Makin' coin flippin' houses

Jan 23, 2019

Welcome to Finance & Fury’s Say What Wednesday

Today’s question is from Lucas, “Hey guess, just wondering if you think that flipping houses is a good strategy? Can you really make a living flipping houses?”

Good question! Flipping houses has become very popular but it’s not as easy as you think.

 

The Theory

1. Find a ‘fixer up’ property at a low price
2. Renovate it. Spend some money bringing it up to higher standard.
   • There are people who run courses on this – you spend $1 and it should increase the value of the property by $1
3. Sell it for a profit – Like magic! Sounds good right?

 

Finding the property  

It’s the same process for any property purchase (researching, etc):

1. Research property
   • Values, growth history, what work needs to be done on the property?
2. Your situation
   • Cap your price – Know how much you can afford
   • Budget – do you have surplus cash in case renovations go over budget?
3. Is it worth it?
   • Look at potential gains – Minus costs in and out, along with interest, stamp duty, agent fees, legal fees etc.
   • Timeframes – how long will it take?

 

Does this work? Here are some examples.

Buy something for $450k, with a 10% deposit (so, you’ll need $45k plus other costs)

 

	Scenario 1 – $2 for $1 every spent	Scenario 2 – $1.50 for every $1 spent
Property Price	$450,000	$450,000
Loan	$405,000	$405,000
Purchase costs
Legal fees, registration, pest inspection, etc.	$2,500	$2,500
Stamp Duty (QLD)	$14,175	$14,175
LMI (10% deposit)	$7,938	$7,938
Total	$24,613	$24,613
Renovation & ongoing costs
Interest expenses - 8 months	$12,150	$12,150
Renovation costs	$80,000	$80,000
Total	$92,150	$92,150
Selling fees
Sale Value	$610,000	$570,000
Agent fees, advertising	$16,775	$15,675
Assessable Gain	$67,850	$27,850
Taxes - CGT (If not living in and only income)	$14,425	$14,425
The Bottom Line	$57,037	$18,137

 

When it goes right:

1. Property markets climb in under 12 months (there’s no guarantees)
2. You are experienced in property construction, renovations
   • You’re in a trade industry, you have friends in trades, and have the time to get the work done

 

Risks:

1. Overcapitalisation – spending more than needed
   • Profits come from ‘cosmetic’ renovations
     1. Structural is normally not valued by buyers. For example – Replace foundations, rotted walls, etc.

2. Your Experience and situation – there’s lots of moving parts to get it done in a timely period
   • How much of the work can you do yourself to save on costs?
   • Is this going to be your full-time job?
   • Getting finance for the project
3. External factors
   • If the property market goes down, you’ll struggle to break even
   • Council or Body Corporate approvals
   • What if it doesn’t sell? Can you afford the loan?

Other Options

• Keep the place and rent it out for more income now
• Retain the property and refinance for more equity and invest elsewhere

 

In Summary

EVERYTHING needs to go right – it’s hard to make a lot of money if you don’t have much experience.

 

If you have any questions hit us up here at the contact page