Property flipping is an enticing strategy for new and experienced investors alike. ‘Flipping’, ‘Buy-to-Sell’ and ‘Trading’ are all phrases used to describe the same strategy. Buy-to-Sell is a good one to use as it describes the activity perfectly; properties are purchased with the intention of selling on at a profit, predominantly after programme of refurbishment.
So why might you want to flip?
Trading property is a relatively short-term cash flow strategy and something that can generate what we like to call ‘chunky money’. Successfully executed flips can make tens of thousands of pounds from one deal which could then be used to fund income producing assets such as a rental portfolio. Traders often flip property through a Limited Company and pay corporation tax on company profit which can be more appealing than the rate of income tax. It is important to note that this article is not intended to give you financial advice so you should check with a qualified professional before making investment decisions.
So how do you ensure that your flip is a success? Well, there are some key things to consider before jumping straight in with both feet. Property flipping can be a lucrative and repeatable strategy but only if certain basic conditions are met.
Three things to research and explore before committing to a purchase are location, property type and circumstance:
When thinking about the place or location to flip properties, it is important to think about who is going to purchase the property from you. What kind of things do they want? A garden, off road parking and an ensuite may all be on the wish list but if it’s in a high crime neighbourhood then that might not be the best project for you to choose. If you are going to flip a three bed semi-detached house and are aiming to attract first time or second time buyers, then amenities and infrastructure are going to be just as important as the actual property itself.
Think about ease of access to get to work or school. Is the property accessible by road, rail or bus, but without being right on the side of a noisy motorway? Location is key to getting a timely sale. A property in an area that could be perceived to be undesirable will obviously stick longer than the worst house in the best street which has been brought up to standard.
A two or three bed house will have universal appeal to a wide variety of buyers, whereas a seventh floor flat might be more niche. This could affect the amount of time you are holding the property, which in turn will affect your bottom line when you take into account utilities (council tax, water, electricity, gas, insurance). Bungalows can also be a good type to flip if you can add genuine value through refurbishment or extension. Often your buyer will want a property that they can move straight into rather than do up over time.
The perfect storm for flipping property is when someone needs to sell urgently and you are in a position to act quickly. Fast transactions help not only you as a trader to secure your next project without a long chain, but also helps the vendor to move a property on and reduce their outgoings. Often, there is value to be added to properties that come to the market after someone has died, the owner is facing repossession or the property has been tenanted for a long period of time and not maintained. Competition can be fierce for these deals when they first come to market so don’t be tempted to get into a bidding war with people who are happy to overpay because they are a) less experienced and want less profit, b) intending to move into it themselves or c) fools that haven’t done their costings correctly.
Provided that the property requires a programme of updating or modernisation, profits can be achieved if you can secure the property at the right price, manage the refurb well and achieve a good sale value. If you can’t negotiate a good price, refurb to the required standard within budget and achieve the right ROI; walk away. There will always be other properties.
How to flip a property
Before committing to a purchase, it is vital that you have done your due diligence on the projected sale price and have been realistic with the price you will achieve. It would be foolish to assume that you’ll get £30k over and above other sold comparables (comps) just because you’re a nice person. You must compare apples with apples and you can use Rightmove.co.uk sold prices to check the sale price achieved recently by other properties nearby that exactly match what yours will be like when completed.
Once you know the end value, you should then work out the cost of the refurb by getting multiple quotes. You can either instruct a main contractor to do the whole project, or project manage individual tradespeople yourself. The latter is the more time intensive option but more cost-effective way. Don’t forget to include professional fees, stamp duty, buying and selling costs and utilities into your cost of sales, plus the interest you pay on any finance you require to fund the purchase and works needed.
Traders will often look for a minimum return on investment (ROI) of 20% when considering a Buy-to-Sell project. You should also assess the opportunity cost of proceeding with one property over another. It is surprising how many new traders will buy a property, do the works and then hope for a profit at the end. It is this kind of ‘finger in the air’ property flipping that can lead to unrealistic expectations, overspend and upset. To increase certainty in your business you will need to be specific with your figures, pleasant with tradespeople and unemotional with your decisions. Only once you know all the costs can you work out how much you can offer for the property to make your required ROI.
Every flip is different but the foundations which underpin how to maximise the profit in every deal remain the same:
- Buy for ‘market value’, or less!
- Add value or complete the refurb to the highest standard it warrants, given the relative cost and profit potential.
- Sell it for the best price achievable (but don’t be greedy!).
- Don’t pay any more tax than you have to.
Now, this is an over simplified list of actions and you may be thinking, ‘well anyone can do that’ and quite honestly, you’d be right. The truth is anyone can; the reality is most people don’t. The majority of people in the world stick to one income stream – usually a job – and don’t give flipping property a second thought.
If you’re reading this article though, you’re probably on the path to property flipping greatness and we wish you every success.