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?
- 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.
- 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.
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