The secrets to flipping houses
Flipping houses is when you buy a property with the intention of selling it for a quick profit rather than holding onto it for long-term capital gains.
An option to buy is a common house flipping strategy, allowing you to sell your interest to a third party before having to settle or close on the deal.
There are a number of other benefits and drawbacks with this investment strategy that you should be aware of.
How does it work?
Property flipping is considered a positive cash flow strategy which involves buying a property as an investment.
You make profit from the investment by renovating the property and selling it for a higher price.
You can flip real estate in two ways:
- Aim for properties located in a growth market which can be resold at a higher price just by holding onto the property in over the short term.
- Buy at market value and renovate or change the appearance of the property to address the needs and requirements of the buyers in that market.
Investors successful at house flipping say the best strategy is to buy, fix up and sell quickly.
Call us on 1300 889 743 or complete our free assessment form to speak with one of our experience mortgage brokers about your property investment plans.
Advantages of property flipping
Flipping a property can reap generous awards including:
- Earning a quick profit: You can get a quicker return on investment compared to holding onto a property for a number of years and relying on natural property growth.
- Building your professional network: You can start to build a list of professional contacts such as real estate agents, solicitors and conveyancers, insurance brokers, and other investors who can become handy for future investment.
- Becoming a better renovator: You can gain enriching construction and renovation experience.
- Becoming a better property investor: You’ll also gain insights about what to look for in the local real estate market and master the art of negotiating with a vendor (person selling the property).
Drawbacks of flipping properties
- Losing money instead of making a profit: There are many factors that contribute to financial loss including taxes related to buying and selling property including capital gains tax (CGT) and stamp duty, as well as and unanticipated expenses like higher than unexpected renovation costs or increases to your mortgage repayments should interest rates be hiked.
- Holding costs: The property may not be sold as quickly as you first anticipated thus increasing the costs related to maintenance and your overall investment loan repayments. This is an opportunity cost and considered “dead money” as a property investor.
- Stress: The entire process of finding an undervalued property, calculating the costs of buying and renovating, and finding potential buyers involves time and stress.
- Missed opportunity cost: There’s the potential of missing out on a higher return on investment (ROI) if you sell the property at the wrong time (timing the market is gamble!)
How to succeed in flipping houses
Like any business, flipping houses requires money and time, planning and patience, and significant research.
Most investor renovators agree that one of the first steps you should take is to get a mentor with significant experience.
Understand that flipping houses is not a get rich quick scheme so here are some golden tips you should follow.
Often, people borrow against their home and then use the equity to fund their house flipping plans.
In this way, you don’t need to apply for a new home loan each time and can potentially avoid expenses like Lenders Mortgage Insurance (LMI) and loan set up fees.
If you don’t have enough equity and only have a small deposit, then consider a guarantor loan.
A guarantor will allow you to borrow up to 100% of the value of the property you’re looking to improve.
It will also allow you to cover the other costs of the purchase including conveyancing costs, stamp duty, and mortgage and land title transfer fees.
Paying for renovations
If you can fund the renovation work using your own funds then there’s no need for a contract builder.
You can hire a tradesman directly which will make the renovation cheaper.
If you need to borrow the cost of construction the bank will require you to use a licensed builder which will cost you a little more than if you were to do a lot of the work yourself.
In addition to this, your borrowing power will rely on the “on completion value” which will typically be lower than what you eventually sell it for. This is because valuers take a conservative approach when completing a valuation.
Buy low and sell high
Sounds pretty obvious but it’s easier said than done.
You not only have to identify the potential in a property but you need the negotiation skills to buy below market value.
The other challenge is that you’ll face this same aggression from a buyer when it comes time to sell your property.
To get a fair price, most house flippers set a slightly higher price and negotiate with the buyer to get as close as possible to market value.
You not only have to identify the potential in a property but you need the negotiation skills to buy below market value.
Here 5 tips for negotiating:
- Knowledge is power: Sites like domain.com.au and realestate.com.au are a great place to start researching but move on to RPData and Residex once you’ve narrowed down your property selections.
- A bad agent is your best friend: A bad agent will undersell the property and even tell you how much the vendor is actually willing to sell for – almost always it’s below the advertised price!
- Don’t be afraid to walk away: Set yourself a budget, make offers on 3 or 4 other properties, don’t become emotionally attached and, who knows, the vendor may be more than willing to drive a harder bargain.
- Don’t let good agents push you around: Skills agents will usually tell you that there are other parties interested in the house – sometimes there is, sometimes there isn’t, so to find out the truth, grill them about what these “other parties” have offered and what the vendor’s response was.
- Know when to make an offer: Never make the first offer and if you’re really sure this is a property you want, sweeten the deal with a larger upfront deposit and work with your conveyancer and the broker to get a quick settlement.
Check out our ‘How To Negotiate’ for a full breakdown on these tips.
On the other side, you’ll face lowball offers from buyers when it comes time to sell.
Investing in a good real estate agent is critical because they will help highlight the property features and the benefits of living in the location when open-housers start showing up at your door:
- Make sure the agent is licensed in your state.
- Make appointments to interview at least three agents and compare their market appraisals for their last few deals.
It goes without saying that you should discuss with them the potential of getting a better price going to auction rather than a private sale.
The condition of the property
If the property is in a bad condition, you’re in a much stronger position to make a low offer.
