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Flip out: Does it make sense to buy, renovate and sell for profit?

17.01.20 | Marc Barlow | Resources

Flipping houses and apartments seems to be all the rage. Fuelled in part by a minor slow-down in the property market and by a glut of local and American home renovation TV shows, the idea of buying a run-down house, doing it up and selling it for an enormous profit is pretty attractive.

The template seems pretty simple: find the worst house in a nice neighbourhood, buy it cheap, do it up fast and sell it in a competitive market. If the ‘flip or flop’ shows are anything to go by, the whole thing is done in about 25 minutes…
As with any promise of easy wealth-making, there are plenty of risks to quick-turnaround renovations. And while it’s true that some people can make decent money out of the enterprise, it’s definitely not for everyone. Here are some of the biggest risks to be aware of prior to embarking on your life-changing flip.

Risk 1: Money

Buying and renovating are expensive businesses, and you’ll need to do your sums to make sure you don’t end up in a deep hole, financially speaking. And it’s not just up-front purchase costs either: capital gains tax, agent fees, mortgage repayments, insurance and more can easily add up to big numbers. If you’re trying to establish yourself financially, flipping properties is a high-risk undertaking.
Add to this the fact that not every renovation goes exactly to time or budget, and it’s clear you need to make sure you can cover unexpected emergencies. Getting the ‘bones’ of a renovation right (plumbing, electrics, stumps, rooves, etc) all cost money and don’t necessarily add much ‘wow factor’ to the final result. Get input from an accountant or financial advisor: how much can you actually afford? How will you secure a loan? What are you risking if it all goes wrong?
The best way to ready yourself financially is to properly understand the project you’re about to undertake. Firstly, make sure you get a pre-purchase inspection of the property so that you know more or less what work needs to be done.
With the help of a builder or architect, devise a list of the most important work needed to get the house ready for sale. Prioritise this work, get an estimate of the costs and take a step back… Are you sure this is the right property for you?

Risk 2: The real estate market

Over time in Australia property has a habit of increasing in value. But it’s not a consistent upward trajectory: there are strong periods of growth, there are periods where the market is softer, and there is even the occasional recession. Real estate is generally considered to be a long-term investment strategy, while flipping is exactly to opposite.
In good times, an owner might experience a general rise in the property market just in the time it takes to renovate. Adding value through home improvements is just the cherry on top. On the other hand, even a slight and temporary decline in the market can have a huge impact on your bottom line. There may be fewer people looking for property, making it harder to sell for the price you want. And you may not be in a position to wait until the market picks up again. Crunch!

Risk 3: Time

Which brings us to time. As the old saying goes, time is money. And this is truer in the world of real estate than almost everywhere else. Lining up tradies and materials is hard. Project managers are costly. Delays are expensive too. Will you be keeping a close eye on the project, or is your own work going to keep you busy enough?
In renovations, delays off a few days can easily become weeks and months. There are so many inter-dependencies. If the tiles don’t arrive in time, the plumbers can’t finish off, so the painters will have to wait, so you’ll need to postpone the flooring people… and we haven’t even mentioned the weather.

Ready to flip? Time to buy.

If you’re still undeterred and can’t wait to get stuck into your flipping project, the next step is to actually buy a place. As with any property investment, consider the demographic of the area (young families, established professionals, etc), the types of people you’re likely to attract and the sale price of comparable properties in the area (know on the US television shows as ‘comps’).
People always talk about the worst house on the best street, but this isn’t always easy to find. Obviously, you’ll want a property in need of enough attention to make a renovation worth your while but not so bad that it takes a year to complete the job. Remember, the longer it takes, the more risk you’re exposed to in terms of ongoing and one-off costs and possible negative moves in the housing market.

Talk to us

Before you flip, there are plenty of people worth sounding out for advice: tradies and building contractors, local real estate agents, financial advisors, architects, stylists and more. Get in contact with us at here at Mortgage Broker Group too: we can advise on costs, loans, mortgages and other financing options. Our advice comes at no cost to you, so talk to us today.