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

  1. Find a ‘fixer up’ property at a low price
  2. 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
  3. Sell it for a profit – Like magic! Sounds good right?

 

Finding the property  

It’s the same process for any property purchase (researching, etc):

  1. Research property
    • Values, growth history, what work needs to be done on the property?
  2. Your situation
    • Cap your price – Know how much you can afford
    • Budget – do you have surplus cash in case renovations go over budget?
  3. 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:

  1. Property markets climb in under 12 months (there’s no guarantees)
  2. 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:

  1. Overcapitalisation – spending more than needed
    • Profits come from ‘cosmetic’ renovations
      1. Structural is normally not valued by buyers. For example – Replace foundations, rotted walls, etc.
  1. 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
  2. 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

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