Investors who are considering property flipping might need to rethink their plans as doing so might only put them at a risk for a potential loss.
The reno and flip strategy amid softer market conditions could potentially be challenging and there are three major reasons why the current state of the market might not be ideal for property flippers, according to buyer's agency BuyersBuyers.
1. Potential rate hikes
BuyersBuyers co-founder Pete Wargent said the upswing in monetary policy might mean that there is less certainty about the market outlook.
“A renovator could find themselves selling into softer market conditions — the generic market capital gains may not be there to carry a project through to profitability,” he said.
Mr Wargent said rising fixed mortgages have already dampened sentiment in some of the markets, particularly the more expensive ones like Sydney and Melbourne.
“Renovator and flippers need to factor in the outlook for the local market they are operating in, to effectively manage project risks,” he said.
“If you aren’t confident about your ability to flip property, think longer term — there’s a looming undersupply of family-appropriate dwellings in the middle-ring suburbs of many of the capital cities, and there are plenty of prospects for growth in rents and property prices in these landlocked areas over the coming decade”.
2. High construction costs
The uptrend in construction costs is also a major factor, as there could be a tangible risk for over-capitalisation if players do not budget carefully.
Figures from the Australian Bureau of Statistics (ABS) showed that the prices of timber and steel have increased by around 50%.
Furthermore, a range of other materials and services have hiked the average cost of construction of a new home up by 20% from last year.
“Obviously, projects need to be assessed on a case-by-case basis, but overlapping supply shocks have made access to construction materials at a reasonable cost less dependable, while in many areas of the country, there is a shortage of available tradies, which needs to be factored in as a contingency to any proposed renovation budget,” Mr Wargent said.
Mr Wargent said construction and material costs are considered “sticky” and renovators and developers should assume that the high costs could persists for some time even if global supply chain issues are resolved.
“Geopolitical events are unpredictable, and supply chains may right themselves in time, but demand for materials and construction services remains relatively high for the time being, so there’s every reason to expect costs to remain high for some time,” he said.
3. Cooling market
BuyersBuyers CEO Doron Peleg said the cooling market could have a significant impact on the profits that could be made from a reno and flip strategy.
“In 2021, purchasing a property price for $600,000, adding $120,000 of value with a $60,000 renovation, and factoring in a property market increase by 20%, could lead to a profitable sales price of $840,000,” he said.
Mr Peleg said even after accounting conservatively for 7% to 8% transaction costs, there’s a still generous profit to made in such a deal in a brief period of time.
“You can also easily see how a reduction in market values of, say, 10% could leave an investor undertaking a flipping project in a precarious or loss-making position, particularly if there were unforeseen cost overruns due to materials or trades shortages.”
Photo by @jimmynilssonmasth on Unsplash