No it’s not a typo. I meant to say floppers and not flippers.
Our TV screens are full of renovation shows at the moment as you’d probably be aware. They seem to pop up in the final stages of a property boom (like the one we’ve been experiencing in Sydney, Central Coast, Newcastle and surrounds for the last couple of years). Maybe that’s because of the time lag from production to airing or maybe they’re late to the party because it takes a while for TV execs to catch on? But either way many people think they can quit their day job and do property flipping full time. However, just like any business start-ups – some work and some don’t.
Don’t get me wrong, I am a firm believer that you can make money from property but if your strategy is to flip, then you need to go into the deal with your eyes wide open so you don’t flop instead. There are some obvious rules to follow (not a comprehensive list):
- Buy at or below the median price for the suburb.
- Buy a property that has good bones and in need of a cosmetic reno.
- No major structural issues (unless you know what you are doing). Unseen things like re-wiring and plumbing are not a value-add.
- Always get a pest & building report before you commit to the purchase. Termites can eat your profits not just your house.
- Renovate to the taste of the market (not your own personal taste).
- Kitchens & bathrooms sell a property.
- Make sure there is money in the deal.
Let’s take that last point and expand on it a bit more: Make sure there is money in the deal. Not just “I can buy for $X, spend $Y on a reno and sell it for a profit of $Z”, BUT –
- Be aware that American flipping shows operate in a different taxation environment than Australia. In NSW for example, on a $650K purchase there is Stamp Duty of $25K to pay and this comes out of your bottom line profit. Not so in the USA.
- Put a value your time. If you spend 3 months of your own personal labour working on the property, how much would you have to pay someone else to do that?
- Allow for holding costs. If the reno takes 12 weeks and a sales campaign takes 4 weeks, it is still another 6 weeks until settlement when you get your money (that’s 5 or 6 mortgage payments you have to make during the process).
- You need to pay tax on any profits you make (which, depending on the structure you use to flip and your personal tax rate, could see up to 50% of your profits paid to the taxman). Get advice.
- There are ALWAYS cost overruns in renovation projects. Allow a sum of money labelled “contingencies” in your costing spreadsheet for the unexpected.
- Don’t fall into the trap of thinking you are a great renovator and flipper because you made a handsome sum of money on your last flip. Most of the profits we see flippers make is due to the organic capital growth of the real estate market during the 3 – 6 months the flipper is holding onto the property, with very little of the profit due to the actual renovation.
- Finally, flipping works best in a flat or rising market not a falling one. Have a fall-back position if the market moves against your position – this may be hold & rent to tenants until the market picks back up.
An experienced Buyer’s Agent can help with the property & suburb selection and advise on what renos to do to maximise your potential profits. Give Propertunity a call (obligation free).