With many markets currently moving up so quickly, some investors are once again considering a 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 your ‘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 have spent fixing up the property. One way to achieve this is to stick to doing cosmetic renovations rather than 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 doesn’t take too long to execute. Even if you hire a painter, the chances are you’ll get back so much more than you spend on it than on 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 similar to the one you’re planning to buy, so that 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 their quoted amounts against the construction data available on websites such as www.washingtonbrown.com.au to make sure that you’re on the right track. Get three quotes when renovating, and stick with subcontractors 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 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.
Here are a few renovation ideas for a unit or strata-titled property:
- Enclose a balcony to create a home office, study or sunroom
- Make room in the kitchen or bathroom for a washer and dryer, thus creating an internal laundry
- Add split-system air conditioning
- Change the door or windows to improve access to views
- Add decorative skirting boards
- Plaster over ugly ceiling finishes
- Install timber floating floors over concrete
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 be swayed by emotions during the project, as a budget blowout 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. The other danger arises if you pay too much for the property to begin with, so that when you take the purchase price plus the cost of the renovation together, the end product is much too expensive for that market and puts the project far above what a reasonable resale price could fetch.
How to avoid the risks
To reduce or avoid 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 in a moderately priced neighbourhood where homes usually sell for around $350,000 and the most expensive house is valued at half a million. 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 into 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 properties. Finally, make sure you seek relevant council approval before beginning your renovation, as it can be very expensive to perform rectification work after the fact.
Counting the entry and exit costs
There’s no denying it: it costs a lot to get in and out of investment property, which is a major deterrent for many would-be buyers. Expenses such as stamp duty, agent’s commission, mortgage repayments, advertising and legal costs are a substantial financial drain, and they need to be factored into your overall project budget. For example, if an investment property was purchased for $400,000 and sold for $500,000, with an estimated $30,000 worth of renovations, the estimated buying, holding and selling costs (see table) could amount to $72,440: $17,440 + $38,000 + $17,000 = $72,440 The final profit, based on a $500,000 sale price, would therefore be $27,560: $100,000 − $72,440 = $27,560
The costs involved will vary for each individual project, but this example offers a good guideline on which to base your renovation. To calculate the entry and exit costs on an investment property you’re interested in buying, visit the ‘Calculators’ section at yourinvestmentpropertymag.com.au. It’s plain to see that if you plan your renovation well and manage to get through to the other side without blowing your budget or dragging out your project timeline, you could enjoy strong profits.
Help! It’s not selling…
So you’ve done the renovation and your property looks amazing, but it’s been on the market for four weeks and you haven’t had a single bite. What can you do if you can’t sell your flipper quickly enough? You have a few alternatives, so your first move is take a deep breath and analyse your options.
If you believe your renovation has added significant value to the property, you could refinance to tap into the equity you’ve created. Some property gurus advocate this as a wealth building strategy, as property generally appreciates in the long term. With the equity you’ve unlocked, you could then buy yourself some more time in which to market and sell the property.
A second option would be to market the property as a ‘rent to own’, where the buyer rents the property from you with the intention of eventually buying it. But your best bet would usually be to simply sit tight and rent your property to tenants until the market improves for selling.
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