould
Reinforcing, welding or structural beams inside walls
Extra pipes (and labour) when shifting toilets, sinks and showers
Does this mean you shouldn't attempt an extensive renovation and embark on a house flip project if you're new to renovating? Not necessarily. But it does mean you should aim to be very organised, with a super clear budget, a contingency of at least 10% over your estimated budget, and a number of experts tradies to learn from.
What are the pros and cons of house flipping?
Pros
Flipping gives you a swift return on investment, with a flip taking on average 6 months.
Flipping is an active strategy that helps to generate profits without waiting for the market to work in your favour.
You will become a better renovator and property investor from working on the tools.
Adding to your professional network is very likely in house flipping, which can pay off down the track for future investment collaborations.
Cons
Flipping can be a risky investment strategy, especially when properties can have hidden issues, needing strong and ongoing cash flow to fund flips.
Flipping can take up a large chunk of your time and without expert skills and knowledge of construction can be challenging to pull off a profit.
Costs associated with buying and selling the properties can eat into your profits.
You may face a higher capital gains tax bill if you own a property for less than a year, and big boosts in your income from a successful flip can also jack up your tax bill.
What are some other property investment strategies?
House flipping isn’t the only investment strategy employed by property investors. Depending on your unique investment situation, circumstances and goals there are different options that might appeal to you such as:
Rentvesting. As a strategy, rentvesting involves purchasing an investment property in one area while continuing to rent in another area. This lets you rent where you want to live while purchasing a more affordable property somewhere else.
Buy and hold. A more passive income approach of purchasing a property and renting it out long term for regular income while the property is likely to increase in value.
Check out more helpful guides for buying, selling and investing
Ronelle Richards is a freelance journalist and editor based in Melbourne. Her work has featured in publications including SmartCompany, Investing News Network and CPA Australia's InTheBlack digital magazine. She has a passion for personal finance and holds a Bachelor of Media Communications and a Masters of Journalism from the University of Melbourne.
If you're looking to invest in property, a line of credit loan could be a great way to leverage the equity in your existing property for a deposit. A home equity loan is a loan in which you put your property up as security to borrow against the equity of your home.
When you sell a rental investment property and make a profit, you will generally need to pay Capital Gains Tax. Some exemptions and discounts apply: here's how to work out how much CGT could cost you.
The laws around buying Australian property using a foreign income have recently changed, so here’s what you need to do to invest in Australian property.
How likely would you be to recommend finder to a friend or colleague?
0
1
2
3
4
5
6
7
8
9
10
Very UnlikelyExtremely Likely
Required
Thank you for your feedback.
Our goal is to create the best possible product, and your thoughts, ideas and suggestions play a major role in helping us identify opportunities to improve.
Important information about this website
finder.com.au is one of Australia's leading comparison websites. We are committed to our readers and stands by our editorial principles
We try to take an open and transparent approach and provide a broad-based comparison service. However, you should be aware that while we are an independently owned service, our comparison service does not include all providers or all products available in the market.
Some product issuers may provide products or offer services through multiple brands, associated companies or different labeling arrangements. This can make it difficult for consumers to compare alternatives or identify the companies behind the products. However, we aim to provide information to enable consumers to understand these issues.
We make money by featuring products on our site. Compensation received from the providers featured on our site can influence which products we write about as well as where and how products appear on our page, but the order or placement of these products does not influence our assessment or opinions of them, nor is it an endorsement or recommendation for them.
Products marked as 'Top Pick', 'Promoted' or 'Advertisement' are prominently displayed either as a result of a commercial advertising arrangement or to highlight a particular product, provider or feature. Finder may receive remuneration from the Provider if you click on the related link, purchase or enquire about the product. Finder's decision to show a 'promoted' product is neither a recommendation that the product is appropriate for you nor an indication that the product is the best in its category. We encourage you to use the tools and information we provide to compare your options.
Where our site links to particular products or displays 'Go to site' buttons, we may receive a commission, referral fee or payment when you click on those buttons or apply for a product. You can learn more about how we make money.
When products are grouped in a table or list, the order in which they are initially sorted may be influenced by a range of factors including price, fees and discounts; commercial partnerships; product features; and brand popularity. We provide tools so you can sort and filter these lists to highlight features that matter to you.
Please read our website terms of use and privacy policy for more information about our services and our approach to privacy.
