Seeking a new business idea is an exciting thing to do, and an especially thrilling prospect for the entrepreneur looking for their next challenge. But with recession on the horizon and many markets saturated, it can be difficult to find the right niche in which to grow.
There is one niche, though, which has been lucrative for a great many people over the past few decades: property. House-flipping, then, could be the right next step for you to take in search of profits. But what is it, and can it really be profitable?
What is House Flipping?
Houseflipping is a colloquial term, popularised in the US real estate, that might be more easily recognisable in the UK as ‘property development’. Simply put, it is the purchasing of property with the intention of renovating it and selling it on for a profit.
It is the route by which many households creep up the property ladder, with successive renovations enabling bigger future budgets or mortgages when it comes to the next house-hunt. With the right time and investment, though, it can also be a potentially viable business model, wherein profits become income.
There’s two clear options when flipping houses, the first is to live in the house while you renovate it (not advisable with kids, as it will be a building site). The second is to buy a second property and work on it until it’s sold. But this usually means a second mortgage, which means you need to factor in paying both mortgages with renovation costs.
Since the changes in landlord tax, flipping has become more attractive to investors, enabling clear profit.
The Pros and Cons of House-Flipping
The Pros
To flip houses as business model can be freeing with multiple benefits; if you go full-time as a house-flipper, you effectively become a freelancer working for yourself. This means you can work according to your own schedule, and in your own ideal routine. If you are familiar with the mechanisms of property sale and renovation, this can be relatively easy work, too, with considerable upside potential.
If you plan on living in the property, this enables the possibility of less competitive types. Flats and apartments can’t be extended, just modernised remodeling. So these are less desirable to property developers.
The Cons
However, despite the potential for major profits, there is a lot of risk tied up in house-flipping. For one, you are at the relative mercy of the property markets, where numerous variables – including interest rates and regional demand – can see house prices fall. This could be disastrous if it happened mid-development, wiping out your potential profits instantaneously.
Other risks present in the form of the third parties on which you must rely to complete a given project. Not only can you be let down by a contractor, but also legal professionals tasked with overseeing your next purchase or sale. Where a conveyancer fails in their duty, you could seek recourse via professional negligence proceedings; these would only mitigate the fallout of a significant failure relating to a sale or purchase, though.
Where possible, use someone you can trust, as a good team working efficiently to a high standard is always beneficial.
How to Get Started
If you are willing to shoulder the risks inherent to property development, and happy to move ahead with house-flipping as career model, getting started can be as simple as moving house. You can leverage profits from your own domestic residences in order to build up capital to invest beyond your own home, after which the real profits could stand to be made.
Outside of the conventional understandings you need to have about mortgages and the house-buying process, the fundamental key to making profits as a house flipper is the formula surrounding after-repair value, or ARV. In order to generate a profit, you should be looking to spend around two-thirds the ARV of a potential property on its purchase – minus the amount you would need to repair it in the first place. This ensures that your profits are protected from the outset. You need to factor in stamp duty, and obviously the more DIY work you can do yourself, the greater the return.
And there are challenges finding the right property. There is competition with professional flippers and builders who know what to look out for. They also often have deals with local estate agents for an early heads up on suitable properties. This enables them to have a strangle hold on the housing market. Plus investors will have the benefit of being a cash buyer, rather than waiting for loans to be approved.
In theory, everyone is after the same type of fixer-upper property. Usually the worst looking one on a street in a ice area, where a refurbishment facelift and newly decorated in a modern style will dramatically increase the purchase price.
And bear in mind, planning permission is needed to extend any property, including the lucrative adding of an extra room or turning a bungalow into a house. Simply remodelling with some repairs is rarely enough to see an ROI once the costs have been factored in. Although this can happen if the property value in the area shoots up more than the national average.
An experience flippers will have knowledge of good areas to monitor the housing market, as an understanding of how the spread of house prices increase outside of big cities can be great value.
How do you make money flipping houses?
Making money flipping homes involves several steps in the process. This is by no means everything here is our advice and some tips:
Don’t go into this blind without any strategy or with unanswered questions. Read up on any available information on any example house flips. Start by learning about the real estate market, local housing trends, renovation cost, and relevant laws and regulations. Take courses, attend seminars, and read books on the subject. Understand planning permissions and taxes that will impact your profit margins.
Set a budget and determine how much money you can invest in purchasing and renovating a property. Consider your financial resources, including savings, loans, or partnerships. Speak to lenders in advance to know what you can borrow or finance.
Look for distressed properties that are undervalued or in need of significant repairs. You can search online listings, work with a real estate agent, attend foreclosure auctions, or network with other investors. Look at potential, can you add an extra bedroom, office or gym? Can you open up the kitchen into a desirable living space? Can you landscape the garden into a major selling point? Is modernising the kitchen and bathroom, with luxury furnishings and giving the house a luxury interior design overhaul enough to make a big profit worth your time?
Before buying a property you need to complete adequate due diligence, thoroughly inspect it to assess the renovation costs and potential profitability. Consider factors such as location, market demand, and potential resale value. The worst thing you can do is buy a property that isn’t structurally sound. But you also need to check with the local council granted planning permission on the street for loft extensions into planning on going into the roof.
Depending on your financial situation, you may need to secure financing with a mortgage, apply for a loan, or partner with investors. Make sure you have the necessary funds to purchase and renovate the property and factor in delays and unexpected issues and costs.
Create a detailed renovation plan and timeline. Hire contractors or subcontractors to handle the necessary repairs and upgrades. Ensure that the renovations are within your budget and completed efficiently and to the right standards.
Once the renovations are complete, stage the property to make it appealing to potential buyers. Market the property through online listings, open houses, and working with a real estate agent to attract potential buyers.
Negotiate with potential buyers to get the best price for the property, you don’t need to accept the the first offer. It’s a sellers market at the moment, with more people looking than properties available. Complete the necessary paperwork, inspections, and legal processes required for the sale.
Calculate your profits by subtracting the total purchase price, renovation costs, and selling expenses from the final sale price. Ensure that the profit margin is worth the time and effort invested in the project.
Remember, flipping houses involves risks, such as unexpected renovation costs, market fluctuations, or difficulty finding buyers. It’s essential to carefully plan, conduct thorough research, and make informed decisions to maximize your chances of making a profit.
