The task seems simple and easy. Buy a house then beautify it a bit, sell it at the market and then earn a big profit. We can see about a few TV shows with attractive and well-dressed investors who present this project as enjoyable, quick and rewarding.
But the truth is, the path to real estate wealth is not entirely about “sold” notices or maybe, curb appeal. There are quite too many real estate entrepreneurs who ignore the basic rules and fail as a result.
How does Property Flipping Works?
Flipping or wholesale real estate investing is a type of real estate investment strategy where the investor buys a property not to live in it but intending to sell it for profit.
You may ask how to get that profit? It is typically drawn from a hot real estate market where the prices are growing fast or from the property’s capital improvements or both. An example is an investor could buy a fixer-upper in a popular and in-demand neighbourhood, do extensive renovations and then put it back up in the market at the right price that echoes its new look plus amenities.
The investors who do property flipping focus on the purchase and the succeeding resale of a single property or a bunch of properties. Most investors try to make a sound and consistent income stream by engaging often in repeated flips.
Thus, how can you flip a house or an apartment? In other words, you wish to buy low and sell high, like most other investments. Yet, you do not follow the wait-and-see approach or the buy-and-hold scheme — you transact completely as fast as possible to not risk your capital for a long time. Normally, the focus is on speed rather than the maximum profit. The reason? Every day that you count costs more money (property taxes, mortgage, utilities, insurance, and other home ownership expenses). This is the ideal plan, but there are many drawbacks.
Where do you Start Renovating for Profit?
Start with this best piece of wisdom: maximize your return potential but control your financial risks. Or in simple terms, it just means do not pay hugely for a home (if you know what its value is) and ensure that you know as well the estimated amount of upgrades or repairs it will cost you before making the actual purchase of the property. With all this information, it’s much better to draw out an ideal purchase price.
Three figures will eventually determine your success or failure: Purchase Price, Total Renovation Cost (including Holding Cost) and Property’s Selling Price (net of Selling Cost). Any professional renovator or experienced developer when sizing up any property would already sum up these figures in their heads. With the wealth of experiences they’ve had in doing renovations and property deals – they would know realistically how much things cost and the maximum amount they can spend to at least make a reasonable profit.
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Consider yourself luck, as we have an Online Renovation Feasibility Tool to assist you with your “financial due diligence.” Beginners can certainly commit many mistakes once they blow up their allotted budget, underestimate costs, or overcapitalise (spending beyond its resale value). Our suggestion is to get several quotations for every item, research the prices online, and do meticulously the costings for every facet of the renovation.
How to Do a Proper Feasibility when Flipping Houses for Profit
Here’s the most significant point of all: When you blow out the budget for renovation, this is not efficient and can result in cash-flow problems and disgruntled suppliers, aside from making you stressed and down. It all boils down to good budget preparation and proper execution during renovation time.
Do you know where you make your money? — It’s by carrying out feasibility and cost estimates while making assessment of the market trends at the same time.
Talking to your accountant now than later regarding capital gains tax, repairs, and improvements may be beneficial as the holding period of your property and the timing of executing your renovation works affect a great deal to your taxable bottom line.
Our House Flipping Feasibility Tool lets you compare 4 different properties at the same time to help you identify which project could bring maximum revenue after renovating, or manufacture capital growth and sell after.
But before you start using the feasibility tool, best to understand all the fields first.
- Suburb is the name of the area. You can also type in the address of the property instead.
- Suburb Median Price is the median property price for the area. Median price varies based on number of bedrooms.
- Advertised Price is the amount required by the vendor for the property to sell.
- Price to offer to the vendor is the amount to be offered to the vendor which is usually lower than the advertised price.
- Mortgage is the percentage or the amount you need to borrow to purchase the property.
- Deposit is the outright cash needed to use as initial payment to buy the property.
- Other costs include Lender Mortgage Insurance (LMI) if applicable, Stamp Duty, Solicitor, Pest inspection, etc.
