In general, flipping is buying something and reselling it for a higher value. When it comes to real estate, this is also true and normally requires a renovation to get the higher resale price.
If you don’t quite follow, let me break it down:
- You purchase a dumpy or run-down property
- You fix it up, renovate and improve it
- You put it back on the market after fixing up for a higher value (the flip).
The idea is to make a good profit in a relatively short period of time.
But beware, this is a higher risk venture for those who have not done it before and is more akin to property development rather than property investment.
If you are a passive, laid back investor, this strategy is not for you. But if you are motivated, have more time on your hands and have some handy skills such as carpentry, plumbing, landscaping or even project management then these skills can be applied to this strategy.
Best House in Worst Street
You may have heard this catch phrase being thrown around “Always buy the worst house in the best street”. Whilst you can abide by this phrase as a regular property investor, it is more suitable to the flip type of deals.
Buying the worst house in the best street means that if you find a tired old house in a really good area (where people want to live) then there is the opportunity to buy it cheaply and bring it back to a good, liveable condition.
Who Does All the Work?
When considering whether to get into flipping, first think about who will be doing all of the renovation work. Will it be you? Will you hire contractors to do it? A mixture of both?
Unless you’re the ultimate handy-man (or woman) it’s unlikely you can do a full renovation by yourself in a reasonable amount of time. Of course you will save heaps on labour, but if you don’t know what you’re doing, it could end up being way more costly due to mistakes.
Even just project managing a group of contractors can be a challenging job, especially when you don’t yet have a “team of experts” that you can rely on.
I know for myself, I once painted my bedroom and it took me days. And I didn’t end up finishing off the job properly. From that experience, I realised I am not the type of person who can work a 10 hour day doing renovation work.
Having said that, I have done renovations on a property successfully by paying for the experts to get the job done. On my first house, I spent $10,000 on getting an air conditioner installed, new ceiling fans installed, new blinds, new carpet, a new oven/stovetop and new fencing.
That was for bringing the property up to scratch to get a better rental return, but believe me it was so much easier to get professionals to do these jobs than to have even contemplated doing them myself. Especially carpeting, I wouldn’t know where to start!
Doing the Numbers
Doing a “flip” deal can provide a large gain in a short period of time. If you’ve decided that you are up to the challenge, have accepted the risk factors and are ready to start looking for the ideal property then let’s take a look at the numbers.
You will want to search for run down properties where the cost of restoring them will be significantly less than the increase in the resale value of the property.
You find a run-down house on the market for $350,000. You also note that other similar houses in the street are selling for around $500,000 once fully renovated.
So you can see there is the potential to make a gross gain of $150,000 but only if the cost of the renovation is significantly less than $150k.
This is the crucial part of the deal; you must now estimate your costs. It will be quite difficult to get a bunch of quotes on a property that you have not yet purchased and unless you have prior experience, this will be more or less a guessing game.
Knowing that, you should be very lenient with your estimates.
So let’s say you make the following guestimates:
- Polished Floors $7,000
- New Carpets $5,000
- New Inside Paint $6,000
- Landscaping $10,000
- New Insulation $2,000
- Fix up Plumbing $2,000
- New Kitchen $10,000
- New Bathroom $7,000
- Mortgage Interest $4,000 (holding cost)
- Extras $5,000
It’s a good idea to have an “Extras” item to allow for things you didn’t think of. It’s virtually impossible to imagine every possible scenario you might face when renovating a property. For example, running into a structural problem that must be fixed that will not add any value to the property.
So in our example, we have $58,000 of expenses.
Resale Price – $500,000
Minus – $58,000 Renovation Costs
Minus – $350,000 Purchase Cost
Minus – $10,000 Taxes and Establishment Costs
Minus – $12,000 Agent’s Commission on Sale
So this deal has the potential to make us $70,000 in a short period of time. The time frame is related to the cost and therefore you should always try to get the job done in as shorter time frame as possible. Let’s assume for this example you are aiming to get it all done in 3 months.
This is definitely a viable deal but your end result will depend on:
- Finished in required time frame
- Blowouts in cost of contractors
- Unexpected renovations
- Does the finished property sell quickly?
- Does the finished property sell for the expected price?
It can be clearly seen that this type of investment strategy can work well for generating quick cash profits but at the same time, there are so many variables to control that it has the potential to lose money too.
If I were to personally try this for myself, I would try to make a profit on the first go but assume that I wouldn’t. I would treat the first time as a learning experience and then determine if it was a strategy I would want to try again in the future.
If you decide to try flipping for yourself, hopefully this article will give you a real picture of what to expect and also what to be careful of.
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