Episode 2: 10 Things You Need To Know About Flipping
On today’s episode,
Bernadette discusses a popular property investment strategy used by many Australians, renovating to sell or “flipping”. She shares the 10 important things that you need to know about flipping, and boost your earning potential and renovating success.
Listen to Episode 2: 10 Things You Need To Know About Flipping:
Podcast: Download (Duration: 20:53 — 19MB)
- Four main reasons to flip
- Why would you NOT flip?
- How you can keep a good eye on your property taxes with a good property accountant and protect your personal assets
- The strategy of flipping a family home and staying on the right side of taxation law
- Doing proper market research to ensure profitability
- Sourcing the right property and working with buyers agents for negotiations
- The two main Types of Renovation and why she loves “cosmetic plus” renovations
- How to manage the holding costs
- Your three roles in managing a renovation
- Why property styling is non-negotiable in flipping
Check out the BONUS Point of the things you need to know in flipping at the end of the episode!
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This is Bernadette Janson of “She Renovates”, a podcast for women who want to create an income and a life they love through renovating.
Today I'm going to be talking about flipping. For those of you who don't know flipping is quite an exciting strategy. It's where you buy, renovate, and sell a property for lump sum profits. But in saying that, while it on one hand it's exciting, on another hand it's quite challenging. And so today I hope to shed some light on some of the things that you need to be aware of if you're thinking about this strategy. The title of this podcast is: 10 Things That You Need To Know About Flipping.
I'm going to start with number one. Why would you Flip? I'm going to give you four main reasons. So the first reason that someone would flip would be if your disenchanted with your job you might be in a toxic environment.
You might be bored with your job, and be thinking that renovating is something that you would love to do and would like to switch over to renovating full time and I know exactly where you are because I have done that for many years. And so that's the first reason.
The second one would be if you're building your property portfolio and it's just not growing quick enough and you want to just give it a bit of a cash injection to put a tiger in the tank. And so that would be the second reason.
The third reason would be, you might be retired and you might be looking at doing something creative and fun that's also going to make you some extra money as well. So that's the third reason.
The fourth reason might be what we call the Avocado Smash strategy. So that's where we've been doing projects with our children, so they are, they invest in it as well by means of an investment loan. We put some money into it. We do a project together and split the profit so that they can get going on their property journey. So that's the fourth reason.
Normally getting flipping to get a deposit is not really practical because you need the deposit to buy the project but in the avocado smash strategy that's what we do.
Point 1, Why would you not flip? Now this is very important. The main reason is because, for one flipping is not investment it's not an investment strategy. It's actually speculative and it's a very short term strategy.
What happens is you breathe new life into this crummy old home and then sell it. It's like selling the golden goose. And once the property is sold. Then the new buyer is the one that benefits from the capital growth.
The 2nd point is that it's the least forgiving, because you are buying and selling into the same market or very quickly. You don't have the benefit of time to heal any errors of judgment. So you absolutely need to get everything on point to make sure that you do actually make a profit. And it doesn't go backwards.
The third reason would be that it's just like a job. So if you don't work you don't get paid. What I say to our community is if you're planning to flip, you need to make sure that you're also working on a longer term strategy side by side. So that when you come to a point in time when you don't want to work on your projects anymore that you have that portfolio to support you.
The 3rd point is that you need to work very closely with a property accountant. This is sort of relevant for all strategies, but in particular flipping, because there are lots of pitfalls for beginners. Now I say property accountant, because taxation law is very complex. You need someone who knows what you don't know and knows what you should be asking because you don't know what you don't know.
And one of the things that you'll need to work out with a property accountant, It's a legal entity in which you buy the properties because if you buy them in your own name then you will pay a lot of capital gains tax on your projects when you sell them. And it can become uneconomical. So you need to find legal ways to minimize it. And the first way is by using company structures or legal entities to do that. So work with your property accountant to get that right.
The other thing that you need to do with your property accountant is actually protect your existing assets. So like it or not when you're flipping you're in a renovation business and you're exposing your personal assets to business risks. So you want to make sure that you use legal structures to protect your personal assets and also that you are aware of all the taxes that you could incur in operating your business. For example, some renovations incur GST. What that means is, if this is the case with your project you will have to pay one eleventh of your sale price in GST and that's regardless of whether you make a profit or not. It’s really important to make sure that you're working with a property accountant on this journey.
The 4th point is that often people want to flip, basically climb up the property ladder flipping their family home.
