Buying Again - 30 Sep, 2020

Pros and Cons of Buying a House to Flip

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Made popular by reality TV-shows such as The Block and House Rules, for the creative and DIY-savvy house flipping is a fun way to invest. However, like any form of investment, it does have its risks, and it’s not always the money-builder that it’s made out to be.

To learn about some of the pros and cons, we sat down with experienced flipper and real estate agent Wendy Chamberlain for advice and tips.

What is house flipping?

House flipping is an investment strategy where the buyer purchases an often unappreciated or run-down property and ‘flips it’ by carrying out renovations to improve its value, the end goal being to sell for a profit. This is usually done as fast and efficiently as possible.

Today’s market

In today’s market house flipping can still be a valid investment strategy, however, as Wendy told us, to be successful you must know what you’re looking for.

“There is money to be made, irrespective of what the market is doing.  The current market is no exception,” she said.

“You need to know your numbers. You need to know your buy price, your end sell price, what it is going to cost you to renovate the house and what your best and worst profit margin will be. Run this rule of thumb over any potential deal. If the numbers work, then that property could be your next project.”

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However, many experts believe the optimum time to house-flip is during a market uplift, when you’re most likely to make a profit – something recent CoreLogic data suggests some Australian cities could be doing right now.

Recent data shows an increase in home values in Canberra, Brisbane and Adelaide since July, with Perth prices stabilising. Commenting on the report, Financial Review Columnist Christopher Joye wrote that the data suggests a correcting market, albeit noting the future uncertainty COVID-19 continues to hold.

“There are signs the modest coronavirus-induced housing correction may be coming to an end in all cities but Melbourne,” he said.

“There are nonetheless threats to this outlook, including a second wave in NSW and the potential for a tsunami of mortgage defaults next year. But on the balance of probabilities, our March forecast for a modest correction followed by strong house price appreciation in the order of 10% to 20% …”

You might also like: Federal government package offers $25,000 grants to home builders, renovators

Pros and cons of house flipping

Pros

  • Build equity quickly: There is a greater chance of boosting the property value faster than with traditional methods of property investment, which rely on appreciation over time.
  • It’s a fun hobby: If you’re creative and love renovating, house flipping is a fun and hands-on way to invest.
  • Personal development: Through the renovation process, you will likely gain management and coordination experience in addition to hands-on reno skills.

Cons

  • Potential to lose money: Like any form of investment, it can be a gamble. The property market can be turbulent at the best of times, and with the added pressure of renovation costs it can only take a few things to go wrong before you start see your profit potential flushed down the (newly installed) toilet.
  • Market crash: While the property market has a wonderful ability to climb and give large profits to investors, it can also experience lulls. House flippers are at the mercy of the property market and should do location research before jumping in.
  • Stress: Are you someone who would find it difficult to coordinate tradespeople? Likely to buckle under pressure? Experienced house flippers will tell you it’s common for things to not always go to plan.

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What to do before settling on a house to flip

Think you’ve found your dream renovation project? Wendy shared a few tips on things to do before settling on a property to flip.

1. Double check your figures

Check that you have the necessary funds to complete the renovation. If something goes wrong and you need to sell a half-finished house, you’re likely to have difficultly finding an interested buyer.

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2. Pest and building inspection

It’s important to check for any underlying issues the property might have, especially since there are many things that can be wrong with a property but go unnoticed until the building or pest inspection.

“For example, the home may require restumping, a total rewire, a new roof, underpinning if it is sinking, to name just a few (expensive) things,” she said.

“None of these things may be obvious to you or – post reno – the end buyer, as they are all behind the scenes. But they are fundamentals that need to be fixed to create the perfect blank canvas to paint your renovation masterpiece.”

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3. Look for signs of property issues during the inspection

Sometimes clues for potential problems will be obvious before you even call a professional, if you know what you’re looking for.

“A home I recently inspected had one floorboard broken, where someone had stepped on it and fell through to the ground below. Those boards had extensive borer damage, so the floor throughout that entire house needed new boards,” shared Wendy.

“Paint peeling or bubbling could mean there is moisture in the house or rising damp. What is causing that moisture? – Is it a rusty roof? Leaking shower? Poor ventilation? Gutters & downpipes dumping rainwater runoff too close to the house?”

4. Know your market

House flipping isn’t just a creative pursuit, so be sure to know who your target market or demographic is and renovate accordingly.

For example, if you are targeting a young family having a bathtub might be important. Likewise, think about whether you need top-of-the-range appliances or whether mid-range products would do.

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What renovations can add the most value to a property?

When it comes to choosing your renovations, Wendy says it’s important to find a balance between the things that need to be done and those that are going to offer “wow factor”.

“Make sure you know what ‘behind the scenes’ are there lurking to catch you out on your budget,” she said. 

“Examples are homes that need rewiring, restumping, replumbing, asbestos removal, a new roof or have termite damage. These all need to be fixed, but the buyer does not necessarily see them.”

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Wendy’s tips for adding value:

  • Modernise the kitchen/bathroom.
  • Give the place a fresh paint.
  • Replace old carpet/polish floorboards.
  • Update light fixtures.
  • Remove old window furnishings and replace with new blinds, curtains or shutters.
  • Tidy up the backyard – i.e. Replace tired fences, add a deck or outdoor entertainment area, tend the garden.
  • If there’s no car parking space consider adding some.

You might also like: Your guide to a complete home renovation

Can you borrow to renovate or house flip?

If you’re the right candidate, most banks or lenders are happy to lend for the purpose of investment however, there can be some caveats when taking out additional funds to renovate on top of the property value. Before committing, it’s always best to check with your bank or lender and seek pre-approval.

Usually, investors can borrow up to 95% of the property value when purchasing an investment property. When carrying out renovations with a licensed contract builder this can include additional funds to help finance the flip.

For those carrying out renovations on their own, this can drop down to up to 80-90% of the property plus finance for the renovations, depending on whether it’s major or minor construction.

For those in need of more funds, having a guarantor can also help. With a parent signing on as a guarantor, well-placed investors can usually borrow up to 105% of the property value plus renovation costs.

Want to discuss your borrowing options? Book an appointment with an eChoice Home Loan Consultant to talk through your lending needs.

Does capital gains tax apply?

That depends, are you planning to live in the property? If so, in some cases you might be able to get out of it or be eligible for a discount.

Capital gains tax is an added cost to your annual income tax assessment and applies when you sell a capital asset, such as real estate or shares. It taxes any profit made and is certainly applicable to any successful house flip.

For investment properties owned for less than 12-months, 100% of the capital gains is taxable. On the other hand, if owned for over 12-months, this is reduced to only 50% of the capital gains. For this reason, many house flippers choose to hold-on to properties for at least a year before selling.

However, the Australian Taxation Office (ATO) exempts properties identified as your principal place of residence from capital gains tax, meaning it’s theoretically possible to get out of it – you might just need to tolerate living on a construction site for a little while. Depending on your flip aspirations and lifestyle this may or may not be feasible.

Want to learn more? Talk to an accountant and/or check out our guide: How to calculate capital gains tax

Words by Kathryn Lee

Looking for a home loan to give house flipping a go for yourself? Contact eChoice. With access to 100s of mortgage products from over 25 different lenders, eChoice brokers have the resources to help you with your lending needs. Best of all? We do all the paperwork!

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