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If you’re one of the millions of people addicted to watching home renovation and house flipping television programs, you might be tempted to throw in your day job for a power drill, plans and a paintbrush. You’re guaranteed to earn lots of money, relatively quickly and easily, as long as you do your homework, right?
Not quite, according to Tom Keel, Associate Lecturer in Property and Real Estate at Deakin University. With several years’ experience in renovating, property development, planning, sustainability and now academia, he’s seen plenty of renovations and developments go wrong. Here he shares some insights that he says you must take on board before beginning a house flipping venture.
Keel says the almost casual nature of the title ‘flipping’ belies the fact that it should in fact be approached very seriously. ‘House flipping is no different to any other business, and can yield great rewards for some and great losses for others,’ he says. ‘But it’s a high risk/high reward endeavour. In reality it involves large amounts of capital, often under finance, and it’s not that easy to make money when inputs such as land are so expensive to buy.’
‘It works out beautifully when the market is going up 10% per year, as it has recently, but if it doesn’t your ability to make a profit is limited.’ He also says that market downturns are an ever-present risk for budding house flipping aficionados.
‘If you’re the last one in the market, and the market turns, you can lose a fortune. If you’ve bought a property and spent 20% of its value on renovations, and the market drops 30%, the losses stack up – the property may not sell quickly and there is still the loan to manage.
‘It’s the dream of a lot of people to be able to quit their job and flip houses, but if I gave these people one piece of advice it would be to make sure you acknowledge there is a risk and don’t make the assumption that every flip makes a profit.’
There are several obvious costs to consider when doing house renovations or extensions to flip property, from the actual purchase, to trades and materials, planning application fees, and architect or draftsperson fees.
But Keel says several other costs are either underestimated or unexpected, especially if the renovation is more significant than just a cosmetic improvement. For example, holding costs.
‘Even though flipping is based on speed, things inevitably take longer than you anticipate,’ Keel says. ‘You can’t speed through the planning system or concrete drying in cold conditions and the longer you hold the property, the more holding costs you’ll pay.’
'House flipping is no different to any other business, and can yield great rewards for some and great losses for others. But it’s a high risk/high reward endeavour.'
Mr Tom Keel,
Deakin Business School, Deakin University
Another often overlooked expense he says you should consider relates to contamination. ‘Often if a house is ripe for renovation it’s probably got contamination as well, for example asbestos,’ Keel says. ‘If asbestos is found, it’s tools down until the asbestos team has been through, which is a costly delay that can wreak havoc on a flip when you’re working to tight deadlines.’
Keel says it’s essential to undertake a thorough cost analysis on a project and include a surplus for unexpected costs to help mitigate risk.
Much of the interest in house flipping, home renovations and house extensions can be attributed to the numerous television shows that make it look fairly straightforward. But Keel says these programs can contribute to novice flippers having an over-inflated confidence in the money they will make.
‘The risk is that many first-timers will minimise the costs and time involved, whilst over-projecting profits, following ideas that are often based on misconceptions picked up through hearsay and highly edited TV shows,’ Keel says.
‘They are just so unreal. They say, “we bought this warehouse for $200,000 and we sold it for $2 million”, but we don’t know their cost structures, they have overly-eager buyers and they have a much bigger trade team than most flippers could ever possibly have.
‘From watching these television shows, people start to think “I could do that because it looks so easy”. They think “I can knock out a wall, have a latte, sing a song and then make hundreds of thousands of dollars”. It’s ridiculous. Yes, some of the shows are very successful but they are based on television ratings and have nothing to do with real world property development.’
With the increased interest in house flipping has come more people applying for loans to make it happen. But Keel says the banks are well attuned to the flipping craze and are cracking down on lending for flips and developments due to the high risk involved.
‘Banks have a lot of criteria in place now and may not lend you the money anyway. I know of professional property developers who are doing their fifth and sixth developments and the banks have told them they won’t lend them the money because the development is too different to those they’ve done previously and that they don’t think the developer knows enough about the new project.’
The increasing competition from developers is another barrier to flippers. ‘You’re often competing with developers who may want to bulldoze an old house and put 10 units on the block, and they’re going to outbid you at the auction every time due to having potentially better yields on their larger developments. It’s not that easy to find just an old affordable house and fix it up.’
Given the high level of risk associated with flipping houses, there’s an increasing trend taking a twist on the traditional flip model of buy, renovate, sell. ‘If you can afford it, there is merit in keeping your “flip” and renting it out,’ Keel says. This could mean buying a property to complete an old house renovation or home extension, but not renting it our rather than selling it.
‘You’re not getting all your costs back straight away but you are getting an income stream through rent. Even the largest property developers around the world are now starting to do renovations to rent out, often called “build to rent”. It’s different to flipping but it’s just an interesting parallel that they’ve identified as an opportunity to combat the inflated market.
‘If you can afford it I think it’s quite a good strategy. Land keeps going up in value because demand keeps exceeding supply, so it’s often astute not to sell land if you don’t have to.’
Interested in learning more about property investment strategies? Consider studying property and real estate at Deakin.
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