House flipping, which the industry refers to as “fix and flip”, can add up — in theory. But will the renovation reality mirror the profit vision?
First things first. What is property flipping?
It is an investment strategy that involves three strategic steps: finding an undervalued property to buy; renovating that property to maximise its appeal (and selling price), and selling the property to profit over and above your total purchase and renovation costs.
Typical investors share common denominators.
Flipping can be useful for those who have a foundation portfolio with good cash flow. Buying to flip can help them to pay down their existing mortgage debt quicker, thereby increasing their positive cash flow.
Flipping houses is an alternative investment strategy to buying a house and renting it.
When you take a ‘flipping houses’ approach to investment, you’re looking to maximise your capital gain as quickly as possible.
Patience is a virtue
House flipping is a business, like any other. It requires knowledge, planning and patience to be successful.
The most common mistake novice investors make is underestimating the time or money the project will require.
For example, costly kitchen and bathroom refits do not necessarily equate to a quick sale. Nor do they guarantee a big increase in property price.
Do your research and find out how to emphasise quality and financial control in your renovations.
How to get started
The house flipping process should begin with detailed research to find an undervalued property.
This property should also have renovation potential if you want to follow a ‘fix and flip’ strategy to maximise your profit.
Flipping tactics that work
Pinpoint potential properties: Divorces, deceased estates, bankruptcies and properties that are heading into foreclosure are prime targets. Consult real estate agents for potential properties in this category that require prompt sales.
Contact the owner and arrange a meeting: Find out about their situation, price requirements and reasons for selling.
Verify the homeowner’s word: Don’t just rely on what you have been told. Do your research into the factors that will affect the initial sale price and ultimate resale value. This includes conducting a thorough property inspection.
Do the maths: Calculate the potential value of your investment. Analyse your costs and profits. Work out what you could pay and the projected profit margin, given your anticipated sale price.
Negotiate with the owner: Try to arrive at a price that is mutually agreeable. It’s important not to exploit the situation while remaining mindful of end-result profitability.
Consult reputable lenders and lawyers: You will need to secure finance. Depending on the type of sale (mortgagee in possession, etc.) you are likely to be dealing with lawyers as well.
Short sale and final price are essential: Set up, check and structure a short sale for the homeowner and present it to the lender to gain approval.
Protect your interests: Seek financial advice about protecting your new property and avoid last-minute surprises.
Fixed to budget: Many distressed homes require only a minimal outlay to become a superior sale prospect. In other cases, you may wish to carry out substantial renovations to realise an even greater profit. But do so prudently.
Sell or rent it: Align your sale for maximum profit, while minimising the lending period. Alternatively, your plan might be to rent the property, negatively gear any expenses and gain in capital growth.