admin-ajax.php

Why Flipping Houses Are Likely To Flop

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

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 houses?

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…

Flipping Houses  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 successful house flipping is knowing the types of improvement you should make to the property to maximise your bottom line. 

ad_build_wealth

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.

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 worth while, 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. property

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 – “house 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 flipping houses work?

While this strategy might make a few experienced property investors 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 house flipping 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.property time market clock house cycle investment timing watch growth

The problem is that most experts, let alone beginning property 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 profit from fliping houses 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? Property-Investment-Checklist-300x199
  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.property cycle

The risks of overcapitalizing on flipping houses 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 quick profit.

Boring?

Perhaps.

Tried and tested?

Most definitely!

As I’ve shown above, losing substantial chunks of your investment profit with flipping houses 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.property house money capital

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?

If you’re looking for independent property investment advice to help you become financially independent, no one can help you quite like the independent property investment strategists at Metropole21138688 - 3d people - man, person and question mark. confusion

We’ll help you cut through the clutter of mixed property messages.

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.

Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.

Please click here to organise a time for a chat.

OR CALL US ON 1300 20 30 30.

When you attend our offices in Melbourne, Sydney or Brisbane you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.



icon-podcast-large

SUBSCRIBE & DON'T MISS A SINGLE EPISODE OF MICHAEL YARDNEY'S PODCAST

Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.

icon-email-large

PREFER TO SUBSCRIBE VIA EMAIL?

Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.


Avatar for Property Update

About

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


'Why Flipping Houses Are Likely To Flop' have 11 comments

  1. Avatar for Property Update

    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

    Reply

    • Avatar for Property Update

      September 19, 2014 @ 10:01 am Michael Yardney

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

      Reply

  2. Avatar for Property Update

    September 19, 2014 @ 7:40 am [email protected]

    Hi Micheal,
    Good article and I have experienced the same thing. I spent $250K on an Expensive Upper North shore reno in Sydney. In reflection, I would have been better of doing nothing and using that cash as deposits on a couple of properties ( and save all my weekends)

    Reply

    • Avatar for Property Update

      September 19, 2014 @ 10:03 am Michael Yardney

      Mark
      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

      Reply

  3. Avatar for Property Update

    September 19, 2014 @ 10:36 am Brendan

    Hi,
    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!

    Reply

    • Avatar for Property Update

      September 19, 2014 @ 11:05 am Michael Yardney

      Brendan
      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

      Reply

      • Avatar for Property Update

        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.
        Brendan

        Reply

        • Avatar for Property Update

          September 19, 2014 @ 4:14 pm Michael Yardney

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

          Reply

      • Avatar for Property Update

        August 10, 2017 @ 2:43 pm Cathy

        I think you generalized and criticized. Your comments were very general and they were based on ONE renovating course’s strategy (as in one company) – not ALL teachers who have courses in this subject.
        I have a very comprehensive course that teaches people how to do the numbers on their property so that they know whether their home is a flip, a hold, or hold for a short period and then sell.
        Its sounds to me like, you may be a ‘general’ property expert – but renovating is NOT your area of expertise. :-)

        Reply

        • Avatar for Property Update

          August 10, 2017 @ 4:57 pm Michael Yardney

          Cathy
          Thanks for your comment. Interestingly my team completed 70 renovations last year and 75 the year before ,and much the same the year before that – in fact we’ve competed close to 1,000 now so I’ve made all the mistakes and learned many of the lessons.

          Reply

  4. Avatar for Property Update

    July 20, 2017 @ 12:21 pm Audrey

    With the trend in the current generation where they tend to move houses regularly, buying a house and lot is no longer considered a productive asset. This mobility calls for more transient housing rather than real estate ownership. However, with flipping, the risk of flopping is a sure thing. Even without expertise in house renovations, one can still do a profitable business out of buying and selling properties by having a reputable home renovation builder help you assess what possible improvements and restructuring would be needed and how much it would cost. Have an expert who can also assist with the documentation process in both the government and insurance companies, and hold to the property to rent it out instead. You get an asset that pays for itself and produces longer time profit for you.

    Reply


Would you like to share your thoughts?

Your email address will not be published.
CAPTCHA Image

*

facebook
twitter
google
0
linkedin
0
email

Michael's Daily Insights

Join Michael Yardney's inner circle of daily subscribers.

NOTE: this daily service is a different subscription to our weekly newsletter so...

REGISTER NOW

Subscribe!