Makin' coin flippin' houses

Welcome to Finance & Fury's Say What Wednesday

Today's question is from Lucas, "Hey guess, just wondering if you think that flipping houses is a good strategy? Can you really make a living flipping houses?"

Good question! Flipping houses has become very popular but it's not as easy as you think.

The Theory

1. Find a 'fixer up' property at a low price
2. Renovate it. Spend some money bringing it up to higher standard.
   • There are people who run courses on this – you spend $1 and it should increase the value of the property by $1
3. Sell it for a profit – Like magic! Sounds good right?

Finding the property

It's the same process for any property purchase (researching, etc):

1. Research property
   • Values, growth history, what work needs to be done on the property?
2. Your situation
   • Cap your price – Know how much you can afford
   • Budget – do you have surplus cash in case renovations go over budget?
3. Is it worth it?
   • Look at potential gains – Minus costs in and out, along with interest, stamp duty, agent fees, legal fees etc.
   • Timeframes – how long will it take?

Does this work? Here are some examples.

Buy something for $450k, with a 10% deposit (so, you'll need $45k plus other costs)

Scenario 1 –

$2 for $1 every spent

Scenario 2 –

$1.50 for every $1 spent

Property Price

$450,000

$450,000

Loan

$405,000

$405,000

Purchase costs

Legal fees, registration, pest inspection, etc.

$2,500

$2,500

Stamp Duty (QLD)

$14,175

$14,175

LMI (10% deposit)

$7,938

$7,938

Total

$24,613

$24,613

Renovation & ongoing costs

Interest expenses - 8 months

$12,150

$12,150

Renovation costs

$80,000

$80,000

Total

$92,150

$92,150

Selling fees

Sale Value

$610,000

$570,000

Agent fees, advertising

$16,775

$15,675

Assessable Gain

$67,850

$27,850

Taxes - CGT (If not living in and only income)

$14,425

$14,425

The Bottom Line

$57,037

$18,137

When it goes right:

1. Property markets climb in under 12 months (there's no guarantees)
2. You are experienced in property construction, renovations
   • You're in a trade industry, you have friends in trades, and have the time to get the work done

Risks:

1. Overcapitalisation – spending more than needed
   • Profits come from 'cosmetic' renovations
     1. Structural is normally not valued by buyers. For example – Replace foundations, rotted walls, etc.

2. Your Experience and situation – there's lots of moving parts to get it done in a timely period
   • How much of the work can you do yourself to save on costs?
   • Is this going to be your full-time job?
   • Getting finance for the project
3. External factors
   • If the property market goes down, you'll struggle to break even
   • Council or Body Corporate approvals
   • What if it doesn't sell? Can you afford the loan?

Other Options

• Keep the place and rent it out for more income now
• Retain the property and refinance for more equity and invest elsewhere

In Summary

EVERYTHING needs to go right – it's hard to make a lot of money if you don't have much experience.

If you have any questions hit us up here at the contact page