Welcome to Finance & Fury’s Say What Wednesday
Today’s question is from Lucas, “Hey guess, just wondering if you think that flipping houses is a good strategy? Can you really make a living flipping houses?”
Good question! Flipping houses has become very popular but it’s not as easy as you think.
The Theory
Find a ‘fixer up’ property at a low price Renovate it. Spend some money bringing it up to higher standard. There are people who run courses on this – you spend $1 and it should increase the value of the property by $1 Sell it for a profit – Like magic! Sounds good right?
Finding the property
It’s the same process for any property purchase (researching, etc):
Research property Values, growth history, what work needs to be done on the property? Your situation Cap your price – Know how much you can afford Budget – do you have surplus cash in case renovations go over budget? Is it worth it? Look at potential gains – Minus costs in and out, along with interest, stamp duty, agent fees, legal fees etc. Timeframes – how long will it take?
Does this work? Here are some examples.
Buy something for $450k, with a 10% deposit (so, you’ll need $45k plus other costs)
Scenario 1 –
$2 for $1 every spent
Scenario 2 –
$1.50 for every $1 spent
Property Price
$450,000
$450,000
Loan
$405,000
$405,000
Purchase costs
Legal fees, registration, pest inspection, etc.
$2,500
$2,500
Stamp Duty (QLD)
$14,175
$14,175
LMI (10% deposit)
$7,938
$7,938
Total
$24,613
$24,613
Renovation & ongoing costs
Interest expenses - 8 months
$12,150
$12,150
Renovation costs
$80,000
$80,000
Total
$92,150
$92,150
Selling fees
Sale Value
$610,000
$570,000
Agent fees, advertising
$16,775
$15,675
Assessable Gain
$67,850
$27,850
Taxes - CGT (If not living in and only income)
$14,425
$14,425
The Bottom Line
$57,037
$18,137
When it goes right:
Property markets climb in under 12 months (there’s no guarantees) You are experienced in property construction, renovations You’re in a trade industry, you have friends in trades, and have the time to get the work done
Risks:
Overcapitalisation – spending more than needed Profits come from ‘cosmetic’ renovations Structural is normally not valued by buyers. For example – Replace foundations, rotted walls, etc. Your Experience and situation – there’s lots of moving parts to get it done in a timely period How much of the work can you do yourself to save on costs? Is this going to be your full-time job? Getting finance for the project External factors If the property market goes down, you’ll struggle to break even Council or Body Corporate approvals What if it doesn’t sell? Can you afford the loan?Other Options
Keep the place and rent it out for more income now Retain the property and refinance for more equity and invest elsewhere
In Summary
EVERYTHING needs to go right – it’s hard to make a lot of money if you don’t have much experience.
If you have any questions hit us up here at the contact page
