Everything you need to know about house flipping
Property as a means of investment is an attractive prospect, especially given the numerous options and methods available to do so. One of those is house flipping, which involves purchasing revenue-generating assets.
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This, in short, involves buying a property below market value, renovating it, and selling it at a higher price, all within a short timeframe (usually a couple of months).
This investment strategy seems to be rather straightforward and extremely quick in comparison to other real estate investments, however there are a number of caveats one should be aware of in order to avoid fallbacks if decided upon getting involved in the trade that is house flipping.
How house flipping works
As summarised above, house flipping is on the face of it, an elementary strategy. The profit that you could potentially make from house flipping can be summarised in a simple word equation: property sale price – (cost of purchase + renovation costs) = profit. Further to this, in using your calculation results for the value of profit, you are able to determine the return on your investment (ROI).
The total profits from the house flipping divided by your total investment will equal to the ROI. It is common practice in the house flipping industry to use a minimum profit on cost value of roughly 20% in the appraisal of projects. This would not only grant a substantial monetary incentive for your investment, but also give financial leeway for unforeseen or unpredictable circumstances and absorb the incurred costs.
Although as mentioned earlier house flipping is not strictly speaking “rocket science”, and it’s not a straightforward process with guaranteed success – there are some skills that could come in significant aid and can be deemed essential to have if you are considering starting flipping houses.
Firstly, you will need some sort of vision and understanding of the housing market which would allow you to identify a given property that you think is undervalued or has the potential to increase in value significantly enough for you to make a profit.
Although you may be fortunate and spot a good deal without prior experience, flipping houses requires a good understanding of the real estate market as well as the ability of spotting market trends and be able to predict to some extent fluctuations which could push the value of the housing market either up or down.
In addition to having a good understanding of the trade itself, the ability to estimate your costs correctly – in other words, get the numbers right in projecting the cost of property, repairs, and sale, and if ultimately and most importantly if your calculations leave you with a net profit.
Furthermore, skills such as negotiating and project management are extremely important in house flipping, there are many extrinsic factors you should consider, with the bulk of your work being with strangers who will, like you, have a position of best interest which could undercut your success and profit.
Which property types should you flip?
It is a common misconception that all or most undervalued property typesare suitable for flipping houses. A more unique property type such as a small flat or a trendy studio could reduce the market for your property from the outset and complicate matters from the outset.
Your goal should be to sell the property in the shortest period of time, and thus choosing a high demand property type, that would appeal to the largest demographic, will set you up for greater success and could allow you to be in control of the price and negotiations, if for instance there is a bidding war for your property.
Further in looking at suitable property to flip, a larger property can be improved quickly and the profit margin, given the size of the property is bound to be higher, seeing that the cost of renovating the house, will not be directly proportional to the price of the improved land. With a smaller property the price change will often be lower, however it will also often be a less risky strategy.
Improving the property
Improving the property can include both internal and external improvements. This could involve landscaping around the garden, decking in the garden or around the patio, or for instance improving or building anew the driveway.
Internally the property could require the fitting of a new kitchen, bathroom as well as other general appliances and furniture as well as other infrastructure, including rewiring or re-plumbing jobs. Furthermore, you could look into expanding the spaces within the property by knocking down walls and converting an unused basement or loft into a habitable area. It is unreasonable to assume that a layer of fresh paint and some budget decorations will significantly increase the value of the property, if at all.
On the contrary you will most probably have to commit yourself fully to the renovation of the property, keeping a close eye and control over the work carried out, if you look to achieve a substantial return on your investment.
House flipping risks
There are, as with any investment, risks associated with house flipping, and it is vital not to underestimate these risks as they are rather considerable and very much real. The nature of the deal itself is rather risky as you are attempting to generate significant profit over a short period of time whilst balancing a number of factors that are largely beyond your control.
Furthermore, even if you do successfully flip a property, the changes in the market will alter the settings for any future house flips meaning that it may be impossible or unlikely to repeat it in a similar manner. You want to scrutinise the data and numbers available to you in order to get the financials of your deal right.
A small mistake can lead to a failure to sell the property and burden you with financially, possibly tying you down to a hefty and unwanted mortgage on what will likely be your secondary property.
All this should not take away from the fact that flipping a property can of course be a very profitable and exciting process. If done properly, it can diversify your property portfolio but also give you invaluable experience in the housing market that you can use in further undertakings.
It should be mentioned for the UK however that there are some more recent challenges that have made the process of flipping houses more challenging. Brexit has had both long- and short-term impacts but has also made the housing market more volatile, which is problematic for an investment strategy such as flipping, which itself is short term and thus can be affected by rapid changes in the interim.
To protect your investment, you are to assess the short-term impact that Brexit and negotiations can have on the economy and the housing market, and thus how those could either increase or diminish the value of your property, or the demand for it. Furthermore, the coronavirus pandemic has exacerbated the already volatile nature of the housing market.
Demand has significantly decreased with most buyers waiting for the stabilisation of global markets before fully committing to the purchase of property.Additionally, house purchase transactions, as well as the simple performance of renovations, is likely to be halted or considerably slowed down due to the coronavirus.
Finally, the economy has been greatly weakened and is suffering, which makes it unattractive to engage in much investment, especially the kind that is reliant on a healthy economic scene and the willingness of people to engage in proprietary transactions.
Flipping a house is at least in theory a simple concept, however as discussed there are a number of challenges and obstacles that can arise during the flipping. Before considering flipping a house it could be rational to gain sufficient experience in the property market, and possibly have associated or similar experiences managing projects that aren’t necessarily your own.
All in all, though, if you have the sufficient funds, and have conducted appropriate research and calculations that convince you of the financial feasibility and profitability of flipping a given house, then by all means you should take on what is likely to be a thrilling and rewarding undertaking.