Flipping houses: what are the costs?
The costs of flipping houses? Well, nothing. In fact, you should be making money from the adventure, not lose money. But that’s only if you listen to the following quality advice, of course.
Question number 1 is: are you a flipper or a keeper? Flipping houses is for those who have the time and resources for an intense period of research, buying, renovating and selling. Home-renovation shows tend to glamorize the process too much. The act of flipping an investment should never be an emotional process. For you to make any money out of an extremely competitive and intense market, you need to base all of your decisions on plenty of research. And of course, with a cool head.
The huge growth seen in Melbourne and Sydney markets also means that even though there are still plenty of places to flip, the returns of investing and then leasing may be more worthwhile than intensely flipping your investments. Renovators tend to benefit most when the market is weaker, with more stock and less buyers. First understand what market you are entering. If you still want to flip, think about looking outside the major cities to less competitive markets such as Hobart, Perth and Adelaide.
Flipping houses: the initial outlay
Don’t just do back of the envelope sums. Get on Excel and create some real spreadsheets. Stat! Mark down the cost of investing and then your conservative estimates of your returns after selling. Then log all the in-between costs:
- Inspection costs. These will save you from any unforeseen costs when renovating. These include building surveyors and pest inspectors.
- Stamp duty
- Agent’s fees
- Capital Gains Tax
- Administrative fees (mortgage fees, professional advice fees)
- Project for any blowouts in costs. Double the cost of your renovations.
Are your margins slim even without these projections? While flipping is about smaller but more frequent returns, you should expect a profit. It shouldn’t be a lucky surprise at the end of the process. This is because the entire business model relies on expected and calculated returns, not a gamble.
Renovating before flipping
So, what kind of renovations are you doing? Cosmetic or structural? Are you getting out the sledgehammer or the paint brush? If it’s the sledgehammer, then more than likely you have a longer-term projection for your investment. Factor in the higher costs of creating new areas in the property and be that more conservative in that old spreadsheet.
Flipping houses is quickly becoming, if it isn’t already, a much faster process. This means seeing the low-hanging fruit that you can use to give yourself fast returns. This is all so that you can avoid paying interest on a place that you aren’t receiving an income from.
Don’t screen your calls. But screen your contractors
If flipping houses is what you really want, then it needs to be a long term game. For you to make it a sustainable investment, by nature it has to be. This means developing ways to spread costs over the long term and over multiple projects.
Developing strong ties with contractors and their sources is key. Be ruthless in developing ties with quality tradespeople and make sure they realise you can be a source of ongoing income for their own business. A smart contractor will see the longterm benefit of giving you a better deal in the short term.
DIY to reduce those costs
Cosmetic renovations will afford you the chance to do things on your own. Again, even though your project is a short-term project by nature, your business model is a long-term model. And that is how you need to think. Buy rather than hire tools that you know you will use across every project and develop knowledge and processes that make each subsequent renovation that much quicker and cheaper. Final tip: hire a dumpster so that contractors don’t have to include waste disposal in their estimates and quotes.
Beyond these steps, check out this beautiful line that you shouldn’t cross on budget renovations and enjoy the flipping!