There are many different ways of investing in property and one that we are asked about often is ‘flipping’ properties. While it can be profitable when done correctly, there are often drawbacks to flipping properties for a short-term gain, as well as a whole range of things to consider before you jump onto that bandwagon.
In this article, we’ll discuss this property strategy in more detail and show you why it’s not always as glamorous as it’s made out to be. Plus, we’ll show you how you can make money in property with less risk and less cost.
What does flipping a property mean?
Firstly, let’s consider what flipping a property is. I’m sure many of us have seen the TV programme, ‘Homes Under the Hammer’ in which people buy a property, refurbish it, and then sell it on to make a tidy profit within a short space of time. This is flipping, and while sometimes you can make a profit, it’s typically less than what was initially calculated.
On TV, you see example after example of people buying a property for £70,000, spending £20,000 refurbishing it and then selling it for £100,000, making a tidy £10k profit. But what you don’t see is all the ones that failed to make a decent profit.
When a profit isn’t a profit
Let’s say it all works out. You buy a £70,000 property, spend £20,000 on it and sell it for £100,000, generating a gross profit of £10,000! Sounds great, right? Well, it’s not so great when you then have to consider that out of that £10,000 profit, you need to factor in solicitor fees, mortgage broker fees (if you’ve used a mortgage), stamp duty, project management fees, council tax, utility bills, security and water while doing the refurbishment, and then estate agent’s selling fees.
As well as those, we mustn’t forget Capital Gains Tax (CGT). Currently, any profit of over £12,300 on a house sale that is not your own home is subject to CGT, typically at 28%. Suddenly, your £10,000 profit has been completely wiped out!
What if you decide to renovate a property that you already have? You could do an extension and then sell the property on, pocketing the profit. Let’s assume you purchased the property a few years ago at £450,000. You then add an extension costing £70,000, being careful to skirt the increasing material and labour prices. Again, once you incorporate other project costs such as project management and holding costs (council tax and utilities) of £10,000 your total spend is £530,000. Following a £70,000 refurb, the property may sell for £550,000 if the market has been increasing! Fab, so you’ve made a profit of £20,000 before tax, or in real terms, 3.8% on your initial outlay.
Again, that doesn’t sound too bad, if you manage to do it all in 6-8 months. But you’ll have to go through that experience and do the work over and over again. Mm – not so great. As well as that, remember that this model is only successful if the property market remains strong and property values increase every year. But as we all know, the market is not always consistent, so these profits can’t always be relied on.
An alternative way to make a profit
Introducing the BRR model! The buy, refurbish and rent model is a preferred option for many as it means that investors can do the work once and get paid forever, in the form of rental income.
Then as your property increases in value over time, you can refinance it and release some of the equity to use as you see fit.
This seems like a more reliable, long-term property investment strategy.
What’s more attractive?
Option 1 takes a lot of time, effort, and money as well as running the risk of the property market fluctuating, all to make a 3% profit.Option 2 has the initial outlay that comes with buying and renovating a property, but you can then rent it out for the next 10 or 20 years and receive a regular monthly income. That property you spent £70,000 to buy and £20,000 to refurbish is now making you an overall (rental plus capital) return of 10% every year, for the next 20 years. To us, option 2 is the obvious choice and that’s exactly what we help our clients to do on their property investment journey.