The idea of flipping houses – buying a property and performing quick renovations before turning around and selling it in a short amount of time has been popularized by reality TV – but the reality of the situation is that attempting to flip houses is not a sound strategy. Flipping houses is by its very nature a rather speculative investment strategy and depends largely on how the market is performing and more than a little luck. Here are some common issues that can often interrupt a flip and how they can prevent you from making the profits you might hope from a renovation flip.
Transaction Fees and Holding Costs
One of the biggest problems with trying to buy and sell houses quickly is all of the fees that can get in your way. Things such as selling costs, stamp duty and interest repayments all eat away at the potential profits from selling the home. On a home that cost $500,000 your transaction costs could end up being as high as $60,000 and when you are selling a home quickly there’s only so much that can be done to increase its value.
Another important factor to consider is that even if you are able to post a profit, you will need to pay taxes on it at your full income tax rate. When you hold onto a piece of property for a longer year you can benefit from the capital gains tax discount and make more money than you would when flipping a home.
Unrealistic Expectations of the Renovation and the Market
As mentioned earlier, renovation flips are seen as a sort of get-rich-quick-scheme and often people go into it with unrealistic expectations. By not spending the time to analyze the market and the value added by renovations, many people can end up losing money in the end.
Renovation as part of larger strategy
I have seen renovations work best as part of a longer term buy and hold strategy to instantly increase your equity and and potential rental price. Plus if the house is presenting poorly, it usually improves your chances of picking it up for less. Renovation also works really well when you are able to retain the house and subdivide off a back or side block. That way you are also creating value in the subdivision, while improving the price you will get for both.