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.
- Profits come from ‘cosmetic’ renovations
- 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