What is house flipping?
The Block, My Reno Rules, Grand Designs, Selling Houses Australia–Aussies love their renovation inspiration, and there’s no shortage of it out there! But is there money in it? If you’ve ever caught yourself daydreaming of buying a house, sprucing it up, and selling it on for a profit, you might be a future house flipper.
House flipping is an investment strategy that sees a person aiming to buy undervalued ‘fixer-upper’ properties and renovating them, typically quickly and cheaply, before selling them on at a profit.
But when you consider the money, manual labour, time, and emotion involved, flipping houses may not be for everyone.
How does house flipping work in Australia?
If you’re considering tackling a renovation project for profit, there’s a lot to think about. A would-be house flipper would be wise to plan out their intent and strategy before buying a property.
After all, finding a suitable property is likely to be the easy step.
Australia has some of the world’s most expensive real estate, depending on where you live, there’s probably also plenty of red tape to navigate, not to mention tradie invoices to pay.
It’s not unheard of for house flippers to end up paying more to buy and renovate a house than they can claw back when it's time to sell. This is known as overcapitalising, and if profits are your major motivation, this is exactly what you want to avoid.
When flipping a house, there are five major steps:
- Finding a property
As mentioned above, this is likely the easiest step. When at an open home, you’d be wise to consider limitations imposed by a property, from access and asbestos removal to structural challenges and heritage restrictions. - Financing the purchase
Financing a property flipping project can be tough, as home loan lenders will typically only lend up to a certain portion of a house’s value, and this might be lower than the cost of your purchase and the renovations you’d like to do. - Planning the renovations
While you would hopefully have a good idea of what you want to change about a property before signing on the dotted line, once it’s yours, it’s time to call trades, reach out to suppliers, and submit applications for council permits, if necessary. - Paying for and undergoing the works
Of course, all that takes money. If you don’t have enough cash to fund the renovation, you might have to consider taking out a larger mortgage than planned, or seeking alternative finance, like a personal loan. - Selling the property
Once the renovation is complete, it’s time to sell the property and (hopefully) make that profit. But don’t forget that, when an investment property sells for a profit, you’re likely to face capital gains tax. And whether you sell for more or less than you bought for, you’ll also need to pay for real estate agent fees, staging costs, and conveyancing fees, to name a few.
It goes without saying then, that house flippers might find it tempting to cut corners in order to save dollars. In Australia, the strategy cops flak from critics who say house flippers tend to focus their efforts on cosmetic upgrades without addressing more serious structural, plumbing, or electrical issues.
Is house flipping right for me?
With all that in mind, you should take a beat to determine whether house flipping is right for you. The answer will ultimately depend on your own personal and financial circumstances.
Since this form of investment involves a large amount of money, both upfront and throughout, it’s advised to get professional financial advice before making any decisions.
Five tips for house flipping
1. Do your research and plan thoroughly
House flipping projects generally require a large investment of time and money, and it's important to plan ahead and do your research.
House flipping can be stressful, and ensuring you have enough time, a clear budget, and a flexible timeline can foster confidence.
Make sure you get multiple quotes from various contractors and trades, and be upfront about your own expectations and budget.
Brushing up on your terminology and typical renovation processes can help things go smoother too. Time is money on a building site and having a strong plan in place before everything kicks off can help avoid costly delays or issues.
2. Make sure you ‘buy well’
House flipping isn’t for the faint of heart and brings considerable risk. To make a short-term return, you’re going to have to buy well. That likely means walking away from any property that isn’t under-priced.
If you plan on renovating, you should also get accurate costings and ensure you’re likely to get relevant approvals. Understanding the condition of the property can also help you avoid unpleasant surprises. This is where a building and pest inspection can come in handy.
3. Consider the finance carefully
Buying a property with cash isn’t a feasible option for everyone, and it’s important to consider how you plan to finance the purchase of the house you’re flipping.
You might think about taking out an investment home loan, one with interest-only repayments (which could free up cash for renovations), or refinancing an existing mortgage to access equity. Even if you won’t be repaying the loan for long, it’s best to assume the worst, where you may have to hold onto the property for longer than initially planned.
Finding a competitive interest rate with the flexibility to be repaid early may be beneficial.
4. Be prepared for the work and challenges involved
House flipping can be expensive, and the ultimate numbers may not stack up in your favour. That’s especially likely to be the case in a high-inflation environment or one where trades are hard to come by.
In such cases, making structural renovations, like adding extra bedrooms, bathrooms, or living spaces, could be the best way to make a profit. But such work typically involves a builder, contractors, and development planning and permits.
5. Keep a close eye on your costs
Some house flippers manage their costs by doing most of the work themselves, opting to only bring in professionals when absolutely required.
Electrical, plumbing, structural, and roofing work is generally required to be undertaken by a licensed professional. It’s advised that you research the relevant requirements of your state or territory during your planning phase.
But doing the work yourself doesn’t always work out cheaper, particularly if you buy all the materials at the full retail price, purchase tools and equipment, and have to redo work that doesn’t turn out right the first time.
What are some of the benefits of house flipping?
House flipping isn’t a simple task to undertake, but the potential benefits can be large. Some of them are:
- Profit: House flipping in Australia has the potential to be lucrative.
- DIY and investing skills: Flipping a house may be a good way to hone your own DIY, project management, and investing skills.
- Having a project: Some people like throwing themselves into a new project, especially one as large as flipping a house.
What are some of the risks of house flipping?
There are some potential risks that are worth considering when it comes to renovating for profit. These risks can include:
- Market conditions: If house prices across the market fall, selling your property at a higher price in the short term may be difficult, even if you’ve improved it cosmetically or structurally.
- Interest rates: If rates rise, it could mean higher loan repayments and pressure on your budget.
- Difficulty selling: If you need to hold onto the property for longer than expected, the costs could quickly rack up and eat into any eventual profit you might make.
- Unexpected costs: Renovation costs you hadn’t anticipated can derail even the most carefully planned budget.
- Rising material and labour costs: A decrease in supply of materials and a thinly stretched construction workforce has seen building costs rise in recent years.
- Time investment: If you choose the DIY route, prepare to say goodbye to your weekends. You’ll likely be spending a lot of your free time on site, and you’ll need to balance your reno work with your main source of employment.