- Property acquisition cost is the total amount required that you must pay right away to purchase the property.
- Renovation cost is the amount required to spend to do the renovation. As a rule of thumb, your renovation cost should not be higher than 10% of the property’s value or sold price if you’re renovating and selling the property. The 10% would include both labour and materials.
- Contingency is an emergency fund which you can use in case some unforeseen event happens during renovation.
- Total renovation cost is the sum of renovation cost and contingency.
- Holding period is the total number of months you’ll hold the property. It starts from the day you settle and ends from the day the property is sold after renovation.
- Monthly repayment is the amount you pay the bank based on the interest rate on your mortgage.
- Monthly council rate, water rate, and electricity are monthly recurring costs for holding a property during renovation.
- Monthly insurance is the amount you pay for the premium of the building insurance which is important when buying a property for flipping or holding.
- Total holding cost is the estimated total amount needed after you settle to the day the property is sold after renovation.
- Selling costs such as agents commission fee, advertising & marketing costs, styling, legal fees for engaging a solicitor, and other miscellaneous costs are the fees associated when selling a property.
- Total selling cost is the total amount to pay when selling the property.
- Total cash needed to fund the project is the sum of outright cash required to acquire and renovate the property.
- Total project cost is the sum of total cash needed for the entire project which includes acquisition, renovation, holding, and selling.
- Target sale price is the amount you aim to sell the property after renovation.
- Target profit is the amount you expect to make, before tax, after selling the renovated property.
- Target profit in % is the amount in percentage that you expect to make, before tax, after selling the renovated property.
Now that you understand what each field represents, you can start using the feasibility tool.
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Top 5 MUST-HAVEs for Home Flipping
Comparing it with other small businesses, this venture requires money, time, skills, knowledge, hard work, good planning, and patience. It’s probably ending up being tougher and more costly than you’ve ever envisioned. Do it gently at your peril, not to run the risk of a negative outcome: if you’re merely wanting to get rich fast through home flipping, the results can be disastrous, and you may be likely poorer in the end.
The following are your MUST-HAVES so you avoid the usual pitfalls in property flipping if you’re planning to do it:
1. MONEY
Getting into real estate is costly, the very first expense being the acquisition cost for the property. Of course, there’s a proliferation of no money down or low-down payment financing schemes here and there – but checking such deals from a legit vendor is much easier said than done. Plus, if you’re the one who finances the purchase, then you also need to pay interest.
2. TIME
Flipping homes and renovations are both time-consuming endeavours. Finding and purchasing the right property can take a lengthy period, like several months. As you own now the house, there’s a need for a lot of time to invest in refurbishing it. This can mean lost weekends and weekday nights especially if you have a day job since you will have to spend time on demolitions and construction. Paying the skilled ones to do the job is also an added time since you’re expected to go over and supervise the activities. Paying these people will also lessen your profit.
It can then be quite an investment in time in selling the property so it’s crucial to evaluate the ‘Days on Market’ or how long a property takes to sell for a particular suburb. A suburb that has an average of 50 days on market or less signifies a perfect area to look for properties to flip.
Other instances where you will spend a lot of time include traveling to and from the property and attending meetings. Now, if you employ a sales agent – you will have to pay a commission. Is this worth it? For most, it is rather more sensible to go along with a steady day job that earns for them a regular salary than risking themselves with erratic schedules and random meet-ups.
3. SKILLS
The actual money in house flipping boils down from sweat equity. If you’ve got hands to do some hammering, hang some paintings, install a bathroom sink, or enjoy putting on tiles – you’ve got some skills to flip a house.
Skilled professionals, such as plumbers and carpenters as well as professional builders usually do house flipping as a side gig to their regular jobs. After all, they’re skilled and knowledgeable in this aspect. They have the experience to find and fix a house.
When you could not tell the difference between an open wrench and a box wrench, for example, then you will require a professional worker to take care of the repairs and renovations in your property. Unfortunately, this will lessen the odds of having a considerable profit on your investment.
