Property flipping: Is it really worth your time, effort and, most importantly, your money?

Investors always seem to want just a little bit more and as house prices move, many investors will start to think of ways to maximise their returns.  

One of the strategies that will raise its head is property flipping. That is buying a residential investment property, renovating it, then selling it to make a profit. It’s a common strategy, but unless you plan carefully it may not bring the kind of return you were hoping for.  

When you buy a residential property, the state government asks you to pay stamp duty worth around 5% of the purchase price.  

If you’ve borrowed to purchase the property and undertake the renovations, you are paying interest on the loan without receiving any rental income during the renovation period to offset the loan repayments.  

When you sell the property, you’ll lose 2-3% of the sale price in the commission you pay the real estate agent, plus another 1% in advertising costs.  

In short, not only are you paying interest on an investment loan out of your own pocket, but you are losing close to 10% of the property’s value merely by entering and leaving the market.  

And, when you actively add value to a property, you are taking a gamble that the sale price will equal the price of the renovations plus your profit margin. Most property grows in value over time, but not all sectors of the market grow at the same rate.  

If there isn’t sufficient demand for your style and location of property, you may not make enough money to cover the entry and exit costs, outstanding loan balance and renovation costs, let alone make a profit. If you do make money on the transaction and you sell the property, you will also be liable for capital gains tax. It’s like taking two steps forward and one back.  

I am not saying that buying to renovate and sell is a poor strategy in itself. It can be highly successful, but only if the capital growth outstrips the buying, holding and selling costs. Even in locations where capital growth is strongest, this may take several years. And capital growth compounds, so the longer you hold the asset, the greater the amount of growth. If you sell the property as soon as the renovations are complete, you may not have allowed enough time for capital growth to take full effect — substantially reducing your potential profit.  

In other words, the substantial entry, exit and holding costs mean residential property should not be traded like shares, but held for the long-term (at least seven to 10 years) to ensure the capital growth justifies all the expenses you’ve incurred along the way.  

If a real estate agent is advertising a property as perfect for adding value, ask yourself whose interests they are promoting — yours or theirs? Remember, they stand to make a commission on selling the property for the previous owner, followed quickly by another commission on selling the property for you after it has been renovated.  

If you still believe that buying to renovate and selling quickly is the right strategy for you, make sure you calculate all the likely holding and transaction costs.  

Then, research the local market to determine the property’s likely selling price. Look at other properties in the area that have been renovated to the same standards as yours and sold in the last three months.  

It’s also important to factor in the cost of your time. How much you would have earned from your normal job if you weren’t at the property supervising or undertaking the renovations? And what about your leisure time? How much time will you spend away from your family and friends?  

For example, if the project is going to take up six months of your evenings and weekends when you would otherwise have spending time with loved ones, will the expected financial profit make that lost time worthwhile?  

If the holding, transaction and time costs add up to more than the property’s likely sale price, you may need to reconsider whether it’s worthwhile undertaking the project.    

Mark Armstrong is a director of iProperty Plan, which provides independent analysis and tailored advice to investors and home buyers.

       

Mark Armstrong

Mark Armstrong

Mark Armstrong is a director of ratemyagent.com.au, Australia's number one real estate agent rating website.

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