Are you considering property development as a way to make money? They might make it look easy on TV but buying and selling property for quick, short-term gains needs careful planning. This article looks at "property flipping". There is a lot to think about if you’re considering buying a house to flip and we help you figure out if it’s the best use of your investment sum.
Dig deeper in to our Investment Planning GuideProperty investment often forms part of an overall financial planning strategy. While property prices can go down as well as up, it’s possible to build both long term and short term property investments to make a success of your investment planning.
When you invest in your own property portfolio it is normally a long term strategy. Many people choose the buy-to-let route and hope the property value appreciates over time. You could also choose to buy a property, improve it, then sell it again as quickly as possible. This is known as ‘flipping’ and is a short-term investment strategy. The difference between long-term property investments and flipping is that you’re not banking on house prices rising due to market inflation. You’re actually trying to keep the turnaround time as quick as possible, utilising your renovation skills to add value to your asset quickly, before moving on to the next project.
It’s a three-step process. It begins with you finding and buying the right property. It can be a house or a flat and once you’ve made your purchase, it’s a matter of improving it and then selling it on again. Sounds simple, right? Well, there is plenty that can stand in the way of making your investment dreams come true when it comes to flipping the odds to your favour.
To be considered a successful investment, you’ll need to generate a positive return (ROI). It is this end return, along with all the work involved, that will determine if flipping is the right type of investment for you, compared to the returns that other investment opportunities offer.
Alternative investment ideas to property
Your return on investment for house flipping can be worked out using this simple formula:
FINAL SELLING PRICE – COST OF PURCHASE – COSTS OF MATERIALS & LABOUR = Profit
Of course, it’s not really that simple. Let’s take a look at what’s involved in each step of the journey.
The first step is to plan the whole process out on paper. How much do you have to spend? Will you use a mortgage to part-fund the purchase? How much money can you put towards the purchase, i.e. your deposit? What budget have you set aside for renovations? What other fees are you likely to incur: solicitors, surveyors, insurance etc. What geographical area will you look at? You’ll need to plan on what market and what type of house buyer you’re aiming at, too.
With all that planning the costs quickly start to add up and give you an indication of the complexity of what you’re dealing with. Don’t forget to add in the estate agency or auction fee, mortgage setup costs, and taxes, stamp duty (until 31st of March 2021, there is a 0% rate on property under £500,000) and capital gains tax too. Don’t forget also to plan around key tax deadlines in the year for maximum advantage.
Once you’ve got the keys, you need to take a careful look, inside and out, to see where you can improve things. The most successful ‘flippers’ make the most money when they sit down and work out who they plan to sell the property to. If you improve features that aren’t important to your potential buyer, you’re wasting time and money. If you don’t improve the right things, in the right way, you’ll find the property hard to sell at your goal price. It’s also at this stage you’ll find out if there are unexpected issues that can damage your chance of a good return. Finding out the electrics and gas piping all need to be replaced, or that part of the house is not up to standard, can be an expensive lesson.
“I invested in my first property 13 years ago and aimed to add a further 1-2 buy-to-let properties per year to my portfolio. Not one purchase has been the same or been easy. Every single property has involved some hurdle to overcome. I’m fortunate to have built a team of trusted tradesmen, architects and legal advisors to help me navigate the optimum way over each hurdle. Investing in property is not a get rich quick scheme as posted about in social media. As anything you take the rough with the smooth before you build the experience to get it right.”
Selling is the easy bit, right? If you’ve done everything right and the market is buoyant then you should be ready to see how your overall return on investment has panned out. If luck is not on your side, then prepare for a long and frustrating period of endless visits and further costs, like bills, insurance and council tax. The estate agent may also need you to ‘stage’ the property with furniture. This can be purchased or loaned from a company. Another additional expense you might not have been expecting.
Once sold, you can apply the simple formula at the top of this article to calculate your return on investment. Are you one of the lucky first-time flippers who made a profit? In 2020 the average profit from a flip was £40,995, before costs. With potential costs (renovation, taxes, estate agency costs etc) being around £20,000 for a £200,000 property, your return percentage, when you factor in your time, can be very hard to estimate in advance. Then ofcourse it is what you do with the money once you have sold. Do you risk investing all of it back in to another project or can you start diversifying and putting some money in other investment vehicles such as a pension or tax efficient investments.
The success or failure of a rental property portfolio hinges on the ability to “gear” the investments. Investment gearing is the ratio between debt and equity. Chartered Financial Planner, Scott Gurd, specialises in working with clients who have property portfolios and he shares how to use gearing: “For a successful gearing ratio the rental income needs to match, but preferably exceed, the monthly costs of the debt. When it comes to buy to lets there are so many things to think about. Can you meet the monthly borrowing payments with the rental income? Do you have cash reserves if you loose the tenant. Do you understand the complexities in calculating the correct gearing ratio? Are you going to update and adjust property calculations when variables like interest rates change or there are new tenancy agreements. Do you have the time, experience and knowledge to be successful? It is practically a full time job. Finally, people always get in touch because they can’t find a mortgage provider who has a product available to meet the gearing requirements. The buy-to-let marketplace is more restrictive than the main residence marketplace.”
Making money with a flip in a surging house market, like during much of the 2010-2020 period, is entirely possible. Making money flipping in a stagnant or declining market is likely to require a much more experienced eye.
Bear in mind that professional flippers might be flipping 5 or even 10 properties a year. That’s a lot of plates to keep spinning all at the same time. So, all in all, this type of investment is very much ‘hands-on’. Much can, and does, go wrong in the process of flipping and only hard-earned experience can prepare you for dealing with the bumps in the road.
The investment planning team at Unividual looks at all types of investments, including property, and advises clients based not just on their goals but also their lifestyles and family situation whilst helping them build a suitable investment plan.
If flipping appeals to you, or if you‘d like to look at a wider range of investment options, get in touch with one of our investment advisors to go over the possibilities.