Buying a home, living in it, renovating it, selling it and keeping going so that they avoid the tax, the capital gains tax, because they take advantage of the exemption. This is another reason why you need to work closely with your property accountant, because the taxation law in this area is quite clear that if your intent is to make a profit then it may well be taxable.
You want to make sure that if this is the path that you're going down, that you make sure that you stay on the right side of taxation law. I certainly know of people who've received a bill for capital gains tax from what they thought was the flipping of a PPOR or Principal Place Of Residence long after it was gone and for several hundred thousand dollars. You want to make absolutely sure you've got that side of your renovation completely organized.
The 5th point is research. Once again you are starting a business when you go down the flipping path with any business. The first step is market research.
You need to research. Well obviously we've just talked about tax. And asset protection but you also need to research the area in which you're going to be buying property. Not every area has profit potential, you want to make sure where you're working is going to be profitable. Some of the things that you will gain from your research, firstly, who your buyer is and what they will pay for.
It's important to identify a gap in the market and know what that particular buyer wants in a renovation.
When you've done a renovation everyone absolutely loves it, but often they won't pay what it costs to deliver. So you need to know exactly what it is that they will pay for and tailor your renovation plan accordingly. You also need to identify margin.
In your research, you need to find the gap between the unrenovated property and a renovated property. That's going to be able to cover all your costs and deliver you a profit. You also want to identify the best agent for your type of property in your area. I really like to select an agent in the research phase because if you leave it until you've got a property to sell, it just becomes a bit of a trap. Once you've got a listing it's really hard to know who's telling you the truth and who's not. If you do this part of the work in the research phase and you're presenting as a potential buyer you'll get a really good understanding of the good agents and the not so good ones.
Point 6 is around sourcing the right property. Now I have worked predominantly in Sydney but I have students all over the country and I also do currently have a project in Queensland. But for me I've discovered that the sweet spot in terms of making a profit is where you buy the property at around $800-900,000. I look for around about $100,000 profit per project, and that seems to be where I can deliver that with not too much anxiety and a reasonable amount of confidence.
If I'm going for something at a low price point I'd like to add a land component to it at the lower price point. Often it can be more challenging to deliver adequate profit. Of course that comes out of your research. We have made like our last project was like a $475,000 studio in Surry Hills where we made an extraordinary profit but I would call that an outlier. Generally speaking on the common types of renovations we do, I call them cosmetic plus and I'll talk about that in a minute, we work on around 10 percent profit. So if you're spending $500,000 on a property then you'll make around about $50,000 with all things being even. I'm not saying it guarantees you a $50,000 profit, but if you get everything right then that's what you can aim for.
One thing I do now, that I've never thought I would ever do, is I now work with buyers agents. What I've found this does, is it really helps with the deal flow. In the past I would source my own properties, I'm quite able to negotiate the purchase of a property at the right property at the right price.
However, finding the time to do that often would lead to a long lapse between projects, because actually getting out there finding the properties, negotiating one falls through. It can take time. I have now got a group of really excellent buyers agents and property strategists that we use, to really speed up that process.
Sometimes people say, “Oh yes, but how much do you have to pay for them?” I think if you're spending six months finding a property, the loss of profit of what you could have been doing in that six months, makes the buyer's agent's fee pale into insignificance.
Now with buyers agents, not every buyer's agent will do, you really need to have someone that's really switched on in terms of what you need as a flipper. Because the problem is, it's a change in mindset, when you're buying something to hold, buying a property in an area that's early in the gentrification process is a real bonus, because there's all that growth ahead of you. However, if you're planning to flip, usually you need it to be further along in the gentrification process so that there are people coming into the suburb who are willing to spend money on a renovated property and often that's not the case in the early stages.
Point 7 is the type of renovation. Now I think most people know that there's two main types of renovations, cosmetic and structural. However, when you say structural it's how long is a piece of string. It can be taking one wall out that you need to put a beam in four or right up to doing an addition and doubling the size of the property.
Now the problem with structural renovations, is if you are required to go to council and get council approval that brings a whole lot of risk in to play. You need to spend money on consultants like engineers town planners, heritage architects, surveyors, you name it. It adds a lot to costs and also it can add a lot to your time frame as well. So there's a level of risk and then of course the market can change while you're waiting for that approval.
What we prefer to do, is go for what we call a cosmetic plus. We don't ever do purely cosmetic renovation. I like to add a bit more to the plan to actually push up the profit potential. That might still need or require some approval like you might want to take out a load bearing wall to open up the kitchen and living and make it more open plan. That's a really common and good value add and that will require an engineer. But you can usually get the approval shoot through a shorter process in New South Wales. It's called complying development. There are similar processes in the other states. By doing that it actually doesn't hold you up in the same way and usually doesn't require the same level of consultant involvement and definitely not the same time frame.
