Real Estate Expert
Flipping is a strategy employed by property investors who typically buy, make improvements (such as renovating, sub-dividing or securing DA approval for development) and re-sell within a very short timeframe for a profit.
It sounds like a great idea and all those TV renovation shows make it look pretty easy. The reality, however, can be far different, especially for people with no experience or skills relating to home renovation.
image via McGrath
Mistakes get made, costs and timetables blow out and in the meantime, you’re covering the full loan repayments yourself with no rental income to help.
Successful flipping means recovering the cost of the purchase, the improvements, the loan repayments during your hold period and hefty trading costs, including stamp duty when you buy and agents’ fees and capital gains tax when you sell. After you’ve covered all of that, what’s left is your profit.
In short – it’s tough to do well and this is why flipping accounts for only a very small percentage of sales each year.
CoreLogic data shows only 1.3% of homes re-sold over the 12 months to June 2017 in Australia were held for less than a year. Only 5.7% were re-sold within 1-2 years of purchase.
Does flipping work? Well, yes it can, if you get absolutely everything right, including buying the right type of property at a good price in the right location; adding enough value through high quality renovations, sub-division or other means; and selling in reasonably strong market conditions.
Flipping, by definition, is done in a very short timeframe, which is why you can’t afford to make mistakes. There isn’t the luxury of time, which is the one factor that every investor can count on to deliver capital growth on a good quality investment.
You have a better chance of making a profit flipping during boom markets, when rapid price growth coupled with the value of your renovations can deliver a handsome profit.
In fact, you can buy a property at the start of a boom, do nothing to it; and sell within a few years for a profit, too. We’ve seen that happen in many cases over the past few years in Sydney. But few people get all the ingredients right.
The biggest challenge for flippers during booms is buying at a reasonable price. If you pay too much, there’s less profit to be achieved at the other end because you’re selling in such a finite timeframe.
CoreLogic recently released its inaugural Property Flipping Report, which provides a national analysis of properties that were bought and re-sold within either 12 months or 1-2 years by sellers specifically aiming to make a profit.
Among the capital cities, it found that flipping was most successful in Sydney and Melbourne, where 9 out of 10 homes flipped within 1-2 years of purchase turned a profit in 2017.
The report doesn’t go into how much of a profit, but it’s not surprising that people made money when both cities were in the midst of a boom.
In flat or normal markets, it was a different story. Only 3 in 10 properties in Darwin and 5 in 10 properties in Perth flipped within 1-2 years of purchase sold for a profit.
The report identified several flipping trends and hot spots nationwide, as follows.
– The highest rate of flipping nationally occurred in Sydney, where 6.8% of re-sales in 2017 were flips of properties held for only 1-2 years
– Nine out of 10 flips in Sydney and regional NSW turned a profit in 2017
– The Illawarra on the NSW South Coast recorded the highest percentage of flips in the state (8.7% of re-sales within 1-2 years of purchase)
– About 98% of flips in the Illawarra turned a profit
– Most flips occurred in South East and North West Melbourne (7.8% and 7.6% of re-sales within 1-2 years of purchase)
– The Mornington Peninsula was the most successful regional area for flipping and Bendigo was the worst
– The highest rate of flipping was on the Gold Coast, with flips accounting for 7.9% of re-sales within 1-2 years of purchase
– Flipping was most successful in Moreton Bay North (95.6% of flips sold within 1-2 years of purchase turned a profit) and least successful in Townsville (48.8% of flips sold at a loss)
– Losses were high for WA flippers in 2017, with 47.7% of properties flipped within 1-2 years of purchase in Perth sold at a loss
– North East Perth recorded the highest losses
– An increasing number of people are flipping in West Adelaide
Flipping is not a wealth strategy I would recommend to the average property investor. It’s a great idea for builders or others in the construction, real estate or interior design industries, as they bring special skills to the table. But for ordinary investors, I will always recommend that you simply buy and hold.
Renovating is a great way to add value and there’s plenty of low cost ways to do it. But time in the market is a much more important and effective element for average investors to achieve capital growth through property.