FLIPPING HOUSES? IS IT WORTH IT?
It seems Aussies have developed a thing for flipping. Recent data from CoreLogic shows the percentage of properties owned for less than two years has grown – coinciding with strong capital growth in our major cities. This indicates flipping – and it’s no wonder when you look at the popularity around TV shows such as The Block.
But, is flipping really all it’s cracked up to be? Do you really want to be living that drama?
The potential for profit is what really makes flipping attractive. However, as an investment strategy it only exists in the short term. And, if you can make $50,000 from flipping, imagine how much you could make by holding onto the property over the long term.
DON’T FALL FOR THE HYPE
Your judgment can easily become blindsided when you watch shows like The Block.
According to the world of TV, anyone can pick up a nail gun and become a property renovator.
What’s rarely discussed is that properties on the block only make a profit because the reserves are set artificially low. In the real world, using market prices, these high end renovations would not be as profitable as they seem.
The reality is that shows like these don’t educate people on being thrifty. In fact, they flat out show people how to lose money.
HIDDEN COSTS AND SKETCHY TIMELINES
The cost and timeframe of renovation on The Block is not realistic in the real world.
Contestants are able to renovate a whole house in the same time it would take to renovate a single bathroom.
Teams of tradespeople demolish and prepare the site before contestants even set foot inside.
Unusually large teams of tradies then work more than 12 hours a day on site, and supplies are delivered within days rather than weeks.
In terms of budget some building supplies are provided for free in return for TV exposure, while tradies work for a lower wage than the average real world rate.
THE VERY REAL RISKS OF FLIPPING
Clearly, reality TV is far from being realistic. Nathan Birch, co-founder of Binvested, says, depending on market conditions and whether you sell at the right time, flipping carries a very real risk of only breaking even, or making a loss.
Some other major risks of flipping include:
• Under budgeting on the renovation
• Having the wrong team of tradespeople
• Getting stuck on finance
• The holding cost being greater than expected due to delays
• The market falling, forcing you to sell for less
FLIPPING IS NOT A LONG TERM INVESTMENT STRATEGY
Nathan has always favoured a buy and hold strategy. He says, flipping in order to make a profit and then flip again is not a good long-term strategy.
Over the course of ten years, an investor can only flip a few properties. They would be lucky to make $50,000 on each, after paying for all costs associated with selling such as capital gains tax, agents commissions etc.
In comparison, the buy and hold investor may have spent those ten years building a property portfolio of five, ten or more properties – which have each doubled in value during that time.
“I’ve seen the results of both sides of it,” says Nathan. “By far, the investors who have had a solid investing strategy are ten times better than those who have just bought to flip.”
Having an asset base of rent collecting properties means your income grows in-line with the economy, and the cost of living. What’s more, it’s less effort and more financially rewarding.
THE DOWNSIDES OF FLIPPING
Flipping can come at a huge opportunity cost. Your money is tied up in the property while the project is being completed, meaning you are missing out on other investment opportunities. If you fail to make a profit, then you lose even more opportunities!
If you make a loss on the project, then you will either sell and lose money, or be stuck with the property (including its holding costs). To have invested so much time, money and effort into a failed flip would be truly painful.
There are often cost blowouts with renovations – causing unneeded stress, delays and less profit than expected.
THE UPSIDE OF FLIPPING
Flipping can be useful for those who have built a foundation portfolio with good cash flow. Buying to flip can help them to pay down their existing mortgage debt quicker, and grow their positive cash flow.
DIFFERENT WAYS TO FLIP A PROPERTY
You may think flipping is all about buying cheap, renovating and selling, but this is only one option.
Depending on your circumstances and what you would like to achieve, the following are different ways to flip property for a profit.
• Buying to renovate and sell – make sure you are realistic in terms of renovation and holding costs. The potential profit is usually quite modest.
• Buying and putting in a development application for a subdivision or rezone, and then selling the title – make sure you are aware of the building controls and processes within the local council area. This can bring good money, but is loaded with risk, Proceed with caution!
• Buying cheap land and building a property on it – this is where Nathan finds “the sweet spot” because it offers the potential for the greatest profit with the least amount of risk. Read more about developing properties for profit here.
TIPS FOR FLIPPING, BEFORE YOU PULL THE TRIGGER
1. BUILD A SOLID FOUNDATION PORTFOLIO
“It’s important to have a solid strategy and the right foundations before trying to make a quick buck,” says Nathan.
A foundation property portfolio will help create a buffer against risks involved with flipping. It gives you a level of income to help with holding costs, and equity which gives you options.
2. GET THE RIGHT PROPERTY DEAL
No amount of renovation will save you if you don’t get the right property, in the right location, for the right price. Buying the right property in the first place will ultimately decide if you make money or not. You need to make sure there is already value to from day one.
3. DRAW UP A REALISTIC BUDGET
Make sure you devise a well-thought out and realistic budget that includes holding costs and buffers.
4. HIRE THE RIGHT TEAM
It can be difficult to find builders that tick all the appropriate boxes. Tradespeople should be trustworthy and good at what they do, while also charging a reasonable price. It is worth spending a bit of time to find the right ones for the job.
5. DO COSMETIC RENOVATIONS, NOT STRUCTURAL ONES
Structural renovations that need major structural changes like new rooms, walls removed, extensions should be avoided. They often need council or strata approvals, meaning they take longer and more likely to come with budget blow outs.
A cost effective cosmetic renovation can inject lots of appeal into a property and adding value. A lick of paint, some new cupboards, floors, light fittings and an updated bathroom or kitchen can be done for a reasonable price.
6. THINK HARD BEFORE YOU BUY
It may be worth doing it yourself, and it may not be worth it. What value do you put on your own time and labour? Would it be better to do your day job and pay a skilled labourer to do the work? Or, would it be better to take time off work and do it yourself.
Weigh up the options and cost – and don’t forget to factor in loss of income and an increased time frame if doing it yourself.
WHEN DOES NATHAN LIKE TO FLIP?
In short, Nathan doesn’t invest to flip and make a quick buck. He invests for the long-haul, and counts on his property net worth growing over time. The aim is to create as much net worth as possible, and sometimes flipping can help an investor get from A to B. If flipping one property helps to pay down debt elsewhere or buy a few more, then it sounds like a good idea.