Why property flips are likely to flop

Have you ever thought of tarting up an old property to on-sell and make a quick profit?

Of course this concept is often taught at property seminars and has recently been popularised by reality television shows like “The Block”.

But can you really make a living flipping properties?

If you’re after a quick buck I’m sorry to disappoint you; while buying a run down property at a good price, improving it and selling it for a profit sounds good in theory, in reality most property flips flop!

Let me explain why…

Flips in theory – double or nothing

Proponents of this strategy and those who sell courses teaching how to do this will tell you that the key to a successful flip is knowing the types of improvement you should make to the property to maximise your bottom line.

They suggest that you should at least double your renovation outlay, aiming for about $2 for every $1 spent on cosmetic improvements.

In order to achieve such lofty profits you are usually taught to undertake a heap of due diligence, researching:

1. Local property values and the growth history of the actual building to be improved.Money_calculator

2. Ceiling prices – what is the highest property price achieved in the area? Obviously if nothing has sold for over $500,000 and you need to achieve $600,000 to make the flip worthwhile, you could end up in hot water.

3. Costs and potential profit margins – is there anything in it?

This is the (sometimes literally) million-dollar question.

You need to have an idea of how much the renovations will set you back, the quality and reliability of local tradespeople (as this will impact your timeframes and end budget) and how much the local market is prepared to pay for a home improved to the standard you have in mind.

4. The market itself – you need to become a local real estate expert understanding your target market, who is your potential buyer, what they expect and what they’re prepared to pay.

5. The target property – “flippers” tend to go for properties being sold by highly motivated vendors. The theory is to buy at the lowest possible price – clearly something very difficult to do in today’s sellers market.

So can flips work?

While this strategy might make a few experienced punters money, in my opinion it’s the wrong strategy to adopt because:

  1. To improve a properties value by $2 for every $1 you spend on it you need to do much more than the simple cosmetic renovations – the type which are in the scope of most D.I.Y’ers.
    It usually involved structural renovations that cost more, take more time, require permits and involve a different level of expertise.
    And even if you can undertake this type of work…
  2. Most of your profits will be eaten up in costs.

Once you look at the table below you’ll see that in a typical flip project you associated costs could easily add an extra 50% to your renovation budget of $75,000 when purchasing a property for $400,000 and trying to flip it after renovation for $550,000table2

But when they do it’s likely that you’ve fortuitously caught the right stage of property cycle and values have moved in your favour.

The problem is that most experts, let alone part-time investors, have real trouble pinpointing where we are in the cycle until it’s already moved on to the next phase!

You must also be cautious with asset selection; one false move could trip up your flip.

That’s because budgets and time frames are at serious risk of a blowout should you purchase a property that, at first glance, looks like it’s in need of a few cosmetic enhancements, but actually turns out to be a structural money pit.

The main you profit from flips is to update a property without getting into costly repairs or extensions, like replacing roofs or re stumping.

These “invisible” works don’t seem to add much value, as purchasers want to see the “bang for buck” and only tend to pay you top dollar for a tangible wow factor.

This means that a preliminary pest and building inspection is an absolute must, along with properly qualifying the level of work required by consulting builders and tradespeople.

Then of course there are other considerations:

  1. Are you going to project manage? Do you have the necessary time and skills to coordinate trades in the right order and a timely manner?
  2. Do you have a contingency fund should things go pear shaped?
  3. Will you need to go through lengthy processes to obtain council approval for structural works?
  4. If you buy a property managed in an apartment complex you’ll need approval from the owner’s corporation?
  5. Can you afford to hold the property in case it doesn’t sell according to plan?
  6. What about the selling costs? Real estate agent, advertising and legal fees, as well as early discharge fees on loans over the property will all eat into your profit margin.

Sexy versus stable

While donning a project manager’s hardhat can be a romantic notion, there’s much to be said for a more “steady as she goes” approach.

The risks of overcapitalizing on a flip and coming out with nothing but a headache at the end is very real; as is the potential to complete your project only to be faced with a market that’s cooled its heels.

After investing through numerous property cycles, I am now convinced that you create sustainable wealth by accumulating and growing your asset base over time rather than by trading, renovating or developing for a Free_property_sales_reportquick profit.

Boring? Perhaps.

Tried and tested? Most definitely!

