Could you make a quick return by ‘flipping’ a property?
‘Flipping’ a property, or buying it then reselling it within months, can be a great way to make money in a short space of time. This method is increasingly popular in the UK, even with coronavirus restrictions in place. Buyers have been taking advantage of the Stamp Duty Land Tax holiday to further reduce their costs.
However, people using this method need to be cautious as a miscalculation of your budget or margins could lead to a smaller profit than anticipated or even a loss.
In order to sell on a property at a higher price, there needs to be a justified reason for the increase. Capital growth can not usually be used to justify an increase due to the quick turnaround time of purchase and sale. Therefore, some kind of refurbishment of the property is usually necessary to increase the value.
So how can you ensure that your ‘house flip’ is both quick and profitable?
- Choose the right property
It may sound obvious but choosing the right property can make or break your profit.
This isn’t as simple as looking for the cheapest property that needs some redecorating work. You need to understand your demographic, who will want to purchase the house from you and what they’re looking for in a property. Think about what could be improved within the property to add a lot of value for the buyer.
You could consider doing some market research about the local area to see what buyers are going for. Look at houses that others have renovated to see what changes they have made. This kind of research will allow you to make quicker and smarter decisions on your own project.
- How are you going to finance your property?
Traditional mortgages are not really made for this kind of property investment. You will probably be hit with an early repayment penalty from your lender.
Even if you’re not charged for early repayment, a mortgage is granted with the understanding that a buyer will be holding the property long-term, either to live in or to rent out. It’s how they make their profits. Lenders may notice the pattern and refuse to lend to you again, and even warn other lenders against doing the same.
The best ways to buy a property to flip are either to use cash or to use a Bridging Loan.
A Bridging Loan is essentially a short-term mortgage which will usually allow you to borrow around 70% of the value of the property. Some lenders will even let you borrow additional money to cover refurbishment costs.
It is important to think about the costs of taking out a Bridging Loan when putting together your budget. The interest and fees will usually be considerably higher than applying for a normal mortgage. Failure to consider this could impact your end profit once the property is sold.
- Consider your budget
There are plenty of considerations when planning your budget other than the purchase price, any loans required, and resale value.
There will be professional fees from solicitors, estate agents, finance brokers and surveyors. There will also be interest and fees on your loan if you decide to take one out.
Your will have costs whilst you are in possession of your property; utility bills, insurance and council tax for example. These shouldn’t be too high as, in theory, you will only have the property for a matter of months. However, they will start to add up if your works fall behind schedule.
Your refurbishment costs are likely to make up the biggest portion of your outgoings. Make sure that and quotes from contractors cover all of the works required and look out for any hidden additions. It’s also a good idea to keep some budget to one side for contingency money if a job should snowball and become more work than initially thought.
- Renovate and decorate
The same as when you choose which property to go for, you will need to consider your demographic when planning your renovation works.
Consider the important features that buyers will expect from a property that they can move straight into before planning your aesthetic decoration. Will you need to replace the kitchen and bathroom, rewire the property, install a new boiler and central heating, add insulation or install double glazing? These ‘essentials’ could add up and eat into your renovation budget.
Aim for the highest quality finish you can afford within your budget, but don’t go overboard! A new bathroom suite may be essential in adding value, but will a designer walk in shower really add that much more?
Consider staging the property. A suggestion of how a space can be used, or what kind of furniture would fit well can really help buyers to imagine themselves in a property. Try not to make a space feel cluttered, aim for neutral and airy!
- Promote the selling points
When listing your house for sale, whether yourself or with an estate agent, make sure the photos and the descriptions highlight the elements that will really sell. Is your house the only one on the road with off-road parking? Do you have a large garden? Close to an excellent school? Shout about it! These are the details that potential buyers will be using to filter their property searches so ensuring they’re all there to see could lead to a quicker sale.
Following all of these pointers should mean that your property flip is successful, and a profit is made. This will pave the way for your next property project.
If you need any further advice about property investments, especially regarding tax as investment activities and trading activities are treated differently, don’t hesitate to contact us.
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