That's why I really love cosmetic plus renovations, because you're really adding the WOW and pushing the profit potential up but it's not taking you all year to do it.
Which brings me to the next point, which is point 8, and that's managing the holding costs. One of the things that we used to have to do was once the property, we'll try and negotiate a long settlement for the property that sometimes works and sometimes it doesn't. Then go like hell to get the plan organised and ready to go as soon as the property is settled and it belongs to you or even try and negotiate early access.
These days, what we tend to do is put the property on short term rental as soon as it settles, provided that's allowable in the area or the building that you buy the property and so that takes that pressure off. So you've got some time to resolve your plan and you're not bleeding money while you are getting yourself organised.
We also tend to put it back on the market for the settlement period. On the short term market for the settlement period after the property is sold, because once the property's sold, so usually you have at least six weeks that you've got to wait, until the money actually gets transferred into your account. And instead of hemorrhaging money you can actually make money in that period of time and reduce the costs significantly. We use short term rental, most commonly Airbnb, quite extensively with our project. And I'll be doing some episodes on that later on.
Number 9 is you've got to manage the process. Basically there are three. You have three roles in managing a renovation. You need to manage the budget. You need to manage the program or the time frame. It's another word for the time frame and you also need to manage the quality of the work, because these days buyers are quite critical and want a good quality renovation. You need to make sure that you deliver that.
Now I know quite a few of us are recovering D.I.Y. I certainly have done my time in D.I.Y but I want to let you know that my profit. I only became truly profitable when I gave up D.I.Y. It's great to be able to do some of the things rather than having to bring a painter back to paint an architectury.
Last week we had sheeting in the bathroom that needed to be fixed, just one sheet needed to be fixed, before the waterproof can start, being able to do those bits and pieces are great, because often if you have to wait a day for the tradesman to turn up, it just floods your job up. However, if your success is dependent on you actually doing the work, being out, being the key contractor in the project, you will find that you will burn out really quickly. I believe that your earning potential should not be linked to how much you can physically do yourself. If you're a D.I.Y. I would think about that. I think it's fine on investment properties, if you're doing a quick spruce up, because you're going to be paying those costs for 20 or 30 years.
If you can do it in a time effective way, like spend a weekend giving a place a makeover, well and good, but if you are flipping, D.I.Y is a recipe for disaster. Because if you have tradesmen who are doing the same thing day in day out they are quicker. They are more efficient and they can produce a good quality job in a timely manner.
The next thing. Just back on to the budget. One of the things that we do with the budget, is we produced a series of benchmarks to actually help you, help break down the budget. Because if you just have a lump sum for your renovation budget and you don't track it down into areas it makes it really hard to manage. Often you'll get to the end of the renovation and find that the money is run out before the renovation has and you can't have that.
So chunk the budget down into areas, so that you can apply the money to the areas that you need to spend it on.
The 10th point is that with flipping, property styling is non-negotiable. Statistically we know the property styling increases the sale price by about 10 percent. We need that 10 percent to help us to pay the costs that we need to pay, such as the stamp duty, the holding costs the selling costs. Before we even get into the renovation and the profit. Often I've heard people say I've blown my budget. I don't have the money for styling and art. So my answer to that is find it. Because if you've blown the budget you cannot afford to sell your property for 10 percent less. And that's pretty much what's gonna be happening if you don't style the property.
Now, how far you go with that styling depends a lot on the area that you are working in and your clientele. Well, for us often we've styled from eBay, Gumtree, off the side of the road and been able to produce a really good outcome. So it doesn't mean that you've got to spend a lot of money, but it does need doing. And you need to be able to deliver a high quality look when you take that property to market.
I mentioned, this is a bit of a bonus point, bonus point eleven. That you should choose your agent in the research phase and what we do is actually work with the agent for the duration of the project. So they are at the first design meetings, so we consult, work together to deliver the best outcome for our buyer and I find that works really well. The other thing is you can develop a really honest relationship and that's most important. Something that a newbie renovator tend to do, is they pitch their sale price too high, because they become emotionally attached to the project as it's going along when it's finished. I think it's worth way more than when they started. Unless you've got someone that can tell you and someone that you're going to listen to, to say, "no, that's too high", often you can kill your market by doing that. Be really careful, and make sure that you get someone that you can work with, a sort of partner, through the project.
I hope that has been helpful. I'll be doing episodes going into more debt in various points that I've made today and in later stages. For now I'm going to sign off and say Happy Renovating!