4. KNOWLEDGE
For you to be successful in this industry, you should know how to select the right property in the best location at the correct price. For instance, in a community of $150,000 homes – you are not expected to purchase at $80,000 and sell at $250,000? The market is much too competent for that to happen normally.
The key is knowing what renovations are to be done and those that can be skipped even though you might have had the best deal of getting away with a foreclosed property – getting a dream for a song. You should be able to recognize the applicable laws. You should realize when is the time to cut losses and get out before your project goes into a financial drain.
5. PATIENCE
Compare the two: professionals plan and take the time to choose the right property, beginners buy the first house they see impulsively. These beginners will hire the first contractor who bids for the work that they couldn’t do. Conversely, professionals have pre-arranged trusted and competent contractors do the job or they may do the job themselves.
For selling: the professionals will bank on the “for sale by owner” endeavours to be able to save up on costs and keep the profits to a maximum. On the other hand, beginners are assumed to do things urgently – go through the process in a haste, get the property a fresh shade of paint and expecting a huge return. The professionals take it the other way: they certainly know the ins and outs of buying and then selling houses and that this process takes time. They also know that the profit margins are not that high at times.
How to do Cost Estimates for Renovation?
- Upgrade the floors – Pulling out an old carpet or discarding old floor tiles is an extremely extensive improvement for the greatest impact. But not certainly a cheap activity.
- Revitalize with new paint – It is one of the most effective means to transform any property. Whenever you apply even just one fresh coat of paint to ceilings makes the space livelier and brighter. For walls, you may select a classic, modern scheme. They say that for every dollar invested in painting, you’ll gain usually a $5-$10 return.
- Revisualize the Kitchen – Most buyers agree that the kitchen and bathroom are the top 2 cost centres. When they purchase, if they renovate the kitchen – it will cost them about $20K and for the bathroom, $15K. If those areas are not touched, then this means they can generally give you a discount of up to $35K if such areas are not renovated at all. Of course, you can always do them for lesser costs.
For kitchen refurbishments, it should cost usually 2% vs. the property value at present, for bathroom – it’s 1.5%. Thus, if you have a property worth $400,000 – all fixtures, materials plus fittings should add up to a total of $8,000 for all the expenses.
- Invigorate the bathroom – Refresh with tile paint and do some resurfacing if the bathroom still has a good structure but looks dated with the wrong design or colours. You can gain a fresh new look doing it for just a day, plus it will not cost you so much if you keep the existing fixtures.
- Spruce-up the windows – Installing window accessories/treatments are important for the makeover. Blinds typically are inexpensive and convey the modern style.
- Revamp the entrance – An automatic curb appeal suggests that potential buyers will not drive past your property but instead stop and check. Top tasks for this may mean tidying up with a pressure washer, some fence repairs, and a quick painting fix.
- Upgrade the driveway – You may use paving paint to easily do a facelift for your driveways and pathways. Remember that a dull driveway can degrade the value of the property.
- Improve the interior’s doors – So many dull doors made of timber simply need to be given an upgraded look with just a fresh coat of paint and perhaps, a new handle. No need for you to buy the pricey door handles since some good ones are just really fake clones and look great.
- Go for the LED lights – Pull out those old pendant lights and replace them with halogen or eco-friendly LED sunken downlights. The goal is to brighten the structure.
- Keep the lawns green – Lawn is usually valued as a high commodity though most residents tend to like a front yard made of concrete for easy maintenance. But having both a front and back lawn (especially green and well-manicured ones) add to the character of your home.
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Key Takeaways
House flipping is anything but easy, it is business like any other. You need to have the knowledge, planning skills, and practicality to make it a success!
A mistake that house flippers usually commit is unfortunately overestimating their skills and knowledge.
And the general flaw which the novice property investors fall into is this: underestimating the time or money the project will require.
The conclusion: Two attributes that house flippers must have which are essential in a time-based business-like real estate investing are patience and good judgment.
