Making money quickly from buying and selling property looks attractive, but a host of pitfalls lie in wait for the unwary. This article covers the 10 key points to know about buying and flipping houses to turn a profit, following an introductory overview of the property market and an explanation of the tax position.
The UK housing market
Property prices have soared by 13.2% over the last turbulent year, which has encouraged many investors to get in on the action and buy and sell houses; the house flipping trend has been fuelled by the government’s Stamp Duty tax incentives. Some investors who have seized the opportunity have realised up to 20% returns on the most successful property flips, making it easy to see why house flipping motivates people to make money.
However, while many investors are attracted to the idea of a new career in property development, a keen eye to spot the right house, shrewd negotiating skills and hard work are required for property flipping and it may not appeal to the risk averse. Making an accurate projection of the costs involved in the entire project is vital from the start, as is maintaining control of expenditure to realise the best chance of profit.
A winning formula employed by many investors aiming to maximise profit when house flipping is to purchase for a low price and sell for a high price. One of the main obstacles to doing this and making money, is the limited supply of houses with potential to realise a quick profit; those that do exist are in high demand, especially from builders and investors with deep cash reserves.
Location and scope to extend
Tim Rickitt of Rickitt Partnership in Cheshire stressed the importance of location and size when considering property flipping. He said:
“These are two elements which cannot be changed unless an extension scheme is planned. First, decide on the type of property; many people just want to do the basics to turn a property around and usually target the kitchen and bathroom. The kitchen is the heart of a house; the best schemes involve an elegant, simple design. A kitchen is a very personal thing, currently buyers want a big dining/breakfast kitchen which can be a social space. It is best to use light colours, nothing bright, and remember there is a fine line between a developer’s taste and what might appeal to the general public; the best policy with property flipping is to appeal to as wide an audience as possible. Good broadband and space for an office are also desirable factors.”
The tax position
It is important to be aware that property flipping is considered as trading activity rather than investing, therefore profits are subject to either income tax, or corporation tax if a property is bought and sold through a limited company. To clarify, if the intention is to renovate a property and sell quickly for profit, the owner is probably trading as a property developer. Capital Gains Tax is payable only where a property is bought as a long-term investment or with the intention of being rented out.
10 key points when considering house flipping:
1. Buy in the right place.
This is crucial; with property flipping, the `location, location, location’ mantra rings ever true, and it is vital to research the housing market to find a suitable property. Opting for a familiar area could bring rewards due to local knowledge of desirable places, individual contractors and potential growth spots as well as potential planning issues; for instance upcoming developments nearby may impact a project. Proximity to the project is also helpful in cutting down travel times and associated costs. A `good’ area for a property purchase might be close to local shops, transport links, schools and employment hubs.
2. Buy at the right price.
Overspending at the start of the project makes achieving a profit difficult; making a simple calculation at the outset is vital. As a guide, use the 70% rule: the purchase price should ideally be no more than 70% of the home’s value after renovation, minus the cost of the renovation works. The resulting figure is the maximum price that should be paid for a property; however, a rising housing market makes it more difficult to get an offer accepted using the 70% rule. Careful assessment of the market and comparable properties is needed to decide on the level of risk to take above this.
3. Identify the right property.
Find a property which will appeal to a wide demographic, for instance, a bargain three-bedroom semi-detached property will always have a high likelihood of attracting buyers. While a larger house in poor condition may deteriorate more quickly and drop in value, it can also be renovated quickly and increase in value; the price differential with a smaller property may not be so impressive. Be aware that some areas have a ceiling value on house prices, so overspending on refurbishment works may well result in a developer making a loss. Keep in mind that attempting to flip a property with niche appeal will attract a smaller pool of potential buyers. When making a property purchase, it is a good strategy to consider houses with potential for adding an extra room if funds allow; remember that the pandemic created a surge of interest in homes with large gardens and flexible space, especially for offices.
4. Plan your whole strategy.
Carry out a feasibility study. Decide whether the aim is for a basic kitchen and bathroom renovation to flip a property as quickly as possible, or is a bigger project envisaged, such as an extension, loft or cellar conversion to add value? Knocking down non-load bearing walls can create flow and desirable open-plan dining space. It is also important to get the specification right; installing bargain basement fittings risks cheapening the end result. Understanding your potential market is as vital as buying a property for the right price to realise a healthy profit. Constant monitoring of the housing market is essential to secure a successful flip when it comes to selling a house quickly.
Keep a close eye on the various ongoing costs and stick to a budget. Obtain prices from contractors for the planned works. Consider worst case scenarios such as the cost of materials escalating, (the price of concrete, aluminium, timber and steel is currently rising), the market dropping and competition from lower-priced property coming to the market. Allow for cash reserves; add a 10% contingency fund to cater for unexpected expenses which inevitably arise and factor in delays, such as the supply chain issues following Covid-19. The current shortage of construction materials may mean that project completion times are extended, affecting hopes of a quick sale.
6. Whole project costs.
As well as the costs of building and renovation work, a survey will be required to identify potential structural problems. Flipping houses will also incur legal fees, estate agents’ fees, broker fees for finance, Stamp Duty, the costs of servicing a loan, plus holding costs before the property is sold, such as insurance, council tax and utility bills.
7. Research is key to making a project profitable.
Look closely at a property for covenants, restrictions and rights of access which may derail plans. Establish whether there are any imminent planning developments nearby with the potential to devalue a property, or conversely, which may enhance its appeal to buyers.
8. Financing a property purchase.
Traditional mortgages are not suitable for property flipping; bridging loans may prove to be a better option as they can be quickly arranged, but they entail higher interest rates. It is important to ensure that a lender is aware of the project’s time-frames. Typically, a buyer would use a bridging loan and/or pay cash. In some cases, a buyer will flip a property through a limited company, therefore paying corporation tax which could be less than paying income tax on individual income.
9. Project management.
Decide who is to be in charge of the refurbishment work; usually this will be a main contractor who will be paid to run the project and hire in sub-contractors. Alternatively, a buyer may choose to manage the scheme themselves and hire in individual contractors. A buyer must know their capabilities and time availability; this strategy runs the risk of slowing down a project and making costly mistakes: it may be more practical to use experts for speed and reliability of work. If the main contractor route is chosen, it is important to agree timescales and maintain regular contact; a payment schedule must also be agreed with him: contractors will require regular payments and funds will also be needed for materials or to pay sub-contractors. It is advisable to only pay for works which have been completed; do not pay ahead. It is essential to be on site as much as possible to deal with problems as they arise and reduce delays.
10. Point of sale.
Stage the property to sell; source the right furniture which can be rented from specialist suppliers. To set a selling price, research comparable properties and house prices. Select an estate agent who is experienced in selling similar properties to give a current market value. A low, realistic selling price may be the best strategy to attract maximum interest to sell a property quickly; too high a price risks a house taking longer to sell, entailing higher holding costs, while a resultant price drop signals a struggle to sell.
When a sale is agreed, maintain close contact with solicitors and estate agents to prevent the sale collapsing due to delays. At this stage, a property investor should be on the lookout for their next house flipping project, while bearing in mind that making a profit is not necessarily repeatable: the housing market may fluctuate and every property comes with its own problems.
What do you think?
Do you agree or disagree with the above? If you have an interesting or informative experience of property flipping, we would love to hear about it: get in touch and let us know.