However, the condition of the property will also affect your chances of getting approved for an investment loan.
If the property cannot be rented out in its current state, you won’t be able to get approved if you don’t have a building contract in place to prove you are fixing it.
If the property can be rented out today, getting an investment loan will be possible.
It comes down to choosing a property that needs a bit of work but is, otherwise, liveable.
In some cases, we may be able to get you approved to borrow up to 80% of the land value and the banks will accept this even if the property is in a really bad condition.
This strategy is only suitable to borrowers in a strong financial position who have significant cash flow on standby to put towards the purchase.
The ideal property will be one which is cosmetically bad (old kitchen, old bathroom, paint falling off the wall, grass and landscaping is overgrown etc.) but structurally very good (floor has no holes, has a bathroom, no smashed windows etc.)
Please call us on 1300 889 743 or fill in this free enquiry form to speak with one of our mortgage brokers about your investment plans.
What types of renovation work adds the most value?
Not all of your restoration and refurbishment efforts are going to pay off when it comes time to sell the property.
In fact, it’s often the simplest improvements that can give the property just the makeover it needs to woo potential buyers. This type of work includes:
- Cosmetic: This ranges from a new cost of paint, laying down new timber or tiles and restoring the gardens and landscaping. This doesn’t require much work, time or money at all.
- Kitchens and bathrooms: These rooms are typically the ones that require a constant update and they’re at heart of the home lifestyle so it’s here you’ll want to spend a little more time and effort.
- Installing a pool: A swimming pool can add value in some locations, for example, Queensland, where the weather permits the use of a pool for much of the year.
- Structural renovations: Knocking down walls and rearranging rooms is quite time-consuming and expensive so you should only do this if there are limitations that prevent undertaking certain work.
- Extension: This includes adding an extra level or extending your home. Just ensure that you obtain approval from the council first!
Watch out for capital gains tax (CGT)
Did you know that if you hold a property for less than 12 months, you’ll pay CGT on 100% on the sale proceeds?
Alternatively, if you hold a property for 12 months and just 1 day, you will only pay CGT on 50% of the capital gain.
It’s actually common for investors pursuing a house flipping strategy to live in the property as they undertake construction.
You just have to deal with living out of a suitcase!
By living in it for at least 6 months, you’ll be treated as a homeowner for tax purposes and can avoid CGT altogether!
Please speak to your accountant before making any investment or financial decision to ensure that you’re operating within Australian tax rules.
Working with a business partner
Should you be flipping houses with a business partner?
It’s best not to involve a business partner as there can be future conflicts of interest, less control over the project and how to fairly go about profit sharing, among other risks.
It’s better to go it alone on a small project or have your wife as a partner.
Sell or keep?
Many clients do not sell the property after they renovate, instead, keep it as an investment property, build up some equity and then buy another property to continue building their property portfolio.
Bear in mind that your borrowing power may be tight if you do this regularly over a short-term period and will invariably limit your ability to fund property investment in the future.
One of the big risks to watch out for is hitting your mortgage exposure limit early on.
However, if you’ve bought in a growth area, the capital gains you generate from holding the property can keep you investing for the long-term.
It comes down to doing your research and due diligence on the local market, keeping your costs down through savvy renovating techniques and keeping funds on standby should you need to cover shortfalls in getting an investment loan or covering repairs and property improvements.
Generally speaking, house flippers get a higher return when property prices are rising and vice-versa.
The quicker you turn the property around, the higher your ROI.
The trade-off is that you’ll be paying more taxes over a short-term period when buying the property and then selling it in 12 months compared to buying and then selling in 3 years’ time, for example.
A successful example of a property flipping
Alex finds an absolute bargain of an investment property in Kogarah, Sydney.
It’s in a great location because it’s approximately 14 km from the CBD.
He knows that it’s worth about $800,000 but the seller only wants $640,000 for a quick sale because he needs some quick cash to settle some urgent debts.
Alex doesn’t have the cash to settle on the property but he’s done his research and knows he could easily find a buyer.
He signs the Contract of Sale on a 30-day settlement with a deposit of $10,000.
Samantha is a property investor with significant means behind her and a mutual friend puts her in touch with Alex.
She is very interested and offers Alex $750,000. Alex can’t believe it and accepts immediately.
They arrange the dates so that there is a simultaneous settlement. That is between Alex and the original vendor as well as Alex and Samantha.
Katherine picks up an investment property that fits with her investment strategy (she plans to renovate it). Alex makes around $110,000 in profit just for simply brokering the deal.
Speak to a mortgage broker
If you’re planning to pursue a house flipping investment strategy, then it’s always best to speak with a mortgage broker about your plans so we can help you develop a proper mortgage strategy.
A well-structured mortgage strategy will allow you to pursue your positive gearing strategy well into the future.
Although we don’t charge a fee for our services, we will charge clawback if you plan to flip the house within 2 years.
Despite this, it’s common for professional investors to go through a broker and pay any potential clawback fee for several reasons:
You can get the CGT exemption by living in the property for at least 12 months.
The profit you make from flipping the property may far exceed the clawback fee.
A mortgage will help you get a negotiated interest rate discount that’s far below what most lenders will offer you.
The tax benefits, interest rate savings and the profit together may be more beneficial than trying to avoid clawback.
Call us on 1300 889 743 or fill in our free assessment form to find out how we can help you with flipping houses.