As I’ve shown above, losing substantial chunks of your investment profit with flips is a real concern when you factor in all the buying and selling costs, as well as interest and holding costs as well as loan establishment fees.

Remember, you don’t have a tenant in there helping to pay the mortgage while you’re undertaking improvements.

And of course if there is any profit left over, the tax man will take his share.

Rather than dabbling in the high-risk flip type of project I would recommend investors buy, renovate and hold on to their properties.

You see… rather than selling you can release your newly manufactured equity by refinancing your property.

By doing so, you will not only retain all of your post-renovation profit, but you’ve retained that great newly renovated investment property, which should attract a wider range of tenants, command a higher rent and give you the benefit of depreciation allowances.

That’s what smart renovators do!

Why not Metropole help you with your next investment or reno?

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Remember the multi-award winning team of property investment strategists at Metropole have no properties on the market to sell, so their advice is unbiased.

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Michael is a director of Metropole Property Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He's been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au

'Why property flips are likely to flop' have 8 comments

  1. September 18, 2014 @ 10:34 pm Sarah P

    Thanks Michael for another great blog.
    A few years ago friend of mine went to an expensive 3 day workshop by a well know female renovator and found that she was told she could do renos for a living flipping properties. In fact she was told if she followed the formula and checklist success was guaranteed. She bought a property, followed the formula and lost big money despite the rising Sydney property market.
    You are so right with this blog


    • September 19, 2014 @ 10:01 am Michael Yardney

      Yes it sound enticing, buy value add and flip – but it doesn’t work in reality


    • September 19, 2014 @ 10:03 am Michael Yardney

      If you undertook to the reno to keep the proeprty in the long term it may have worked out, but maybe “you” shouldn’t have done it, but paid someone to do it


  2. September 19, 2014 @ 10:36 am Brendan

    Yes there is every chance that investors looking to make money from reno-flips can get it wrong and lose money – usually from poor propetry selection, blowing reno budgets and time budgets, and not delivering into the market the product that owner occupiers want to buy. That said, I am always a little nervous that the publicly declared negative experience of some could influence many potential successful active dedicated renovators from undertaking such an approach.
    It is very important to know what you’re getting into so speaking to others who have made a success of it is critical. And I’m not talking about the stage presenters, but rather those living it daily.
    There are many people touting personal success from the strategic approach… I personal know very many people making money in property with this strategy – even today. (Admittedly, not in Sydney right now)
    I am not a fan of sweeping generalisations that discredit the success of others. A Buy-Reno-Sell strategy does work and can be a source of creating wealth. It is a high effort, time intensive strategic approach, but it can create wealth for those committed and dedicated to achieve it this way.

    Just a thought in favour of the possibility!


    • September 19, 2014 @ 11:05 am Michael Yardney

      Thanks for your comments and I agree this blog is a generalisation. I also know you’ve been successful at renovations yourself.
      Having said that I’ve found that most “part time” renovators can’t make the profits they were expecting and in my mind the aim of investing in real estate is to grow your asset base – you don’t do this by flipping, but you can using the buy, renovate and “hold” strategy


      • September 19, 2014 @ 1:15 pm Brendan

        Hi again Michael,
        Great to be chatting with you! :)
        My mind immediately goes to two points… 1. the expectations of the part time renovator & 2. the building of an asset base.
        I agree that the expectations of profit from a part time renovator can easily be blown out of proportion or even romanticized by property spruikers touting renovation as an easy way to create fast cash. And in this there is a vulnerability for the part timer to get it wrong and fall short of the expectation of profit that they set out to achieve. But again, it depends on the dedication and commitment of the part time investor to get it right before buying. I still say it’s possible to achieve profit in renovation for part timers. Which leads me to the second point…
        As an idea, an Asset Base is simply cash in different forms. An Asset base can be shares, property or even cash in the bank. Each will obviously attract different rates of return – none the less, they all forms parts of an asset base.
        If the primary objective is to build your asset base – and I absolutely agree that it is – then doing reno’s repeatedly and successfully still achieves the goal.
        As a challenge… doing reno’s in a flat market, making a profit and repeating the process will actually yield a faster rate of growth to your asset base, than holding a renovated property in the same flat market.
        Again… thanks for the conversation.


        • September 19, 2014 @ 4:14 pm Michael Yardney

          You make some excellent points Brendan – that’s why you’re such a successful property mentor


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