Property flipping is relatively easy in concept – you buy a property, you renovate it, and you sell it for a profit.
Sounds really simple, but lots of people have tried and not made any money.
Why haven’t they made any money?
It’s probably because they have purchased the wrong property.
We have had a lot of enquiry recently from people that are keen to do a property flip, but who were not really sure where to start. They thought it sounded simple but were clever enough to seek advice before they jumped in.
That’s why we decided that we should write this short article about property flipping.
Property Flipping for Beginners
So let’s explain how we need to do this more simply to ensure that you get the right property and can make money from property flipping. We talk about the three-step process. You buy, you renovate, you sell. Where most people get this wrong is they focus on the buying first. We suggest that you need to focus on the selling first. You need to establish what your market is so that you know who is gonna buy the house that you’ve just renovated.
Now, a lot of the professional property flippers, they will have a database of property investors who will buy the properties on completion. These are people that do property flipping as their full-time business. And so for most of us, we can’t compete with them. I would put a line through property investors and suggest they’re not necessarily the right target market because we’re not gonna have the volume of properties to sell, and we’re not gonna invest enough time in building a database of property investors. Property investors also tend to be more focused on the price, and therefore, it’s generally a lower margin business.
Where we’ve seen the most success is when people focus on the buyer of their property being a first home buyer. First home buyers are not restricted with the fact they have to sell anything else. They’re essentially cash buyers. They’re also buying a home to live in and therefore they don’t mind spending a little bit more money to get the right property that has the good feel about it and suits their family.
So if you agree that your buyer is most likely gonna be a first home buyer, then you need to work out what type of property they want, in what area, and ensure that you can take the property to the market, so it’s not competing directly with too many other properties. As an example, you might choose to buy in a suburb in West Auckland, and that might be Massey. At the moment, we know that there’s a lot of new builds in Massey, and a lot of those new builds are two bedroom. So we would want to ensure that we’re not working in that same market.
When you do your research, you’ll probably also notice that there’s a shortage of reasonably priced three to four bedroom properties in Massey. So a good target market could be to try to get a three to four bedroom property in Massey that is price competitive. And that price might be eight hundred thousand dollars. It’s well within the reach of a lot of first home buyers and you’re not having to compete head on with too many other properties that are for sale.
Then we work backwards, and we decide how much profit we want and what the costs for the renovations would be. I think it’s important that you set your profit at a fair level. And for this example, if we set it at fifty thousand dollars. That means if you have to discount the property a little bit because there is all of a sudden an influx, then you have a little bit of room to move. And you’ll still end up making a pretty reasonable profit on the project.
At this stage, when you’re setting your budget and looking for a property to buy, you need to establish what your renovation costs might be. Now, again, for this example, I’m just gonna put the number of fifty thousand dollars in there. And that’s just to give me an indication of what type of buy price I need to be focused on. Now, of course, the renovations might cost more than fifty thousand dollars or less than fifty thousand dollars, depending on the property that we find. The key thing is to start with a number and then drill down once you actually find the property.
Once you’ve done more property flipping, you’ll find that you’ll get more accurate with this. But the key thing for most people that are doing property flipping as a sideline is to ensure that you’re not having to do big renovations. You really want to be looking at doing nothing that needs council consents, as that can hold up the whole process. And you don’t want to be doing any structural type work.
For your first property flip, if you can target on a good clean up, repaint, put a new kitchen or bathroom in, new flooring, maybe a nice deck, and some window dressings, and a bit of landscaping. When you start moving walls, adding bedrooms or bathrooms, or putting a garage in, it all starts to get pretty expensive.
And the more expensive it is, the potential risk increases.
So again, we’re looking at the cost to renovate of $50,000 in this case. So working backwards, you’re selling the property for $800,000 and you want a profit of $50,000 and you’re spending $50,000 on it, so your purchase price needs to be no more than $700,000.
The next step is to go and have a look at what you can purchase for $700,000.
See if there are any properties available, and then once you’ve had a look at those, revisit the numbers for the renovations to see whether the $50,000 budget is realistic or not. We would also reinforce that you must refer back to your plan and not deviate from it.
Get The Right Finance Structure
You will need to make sure that you get the right finance for your property flip.
This is another area where many people get this wrong.
Never link the property that you want to flip to your home where you might need to access the equity. Always keep your home with another lender so it is insulated from any risk with a property flip and therefore it means that you retain control of the money.
Banks are not good at doing property flipping loans and at Mortgage Managers we have a range of options that we can use depending on your situation.
Read More About Property Flipping
You might want to read more about property flipping, and here are a few articles that we would suggest.
House Flipping : A Guide to Flipping Houses in New Zealand – this is written as a good guide to flipping houses, and specifically for doing this in New Zealand. This is a “must read” guide for anyone that might want to try a house flip.6
Jess – Discusses Property Flipping – she is a mortgage adviser that has also done property flipping herself, and she shares her knowledge.
Tips from Canstar – this article provides 5 tips for house flipping and a also points out the risks.