House flipping is when you buy a home - often at auction or in a distressed sale - and then resell it at a profit. You can make a lot of money doing this, and according to the experts, it can be a lot of fun. However, it’s high risk and hard work and you could lose everything you own if you don’t know the ropes.
One of the most important things to remember is that for an investment property venture it doesn’t matter whether or not you like the design or style of a home - the two main factors to take into account are location and price.
As with all real estate purchases, the most important criterion for buying a suitable house to flip is location. The worst house in a desirable neighbourhood or an area that’s improving is far easier to resell than the best house in a rundown suburb. You can always upgrade a house, but it’s seldom possible to improve the character and safety of a neighbourhood.
Look for zones with rising property prices, employment growth, and other indications the area is thriving. Avoid neighbourhoods with an usually high number of homes for sale - this could be a sign of a depressed local economy or that residents are leaving due to high crime levels or unwelcome forthcoming developments.
Properties close to good schools, public transport, shops and other amenities are more desirable than those in outlying areas, where homes generally take longer to sell.
You also need to think about the property’s distance from your own home. You’ll be working on this house daily in the weeks and months to come, so you want it to be reasonably close.
Before putting in an offer to purchase, you need to estimate the price at which you could sell the property and how much the renovations will cost.
The standard formula for a profitable flip is to pay no more than 70% of the value after renovations, minus the cost of the project. For example, if the value after necessary renovations is R2 million, and the cost of repairs is R300 000, you should pay no more than R1,1m for the property. (R2 million x 0.70 = R1,4m – R300 000 = R1,1m).
It’s important to look for structurally sound properties, especially with older homes. If you don’t know what to look out for, take along someone who is knowledgeable about building, electrical, and plumbing to help determine if it’s a good prospect.
No matter how much you are attracted to a property, you should avoid any that have signs of damp, or need a roof replacement or rewiring. These projects all take up far too much time and cash to be profitable.
You should focus on properties that only need some quick relatively inexpensive renovations. Look for homes where refinishing kitchen cabinets, adding new sanitaryware, cleaning up the garden, freshening paint and updating flooring could quickly transform them for reselling at a profit.
With some experience, you can learn how to estimate the costs of many home renovations and get an idea if a particular property is a good buy or not. Carrying out some renovations on your own home can give you a general idea of costs and project timelines, as well as the type of projects you enjoy and are capable of and which jobs you should rather outsource.
Check your credit score
Unless you have enough cash to pay for a property and all necessary renovations, you’ll need some kind of loan. And although banks are keen to lend at present, lending criteria are still tight. This means your credit record needs to be immaculate – particularly when applying for a high-risk house flip loan.
The higher your credit score, the better interest rate the banks will offer you on a home loan. This can save you thousands when you start house flipping, freeing up more cash to invest in the property itself.
You are entitled to one free credit report every year from each of the South African credit bureaus, making it easy to check your credit score. You can view your account payment history, balances and instalments as well as adverse credit information. Make sure that there are no fraudulent accounts, and that errors are fixed.
If you don’t have a good credit score, you need to start building one before applying for a loan. Pay your bills on time, pay down existing debt, keep your credit card balances low and don’t sign up for any new vehicle finance or store cards.
Stick to your budget
One of the most common mistakes novice house flippers make is to under-budget and then run out of funds. To be on the safe side, add 20% to the estimated cost of any project.
To be successful in this type of venture, it’s essential never to undertake any renovations and repairs you can’t afford, and don’t be tempted to overspend. You want to improve the property just enough to make a healthy profit and keep it in line with what’s selling in the neighbourhood. If you invest too much in the property, you won’t make that all-important profit.