Flipping Houses: Is it a Viable Risk?
Ever contemplated the idea of revitalising an older property, aiming to sell it and turn a quick profit? This strategy is a familiar topic in property seminars and has gained popularity through reality TV shows like “The Block.” Have you ever wanted to know if you can make a living flipping houses?
Yet, the question remains: Can flipping houses become a sustainable source of income? And can you make a living flipping houses? Read along to find out more.
House Flipping Insights. Can You Make a Living Flipping Houses?
If you’re seeking a rapid financial gain, I hate to break it to you. But a lot of house flipping actually FLOPS
While the notion of purchasing a rundown property at a favourable price, enhancing it, and selling it for profit seems promising in theory, the reality is that most property flips end up falling flat.
What Constitutes a House Flipping Strategy?
Advocates of this approach, often found teaching courses on the subject, emphasise that the key to successful house flipping lies in making strategic improvements to the property that maximise your returns.
They recommend doubling your renovation investment, aiming for a ratio of $2 for every $1 spent on cosmetic enhancements.
To attain such lucrative profits, thorough due diligence is essential. Research is often key.
Things to note include local property values and the growth history of the property to be improved. Ceiling prices – determining the highest property price achieved in the area. Costs and potential profit margins – assessing if there’s profit after all expenses. This is the million-dollar question, both literally and figuratively.
You need to estimate renovation costs, evaluate the reliability of local tradespeople, gauge the market’s willingness to pay for a property improved to your desired standard, and become a local real estate expert to understand your target market.
The House Flipping Strategy
In broad strokes, a house flipping strategy entails:
Cost-cutting: Many individuals leverage their home equity to fund house flipping, eliminating the need for a new loan application. Strategic renovations: Focus on enhancements that add the most value, such as cosmetic work and select structural improvements. Direct payment for tradesmen: Opting for direct hiring to reduce renovation costs or even taking on some of the work yourself. Buying low and selling high: Identifying potential properties and negotiating skilfully to purchase below market value, a challenging task in the current seller’s market.
Does House Flipping Work?
While this strategy may yield profits for some seasoned property investors, I believe it’s an ill-advised approach for two reasons:
Achieving a $2 increase in property value for every $1 spent often requires substantial structural renovations, which are costlier, time-consuming, involve permits, and demand a higher level of expertise. Even if you manage such renovations, the associated costs can significantly erode your profits. Upon scrutinizing the tables below, it becomes evident that typical house flipping projects can incur an additional 50% in costs beyond the renovation budget.
You need to estimate buying costs that will include, property purchase legal fees (varies), stamp duty (varies by state), mortgage costs (varies by lender), property valuation fees, building and pest inspections. Base on a $400000 home purchase you could be well looking at buying costs of $27,400 or more.
Renovation & selling expenses need to be accounted for and included. Renovation costs, Legal selling expenses, selling agent’s commission & advertising Loan exit fees & charges (varies by lender), Rates during holding period, Interest on funds for 6 months. It all adds up.
While occasional flippers may profit, it often results from favourable market conditions rather than a foolproof strategy.
Moreover, accurately predicting the property cycle stage is challenging, even for experts, making it risky for beginners and even riskier in the country.
Asset selection is crucial, as seemingly cosmetic enhancements may hide expensive structural issues.
The primary profit in house flipping comes from updating a property without incurring costly, less visible repairs like roof replacements or re-stumping.
These “invisible” works may not significantly increase property value, as buyers typically seek visible improvements that justify top-dollar prices.
Conducting a thorough pest and building inspection, consulting with builders, and qualifying the level of required work are crucial steps.
Additional considerations include:
Project management capabilities: Do you have the time and skills to coordinate trades effectively? Contingency fund: Are you prepared for unforeseen challenges? Council approval: Will you face lengthy processes for structural work? Ownership within an apartment complex: Does it require approval from the owner’s corporation? Holding costs: Can you afford to retain the property if it doesn’t sell as planned? Selling costs: Real estate agents, advertising, legal fees, and loan discharge fees can eat into profits.
Top Tips for Property Flipping
Despite cautioning against house flipping due to the associated risks, here are tips for those adamant about taking the plunge:
Conduct thorough research and due diligence: Understand property values, construction costs, and establish a strict budget.
Avoid overpaying for your property: Emotional decisions can lead to overpayment, jeopardizing your profitability.
Carefully consider loans: Plan for the best but assume the worst, factoring in the possibility of being unable to sell at the desired price.
Monitor costs closely: If you possess the skills, consider doing some work yourself to reduce costs, but avoid delaying the project as it may increase holding costs.
Is House Flipping Worth It? Can You Make a Living Flipping Houses?
While the idea of donning a project manager’s hat may seem enticing, a steadier approach is often wiser.
The risks of overcapitalising and encountering market downturns are real, and after navigating various property cycles, accumulating and growing your asset base over time is a more sustainable wealth-building strategy than chasing quick profits through flipping.
Remember, holding costs can eat into profits, and unexpected challenges can arise, leaving you with minimal returns or even losses.
Instead of engaging in high-risk flips, consider a strategy of buying, renovating, and holding onto properties or selling when the market is high.
By refinancing, you can release newly manufactured equity, retaining both profits and the improved property for long-term benefits.
This approach allows for a broader tenant pool, higher rent potential, and depreciation allowances.
That’s the approach savvy renovators take!
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