17 Aug Planning the perfect flip
With heat in the property market, now could be a good time for bargain hunters to find the perfect flip. Mark Story
With the local share market likely to deliver underwhelming returns over the next 12 months and fixed interest at historical lows, it’s hardly surprising that more adventurous investors are using access to easy money to try and ‘flip’ residential property for a quick profit. Given the time constraints associated with costly structural renovations, most flips quickly return to the market following what’s known as cosmetic renovation.
A flip by definition means buying and then handballing the property onto another buyer quickly and the beauty of cosmetic renovations is they allow you to do just that. The key objective is to buy the right property and complete a cosmetic makeover before re-selling…and all within a six-week window. That way the market won’t have changed enough to undo the increased value your material improvements have made to the property.
If all your property investment stars collide, independent property expert Chris Gray says you stand to not only benefit from material renovation improvements, but also market movements along the way.
“In some areas where the market might be moving between five and 15 per cent, this would also be compounded by renovation value,” he says.
But whether you’re flipping an investment property following cosmetic or structural renovations, the end game comes down to numbers. Australia’s renovation queen Cherie Barber says there should always be sufficient profit to justify your efforts and the underlying risk.
However, due in part to the mass popularity of DIY renovation TV shows that are fixated on emotion and hype, she says too few flips are profitable, while those that are seldom achieve their full potential. Then there are the disasters, whereby investors are worse off following a failed flip that crashes and burns.
Provided you do the necessary amount of planning and research, Barber says any type of market presents opportunities for a successful flip. That’s especially true within some property markets where an abnormally high number of houses for sale, and fewer buyers, raises the opportunity of finding a bargain.
Become ‘reno ready’
The journey to any successful flip starts with what Barber calls becoming ‘renovation ready’. She says there’s simply no substitute for attention to detail when it comes to planning.
Contrary to popular opinion, she says a lot more science goes into successfully renovating for profit than throwing a lick of paint on a tired and unloved property.
“Successful flipping is less about voyeurism and more to do with carefully considering what a property would sell for once needed reno work is completed,” says Barber, who has been flipping renovated houses for 20 years.
Like it or not, the amount you pay for an investment flip is critical to a successful outcome. That’s why Mark Armstrong, director of iProperty Plan, says it’s important to invest a few weeks of your time becoming an expert on the small cluster of suburbs you’re thinking of buying in. He recommends looking at other recently renovated properties in the area and checking out how much they sold for. He reminds investors to be wary of real estate agents who spruik a property as ‘perfect for adding value’.
“Ask yourself whose interests are they promoting, yours or theirs?” Armstrong says. “They stand to make a commission on selling the property for the previous owner, followed quickly by another commission on selling the property for you after it’s been renovated.”
Do your sums
Regardless of what kind of renovations they’re undertaking, Barber says most investors come undone by failing to do their sums properly. Instead of settling for back-of-the-envelope figures, she recommends putting together spreadsheets highlighting where you started the project and where you plan to end up.
After factoring-in the purchase price, the expected sell price, plus all the associated costs – including a line by line record of proposed removals and new installations, stamp duty, agent’s fees, plus capital gains tax – she says the spreadsheet should indicate whether a proposed flip is worth it.
“Most people have the right strategy for renovating for profit, but come unstuck by applying it to the wrong property, which seriously pulls profits down,” Barber advises.
“This is where your calculations can quickly reveal whether you can achieve a high enough price to make it worthwhile.”
Investors also come unstuck, Gray adds, when renovation costs come in well over budget. Given how often this happens, he says by doubling the renovation costs on a spreadsheet, investors will get a more accurate idea of whether they’re going to make a profit.
“Instead of seeing your accountant after you’ve done your sums, why not involve them in the process?”
While private investors don’t have access to the same property investment tools the professionals use, Barber says the next best thing is to self-educate, tap into experts who’ve done the hard yards, and engage the right agents. She recommends going to five to 10 agents and asking them what people in the area want, both internally and outdoors.
“Education is the key to successful renovations and you need to invest in getting the right knowledge.”
To avoid unforeseen costs eating into your profit, Barber says it’s important not to overlook a pre-selling inspection to ensure you’re not left with an unexpected bill getting rid of the seller’s junk. If following the pre-selling inspection there’s still a lot of cleaning up or promised repairs to be done, she recommends withholding an amount required to cover the costs in the event that the seller doesn’t have the time to attend to them.
Once you’ve bought the right property at the right price, the next big challenge is deciding what material changes will deliver the best value-add for your buck. One of the biggest mistakes Barber repeatedly witnesses is people making their emotionally-charged embellishments – including things that can break down – rather than making changes that meet the needs of the market. That simply means knowing what changes are going to add the most value. On any cosmetic renovation, she says it’s always common sense to tackle the ‘low hanging fruit’ first. For starters, that typically means attending to the stuff that leaps out at you, like painting strange coloured walls, re-carpeting, window furnishings, landscaping, external rendering and cleaning.
As a rule of thumb, she says the two rooms worth investing the most time and money in by far are bathrooms and the kitchen.
“The age of a property will typically dictate the type of renovation you’re undertaking and while you need to factor the removal of things like asbestos into your calculations, they won’t add to the value of the property,” Barber says.
However, when it comes to structural renovations, added floor space has the biggest impact on price, which is why garage conversions can be a good place to start. Given they’re risky and can take up to two years to complete, Barber says it’s critical that you’re totally committed to structural renovation before starting.
“A lot of people get to the end with their bank account totally depleted, have no choice but to sell within a market that has pulled back, and find they may only break even,” she says.
Assuming you’re committed, Barber says the high-density, inner-city fringes by nature complement structural renovations, especially in areas where there’s high pricing disparity such as: Sydney’s Balmain, where there’s a more affluent demographic; Melbourne’s St Kilda, Richmond and South Yarra; Perth suburbs Dianella and Yokine; and Brisbane’s Coorparoo.
It’s typically extra bedrooms that are the best use of extra floor space. Similarly, she says investors who don’t have the budget to hire professionals to project manage structural changes need to learn the tricks of the trade fast. That means ensuring that the tradies coming in to do the walls, floors and ceilings are spot on.
While most inexperienced renovators won’t know how to monitor minor defects during the building process, she says they can cause headaches when it comes to tiling and fitting fixtures like showers.
It’s equally important, Barber adds, to do your homework on any tradies you plan to hire.
“Once you’ve decided on a tradie, ask to see both their licence and insurance and if they can’t provide them, don’t let them onto the property,” she warns.
“Similarly, ask if you can go around and check out the other jobs they’re currently working on.”
By developing a good relationship with a builder, Gray says you’re also less likely to be left dangling with a job half-finished.
This can happen when they run out of time and walk off a job, leaving you high and dry with little chance of someone else stepping in and finishing it off. It’s always best to start small, he says.
“Learn from a smaller, more controlled first project and move out from there as you gain confidence.”