House flipping in the real estate sector refers to where you invest in a property with the objective of making a nice profit on it, often in a relatively short period of time. This may for example include buying a bit of a run-down, upgrading it and then reselling it for a handsome return on your investment.
The golden rule with making money on property is always to buy low and sell high, but, says Samuel Seeff, chairman of the Seeff property group, there are enormous risks. Especially if you are a novice investor or renovator, you need to really do your homework and then some. Your ‘flip’ can quite easily turn into a ‘flop’ and a significant financial loss, he said.
While we would always advocate that home buyers, especially first time buyers, should buy with the view to creating security for themselves and their families, property does of course present the opportunity to not just grow your personal wealth, but make some nice profits, Seeff said.
The property group cautioned home buyers against doing this with their primary home. You may for example make a nice profit on selling, but can you replace what you have in terms of the asset value, area and other reasons that motivated you to buy the home in the first instance, it said.
The financial implication could be significant and could include Capital Gains Tax in certain instances, especially for secondary and subsequent property and especially where the objective is to earn profits, Seeff said.
Some of the popular types of property that house-flippers tend to look for are fixer-uppers and quick sale or distressed properties. Seeff pointed out that agencies have special arrangements with the banks and are able to offer interested buyers access to a significant number of distressed or quick-sale properties.
New developments are also often targeted by house-flippers as these often see rapid price growth and high demand, especially during buoyant economic times.
Older, up and coming neighbourhoods also tend to be good areas to consider if you want to profit from the property flipping trend, said Seeff. In Cape Town for example, an area such as Woodstock is benefiting from rising demand for urban living. That means that buyers are able to invest in older properties, upgrade these and sell them for a profit.
If you are thinking about getting into the house-flipping trend and want to make it a profitable venture, then consider these five top tips from Seeff:
1. Buy smart
Always do your homework and ensure you buy smart. Investing in property is a costly exercise, especially if your finances are tight. Even if you are flush with cash, you would still want to exercise caution and ensure you understand the area and market that you are investing in. Be sure that there is a demand for the type of upgrades or renovations that you are planning as it does not pay to overcapitalise.
2. Understand the market
It is important to have a good understanding of whether there is a demand for the type of remodelling or upgrading that you are planning. While a smart investor will create the need for his/her property, you are often unfortunately guided by what buyers want and what they are prepared to pay. This means that you need to research the area and market thoroughly and ensure that your plans, asking price and profit expectation match the current market.
3. Start with the end price in mind
Always start with the end price that you may be able to sell your property for in mind. That is, the price right now that you could get in the market given the economic and market cycle. Also be sure to price in line with what the market will pay.
Often, investors will overspend on the upgrade of their investment property and then price it at the top end of the market. Top end buyers tend to be few and far between and can be quite discerning and will not pay an inflated price regardless of how fabulous the upgrades are.
4. Renovation costs
Most renovators will tell you that it is almost inevitable that your planned renovations or upgrades will turn out to cost more than initially anticipated. Nonetheless, there are many examples of well-budgeted and planned renovations that have turned older homes and complexes into trendy spaces that have not only attracted buyers, but contributed to upgrading the area.
5. Economic climate and property cycle
Generally, house—flipping relies on a buoyant property market because you would want to get a good price and for this, you need willing buyers and some competition. The economy and property market are cyclical in nature and heavily sentiment driven. This is something that we see right now.
For example, while the South African property market has historically shown itself to be resilient and delivering excellent value growth, it is not immune to economic uncertainty. Right now for example, we are seeing a very flat economy and property market, one where price growth is slower and with the exception of a few sales, we are not really seeing high prices being paid.