Have you ever thought of doing 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”. Lawnmower Blade
But can you really flip houses for a living?
If you’re after a quick buck I’m sorry to disappoint you.
Note: 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!
Note: 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!
Proponents of this strategy, and those who sell courses teaching how to do this, will tell you that the key to flipping houses successfully 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 by researching:
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.
Generally, a strategy for flipping houses would look something like this…
While this strategy might make a few experienced property investors money, in my opinion, it’s the wrong strategy to adopt for two reasons:
Once you look at the two tables below, you’ll see that in a typical house flipping project your 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 $550,000.
The occasional flipper that makes a profit it’s likely that they have fortuitously caught the right stage of the property cycle and values have moved in their favour.
In other words, they got a “free kick.”
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.
Note: The main profit from flipping houses is to update a property without getting into costly repairs that are not easily visible, like replacing roofs or re-stumping.
Note: The main profit from flipping houses is to update a property without getting into costly repairs that are not easily visible, like replacing roofs or re-stumping.
These “invisible” works don’t seem to add much value, as purchasers want to see the “bang for the 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 questions to consider:
As I mentioned above, at Metropole we advise against house flipping for all the reasons listed above.
But if you’re hell-bent on risking a ‘flop’ then at least read the following tips:-
If you're interested in property flipping you must understand property values, construction costs and start with a strict budget and stick to it
Don't let emotions rule and overpay because if you pay too much you'll be forever chasing your tail.
Don’t feel that it doesn’t matter what type of loan you take out because you won’t be repaying it for long.
Plan for the best, but assume the worst – that you won’t be able to sell for the price you want, and will have to hold the property.
If you have the skills, keep costs down by doing some of the work yourself, but not if it slows the progress of the project, because this will only increase your holding costs
While donning a project manager’s hard hat can be a romantic notion, there’s much to be said for a more “steady as she goes” approach.
The risks of overcapitalising on flipping houses and coming out with nothing but a headache at the end are 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.
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.
And of course, if there is any profit left over, the taxman 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!
ALSO READ: How Much Does It Cost to Renovate a House in Australia?
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Should you buy, should you sell, or should you just wait?
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Great read. As cash buyers we have viewed around 60 homes to buy to live in. Our main problem is flippers renovating, with cheap fittings, adding extra kitchen areas and doing away with an jnternal garage to add more bedrooms. It's very frustrating. ...Read full version
Hi Michael Great Blog. Like most things there are exceptions to the rules but there is a reason most property investors dont get past 1 investment & even then its often not for long enough to reap the rewards. Time is the most important aspect ...Read full version
Great article Michael! You raised some important points. But I feel by being intelligent flipping houses can still be profitable. After all, the average gross profit on flipping a house was $62,900 in 2019.
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Great read. As cash buyers we have viewed around 60 homes to buy to live in. Our main problem is flippers renovating, with cheap fittings, adding extra kitchen areas and doing away with an jnternal garage to add more bedrooms. It’s very frustrating. After 2 months of looking we still haven’t found a home. But we’re still looking in the Ipswich QLD areas.
Keep looking you’ll find your home
Hi Michael Great Blog. Like most things there are exceptions to the rules but there is a reason most property investors dont get past 1 investment & even then its often not for long enough to reap the rewards. Time is the most important aspect of proprty investment – even a poor purchase – given enough time will eventually become positive. The only guarenteed proft from flipping is to the govenment – even experienced ‘flippers’ end up loosing on some deals – they just dont shout it from the roof tops.
Great article Michael! You raised some important points. But I feel by being intelligent flipping houses can still be profitable. After all, the average gross profit on flipping a house was $62,900 in 2019.
Yes, all the U.S. flipping shows are when the housing market crashed, or they have clients already lined up to pay near the asking price. The big difference between the U.S. and Australia, is that most people want to tear down the worst houses in the best areas and build new, they don’t really want a renovated house that is decades old or older. You are competing against these people, so the chances of getting a bargain are slim unless it’s in a “bad” area where people don’t want to live and the likelihood of property prices going up are slim. Great article Michael.
Thanks David – the other bog difference between the USA and here is that our stamp duty and CGT kills flipping
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.
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!
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
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
You make some excellent points Brendan – that’s why you’re such a successful property mentor
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. 🙂
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.
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)
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
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
Sarah Yes it sound enticing, buy value add and flip – but it doesn’t work in reality
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