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If flipping a property is part of your list of pet projects this year, check out our top tips for doing it the right way.
The new year presents an opportunity to take on new challenges. For people who have been watching The Block or other home improvement television shows and saw the potential of renovating properties to make a quick profit, flipping houses may seem like the perfect new project to take on.
But in reality, flipping homes successfully is not as simple as it is made out to be on reality TV. Being a house flipper is hard work, and it can be a bumpy road.
When we think about the investment of finances, time and emotion that can be involved in this type of property investing, house flipping may not be up everyone’s alley. A lot of people underestimate how challenging it is to flip homes when investing in real estate, which can lead to problems and financial losses.
However, at the same time, it’s this challenge and the potential profit to be made that inspires ambitious Australian investors and renovators to get their hands dirty and have a go.
In this article, we round up the top tips that can help you maximise your chances of successfully flipping properties.
What is real estate flipping?
Before we give you strategic tips on how to succeed at flipping homes, let’s take a look at what the process involves.
Real estate flipping (also called a fix and flip) is an investment strategy that typically involves these three strategic steps:
Step 1: Find and purchase a property to buy (usually an undervalued property).
Step 2: Renovate the property to maximise its appeal and value, also referred to as the “fix” part.
Step 3: Sell the property and make a worthwhile profit over your total purchase price and renovation costs, which is the “flip” part.
In a nutshell, it’s buying a property with the goal of renovating it and selling for a profit a short time afterwards. It is generally viewed as an alternative investment strategy to buying a house and renting it out.
The profit generated from flipped homes depends on several factors, including how undervalued it is when you buy it, how much money (if any) you spend renovating it, and how much you sell it for.
When talking about house flipping, it’s common to read about investors using the 70 per cent rule. This rule of thumb is used to determine what price to pay for a fix and flip to make money. Make sure to read our article on how the 70 per cent rule works before you implement this strategy when buying a fix-and-flip property.
Top tips for property flipping
1. Take a business approach and plan ahead
People who have been in the business of house flipping for a long time know that there is a lot of drama and stress that renovation projects can involve. This is why it’s a good idea to treat any flip as a business.
Create a business plan that will provide you with precise and achievable targets for your project. Make sure to have realistic timings, well-researched budgets and measures to help you hold yourself accountable. Ask questions such as:
Asking these questions will help you formulate a more grounded and well-thought-out plan. Additionally, a good road map will help you keep your head on your shoulder when the pressure ramps up.
2. Make sure to buy the correct property for your goals
A seasoned house flipper will tell you it’s not what you sell for – it’s what you buy at. Buying the correct property is vital for a successful fix and flip. Experts advise walking away from any property that is not underpriced or undervalued.
They also advise not getting caught up in an auction frenzy and wait for the right property to be within your sights.
Aside from being undervalued, the property should also have renovation potential if you want to follow a “fix and flip” strategy to maximise your profit.
The ideal property you purchase to flip should also conform with what’s in demand in the local market. This will enable you to focus on renovating the property to be up to (or beyond) the required standards. This is why in some instances, experts advise against going for unique properties.
Unique properties are real estate that is located in a challenging location (e.g. clifftop, forest, hillside or a sloping block), are quirky (like architectural one-off designs or conversions) or are historic and older homes (like a Victorian home or century-old structures). These types of properties usually take longer to renovate due to the challenges they present that are not found in common homes.
Unique properties may also only appeal to a small pool of niche buyers, so you are limiting your resale market considerably. But if you already have connections with buyers who are on the hunt for unique properties, it may be a rewarding flip.
To begin your search, you can start by browsing online listings. For a more hands-on approach, try getting in touch with a local real estate agent in the area you want to buy in. These professionals tend to know their market intimately and have a deep insight into the local area.
They know what sells quickly, what people are looking for, what they’ll pay a premium for, and what they are willing to pay in the current housing market conditions. They also have contacts that can give you access to off-market listings and know a renovator’s delight when they spot one.
3. Get your finances in order
Like any investment property, you can seek financial assistance for flip houses. There are plenty of lenders who provide loans to flip houses, given that you meet their lending criteria.
Fix-and-flip loans typically work like any other investment property loan if you’re renovating. Before applying, make sure you are able to afford your loan repayments and any additional terms and conditions specified by the lender.
The two main types of fix-and-flip loans are principal and interest loans and interest-only loans. Generally, repayments on interest-only loans are cheaper because you are only repaying interest. Meanwhile, repayments on a “principal and interest” loan require you to repay both the amount you borrow plus interest.
It’s important to be strategic about the financing for your flip home. Don’t go thinking that it will not matter because you will not be repaying the loan for a long period of time.
It also means that you should consider getting a loan with a rate at the low end of the market, with the flexibility to be repaid early, which will exclude most fixed rate loans. Of course, you must be able to afford the repayments, or the bank will be the one to make the decisions for you.
After choosing the right loan, go armed for preapproval with an idea of what you’ll need to spend on a property to maximise its appeal without over capitalising and going over your budget.
Aside from financing, keep a close eye on all your costs. Make sure to account for all the costs involved when acquiring a property, including land taxes, stamp duty, holding costs, insurance, paying tradies etc.
Prepare for all eventualities, such as not being able to sell for the price you want and holding the property longer than you originally intended. Build in a contingency for when things don’t go to plan with construction or timings. Factor in interest rate rises, unexpected costs, as well as changes in market conditions.
4. Buyer comes first
It’s easy to get caught up in the reno frenzy, and you may start to blur the lines between renovating for your own home and for your investment property. And while you may be into eccentric decor and colourful wall paint, some of your potential buyers may not be.
When flipping a property, think about the target buyer demographic when planning out your renovations. Research what they are looking for and what will appeal to them when it comes to design and style choices. This will allow you to have a bigger buyer pool, and you will not have a hard time selling the property.
5. Be prepared for the work and challenges involved
House flipping is not for the faint of heart. No matter how big or small your renovation is, it’s almost inevitable that there are going to be high emotional states and stress levels during the process.
And while most people think that renovating a property means setting aside some hours during the weekends for the project, this is far from the truth.
Extensive structural renovations can include adding to the back of an old terrace, modernising the property, adding an en suite, making another room and adding an upstairs; works that will require almost round-the-clock supervision and constant communication with tradies and other professionals who are involved in the project. The time constraint, as well as working with a strict budget, will also add to the pressure.
To help you prepare for the haul, get ready to be involved in your project beyond a Sunday afternoon. Be stringent about following timelines you have set but also be ready to put in more hours than you intended.
To alleviate some of the stress, it’s also advised to shop around until you find a team you feel comfortable with and be upfront about your expectations and budget with them. Make sure you have a very clear budget and stay on top of it from the get-go. Negotiate with your contractors for their best hourly rate and their professional estimates of time and cost before you kick the project off.
It’s no secret that stress comes from the feeling of being out of control and out of your depth. But when you get all your preplanning in place, and you go into your renovation with a full arsenal, house flipping can and should be an incredibly rewarding experience.
Disclaimer: This is a general guide only and is not intended as a substitute for financial advice.
If you’re a first-time buyer looking to enter the real estate market this year, don’t go unarmed! Make sure to bring Smart Property Investment’s brand-new white paper, Why 2022 is the right year to invest for beginners with you on your property investment journey.
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