Flipping Houses for Profit – Is It Worth It?
It’s the age old question when it comes to making money from real estate. Should you buy and flip, or buy and hold?
The potential profits of flipping make it sound instantly attractive compared to the idea of boring long-term investing. BUT – how much money do you really make, and is it all that it’s cracked up to be…
If you’re serious about making a buck from property and are leaning towards the idea of a quick sale renovation scheme, then before you begin, pause and ask yourself these key five questions:
1 – DO YOU HAVE THE TIME, SKILLS AND MONEY?
The number one question you need to ask yourself before you consider renovating a property for quick profit is this – will it be the best use of your time, skills and money?
There’s no doubt that the Kiwi DIY-er in us loves the idea of rolling up our sleeves and salvaging some derelict shack and transforming it into a luxury home fit for a king, but the expectation of this VS the reality seldom measures up.
TV shows like The Block and Mitre 10 Dream Home show us a fantasy world of what’s possible, but what we fail to see is the big sponsored budgets, non-competing life priorities and all of the on-the-ground professional man-power that pulls it together in just a few short weeks, with the contestants pocketing millions.
In the real world, it’s not always such a wonderful time. First you have to find the property, buy the property and put some serious renovation plans in place, along with timelines, budgets, trades professionals and other key products and resources. Then of course the work needs to be done.
With so many moving parts, you must assess where your skill set lies. Are you a good project manager? What are you like with managing money? Can you stick to timeframes? Do you have the right support if something doesn’t go to plan? Then of course, how are you going to account for your time from a cost point of view? Will you be taking time off work or is this a project for weekends? If so, how long can you afford for the renovation to go for? What will be the end impact on your profits?
Once you weigh up all of this (and more), you’ll be able to establish if it’s a worthwhile venture or if it’s a better return on investment to stick with your day job.
2 – CAN YOU PUT SKIN IN THE GAME?
Historically, given the right skill-set and approach, flipping has been a great way to make quick money in real estate. However, there are now some additional challenges that make it harder than it’s been in the past.
The most obvious issue potential flippers face is that you can’t renovate new property. So of course, the whole premise is to buy older property that requires work, renovate it to become more desirable, which in turn drives the price up to well above what you paid for it so you can cover your costs and walk away with a decent chunk of change…
Easy right? Well, it was until new laws came in that now require investors to put down a 40 per cent deposit on second-hand stock. That’s a lot of money up front! Be it money or equity, 40 per cent is a high price to hold the deal while the renovation takes place. In fact, some people may not have that available in any form so for them, flipping will be completely off the cards.
3 – DO YOU KNOW YOUR PROFIT MARGINS?
On top of requiring a large up front deposit, you’ll also need to establish what your profit margins look like. As well as your time and other associated costs, you’ll also need to factor in things like tax and GST. In most cases just those two things alone mean that half of your profits have ‘POOF’ – gone!
Only you can decide if the end result will be worth it based on how much you’re prepared to spend, and how long the renovation will go for.
4 – DO YOU KNOW THE DIFFERENCE BETWEEN TRADING AND INVESTING?
This is a good time to explore the difference between being a property trader (flipper), and a property investor (buy and hold long-term). These two strategies work on completely different models, so it’s important to find the right fit for you based on your circumstances and overall life goals.
Flipping as we know is buying a property, adding value to it through renovation and then selling it quickly for profit. Not only do you have to have real skill and expertise, but you have to account for your time, renovation costs, up-front deposit and of course taxes at the time of sale. After all that you may come out with $10K or $50K – who knows? But what we can say for sure is that most property flippers will admit that it’s a bloody hard slog and certainly not for the faint hearted. You also have to hope that market conditions are favourable and that you buy right to begin with. A lot of variables to consider.
Property investing on the other hand is when you purchase a property with the aim to hold it for the long term.
Now I’ll admit, this model is surely not as exciting, but the benefit is that it works for you while you’re sleeping. See, as you’re going about your daily life, your property is getting paid down by tenants and growing in value.
I know many people who just in the last 12-18 months have purchased a property with as little as 10 per cent deposit and have already made $200,000 in capital value by doing absolutely nothing. They’ve made a massive non-taxable gain for very little effort.
Most investors keep their day job because let’s be honest, it’s what they’re good at, and they get paid well to do it. On top of that they’re not spending their weekends and spare time knocking down walls and painting fences.
The question is, which model is going to work better for you?
5 – CAN YOU BE A FLIPPER AND AN INVESTOR?
Short term vs long term – can you do both? It’s a good question to ask considering we just covered the fact that they’re at opposite ends of the spectrum.
It’s important to keep in mind, when it comes to developing a long term property strategy, there are endless ways to generate wealth and it’s quite possible to combine tactics to get the result you require.
For instance, someone who’s confident in flipping may use that as a play to build cash deposits over a short term to be able to acquire a strong performing, longer term investment portfolio.
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Sue Irons
CEO – Positive Real Estate NZ