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What is house flipping?
House flipping is different from standard property investment because you’re not looking for regular income and capital growth as a return on your investment. Instead, you’re looking for a house that is under-valued compared to other homes in the same location and can be bought and sold quickly for a healthy profit after renovation.
Without extensive building knowledge and experience, house flipping can be a risky project to undertake. The lure of a quick profit is nice, but the chance of uncovering issues during the flipping process is high. And some of these may turn into serious cost concerns.
- Time and budget overruns due to unexpected problems
- Holding costs will add up if the market isn’t ready for the property when you’re ready to sell
- Council approvals and permits may cost more or take longer than expected.
The house flipping process can take anywhere from weeks through to months. It all depends on a few key factors – the work required, the time you have available and your budget. Flipping houses requires disciplined decision making because overcapitalisation can be a real concern.
- Useful reading: Renovation Budget Blowout – How to Avoid
Gather your team, do your research and crunch the numbers
Research is paramount with any type of investment, especially a high-risk one like this. For a successful property flip, you must understand the market you’re buying into, be able to identify the right property, make astute decisions about the renovation and move quickly.
Get your key people in place in advance so you can move quickly when the right property makes it onto the market. A draftsperson, builder, accountant and mortgage broker should have you covered. They’ll be critical partners in the process and help you crunch the numbers for each property to determine its viability as a flipping project. Don’t forget to factor in your buying and selling costs – these can be substantial.
Financing a house flip
Reliable cash flow is critical to getting your project underway and finished. You’ll need money upfront for the purchase as well as enough to finance the renovations. Running out of funds during the flipping process is a sure-fire way to break the budget and walk away without the profit you were expecting.
Speak to your Yellow Brick Road Mortgage Broker about a loan facility that provides flexible drawdowns or access to loan funds. You’ll also need a facility that has no penalty for early repayment. Some property flippers use the equity in an existing home and opt for a line of credit to have funds immediately available for each project. There’s no waiting around for approvals as a line of credit can be repaid and used again. This type of facility also helps with unknown contingencies.
Speaking to a mortgage broker early on will give you an idea of your borrowing capacity. Also, how you’ll need to structure your loan during the purchase and the renovation, especially if you’re reliant on the new property to support the mortgage.
The whole premise of a house flip is finding a house where you can add value in a short amount of time. But you’ll need to move fast because there’ll be others like you. Having your finance sorted in advance means you can confidently negotiate the purchase ahead of other interested parties.
Is house flipping right for you?
Proceeding with caution is appropriate when thinking about house flipping. At a minimum, you need to be able to buy the property at the right price, add value without overcapitalising and ensure you have strong buyer demand when it comes time to sell. It can be challenging when you’re under pressure with a strict schedule and a tight budget.
If house flipping is something you’re keen to do, have a chat with a Yellow Brick Road Mortgage Broker and find out how we can help.