With many markets currently moving up so quickly, some investors are once again considering renovate and flip strategy. Here’s what you need to know before embarking on this advanced strategy.
Flipping real estate takes work and can be risky, but the potential rewards can be huge. That’s why investors are attracted to this strategy.
The key to the ‘renovate and flip’ success lies in knowing what improvements to make, in order to generate the highest possible profits.
As a rule of thumb, you want to get back at least $2 for every $1 you spent fixing up the property.
One way to achieve is to stick with doing cosmetic renovations rather than the more time consuming structural work.
Paint is inexpensive and can instantly refresh a tired, shabby looking property, both inside and out. It’s also something you can do yourself to save on costs, and it doesn’t take too long to execute.
Even if you hire a painter, chances are you’ll get back so much more than you spend on it than anything else. In other words, paint is the ultimate cosmetic fixer.
Research is king
Before you even think about dipping a brush into a can of paint, however, you need a plan.
Rushing into renovation is the quickest way to fail as there are plenty of issues that can derail your project, blowing out your budget and your renovation timeline. Therefore, your first step is to do your research – and lots of it.
Start by researching renovated properties like the one you’re planning to buy, so you can estimate a fair final selling price.
You really need to compare 'apples with 'apples' and be honest with yourself about what the renovated property is likely to achieve.
Free sales data is available from websites such as www.OnTheHouse.com.au
for most states, or you could turn to local real estate agents to get their take on the market.
Next, you need to map out a clear budget, and be realistic about what you can expect to gain. It’s a good idea to research what is happening in the neighbourhood, to make sure your renovation is in line with the market so you don’t overcapitalise.
When it comes to obtaining quotes from contractors, you can check the amounts against the construction data available from websites such as www.washingtonbrown.com.au
to make sure you’re on the right track.
Get three quotes when renovating, and stick with sub-contractors that you’ve used before and are happy with.
What to buy
The exact type of dwelling you buy, whether it’s a freestanding house, townhouse, unit or duplex, isn’t as important as the individual property’s potential.
You need to assess each property on a case-by-case basis, starting with “problem properties”.
Problem real estate is usually discounted because the seller usually just wants to get rid of it and move on with their life. Estate liquidations and mortgagee auctions also present strong buying opportunities, as the vendors are often looking for a quick and hassle-free transaction, even if they have to accept a lower price.
If you choose to renovate any type of strata-titled property, be it an apartment, villa or townhouse, you’ll usually need to obtain approval from your strata manager. It can be worth the effort, as there are a number of ways to create value in a strata unit.
Assessing the risks
There are plenty of risks associated with the ‘renovate and flip’ strategy, so remember that your goal is to make money: you can’t afford to get swayed by emotions during the project, as a budget blow out is the quickest way to demolish your profits.
The main risk you face is that you could buy a property, renovate, and then be unable to sell it for a profit – or worse still, unable to sell it at all.
To mitigate the risk of overcapitalising, be realistic about profit margins before you begin. You won’t have much luck selling a home for $1m if it’s situated in a moderately priced neighbourhood, where homes usually sell for around $350,000, and the most expensive house is valued at half a million.
As such you need to properly plan your renovation and its likely costs before you commit to the purchase. If your renovation is complex – as in, it’s more than a dash of paint – then you should consider seeking the assistance of an expert builder. It will save you from committing to a renovation that might cost you thousands more than you expected, which could be the difference between success and failure.
You also need to make sure you get a building and pest inspection built in to your purchase contract as a special condition. The building inspection will pull out any major defects which can become a price negotiation point if you decide to proceed, as often even the sellers don't know about the problems with their property.
Finally, make sure you have sought relevant council approval before you begin your renovation, as it can be very expensive to perform rectification work after the fact.
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