Flipping houses is a popular way to make money over a short period of time, but only if done right. In fact, there is potential to make tens of thousands, or even hundreds of thousands of pounds if you secure a good deal on a good property.
But what is property flipping? And how do you do it effectively?
Property flipping is the act of buying a property at or below market rate for the sole purpose of renovating it and then reselling it for a profit.
The term “property flipping” is more common among our American friends across the pond. In the UK it is more commonly referred to as “buying to sell” or under the wider umbrella of “property development”.
If you want to make money from flipping a house you need to have your finances in place and be smart with your buying decisions. To make a profit, in the end you need to sell the property for more than the purchase price plus the costs of the refurbishment.
Here’s an example:
Purchase price: £200,000
Additional costs (refurbishment, fees etc.): £25,000
Sale price: £250,000
So in order to make a profit, you need to be sure that you can sell the property on for more than what you ultimately spend on it.
Alternatively, you can calculate your ROI (return on investment). You can do this by dividing your profit by the total amount of money you invested. Using the previous example, it would look like this:
£25,000 / £225,000 = 0.11
ROI is presented as a percentage, so in this example the ROI would be 11%.
Generally, a good return on investment for a property flip is 20%, however in reality it’s whatever amount you’d be happy with. However, 20% is thought to be a good amount to aim for because if you misjudge your costs or run into problems, you have a good buffer to still make a profit. Whereas if you aimed for 10% and had any problems you run a high risk of making no profit, or losing money.
Don’t forget that you will have to pay tax on whatever profit you make. This is why many house flippers will run their projects through their own flipping company, meaning that they will pay corporation tax on the profits.
If you don’t undertake your house flip through a company and instead do it as an individual, the profits will count under your personal income and will affect the amount of income tax you need to pay.
Income tax is higher than corporation tax, so many consider it more tax efficient to undertake the project via a company. However, this is not tax advice and you should speak to a professional about your individual situation and plans.
Although sorting your finances and making sure you make a profit may sound difficult, the real challenge lies in finding the right property to flip. A lot of factors come into play when you’re looking for your next project - some of which we’ll cover in a moment.
You’ve got to remember the buying climate; is the housing market slow? Or is it moving at a good pace? This will determine how much competition you should expect. A slow market means less people buying and more competitive prices.
When it comes to location, you need to look at the property from the perspective of another buyer - a buyer who wants to live in it. When a buyer is choosing a location to buy and live in, they will be looking for amenities like public transport links, proximity to shops, and schools. They will want to be in a good neighbourhood with a low crime rate so they feel safe. They probably won’t want to live with a railway at the bottom of their garden, or a motorway.
Houses for sale in popular locations like Great Dunmow sell fast, but you can still find a good opportunity at a good price, you just need to keep your eye on the market.
Buying a property in locations where the market is moving fast means you’ll have a good chance of selling quickly once your project is finished. You can find these areas by asking local estate agents, or if you’re a local you’ll probably have a good idea of where is popular. Make sure to check this information by keeping an eye on sites like right move to see how quickly houses in these areas are listed and then sold subject to contract.
The house you buy to sell will ideally be one that appeals to a wide range of buyers. The more niche you go, the less people there will be fighting over your property, and the slimmer chance of a bidding war.
When it comes to house flipping, three bedroom semi-detached houses are an ideal investment. They can appeal to both first time buyers and buyers who are looking to move into a bigger property. Being semi-detached makes them more financially accessible in comparison to detached homes of the same size, but can also present the opportunity for future extensions.
This doesn’t mean that other properties are bad investments, you just need to know your buyer. Smaller houses and flats can still be bought and sold for profit.
Bungalows are also a very popular option as there are less of them on the market. Their buyers are normally older families or couples looking to downsize, meaning they’re also looking for a home that doesn’t need any renovation work - the ideal buyer for your project.
That being said, even if you find what looks like the ideal property in a good location, you do still need to ask yourself if the property is right for development. If it has substantial problems there is a risk that the cost to fix them will massively eat into your potential profits.
Finally, under what grounds is the property being sold? If the seller is looking to make a quick sale, they will be more likely to accept an offer than hold out for a higher price.
Needing or wanting a quick sale can arise from a number of situations, such as if the seller faces repossession, or if someone has died. These properties are generally in a condition that would benefit from improvement, and the sellers want to make a quick sale to either get themselves out of difficulty, or to gain inheritance.
The downside is that other people looking for their next house flip project will also be on the lookout for similar properties. This means that you’ll need to act fast to get to the front of the buyers line, but also have boundaries in place. Know the figure that you’re willing to pay that will still result in profit so that you don’t get caught up in a bidding war. Know when you should walk away.
As we’ve concluded, buying to sell isn’t an easy process and takes a lot of time and dedication but the rewards can really pay off.
Keep your wits about you and keep your eye on the market at all times so you can spot potential projects early and strike while the iron is hot. Make sure you know how much money you can realistically spend on a property before you risk your profit margin, and that buyers will be fighting for it once your flip is complete.comments powered by Disqus
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