Flipping Houses

Flipping houses explained

Flipping houses isn’t as quick and easy as its name suggests, but there’s money to be made buying and selling investment properties in a red-hot property market when interest rates are low. Find out how to go about flipping homes, as well as some of the pros and cons of doing so, with Savvy.

How does flipping houses work?

The concept of property flipping involves buying investment property which is run-down or in need of repair, carrying out improvements and selling again for a profit, all within a relatively short period. This process is repeated perhaps several times a year to earn the renovator a substantial income from the profit of sales.

As much as this sounds easy in theory, there are many risks and pitfalls to beware of in this process. There’s no one simple answer to the question of the best way to flip houses. For this reason, it is important to plan your first investment house upgrade very carefully and to build up your house flipping skills over time, rather than being too ambitious in your first renovation project. It takes time to learn how to flip a house. It’s worth educating yourself about the best way to flip houses before you start your renovation project.

What are the risks and benefits of flipping houses?

Some of the main risks of house flipping are:

not being able to sell the improved property for sufficient profit to make the project financially viable
over-spending on a property so the investment of time and money doesn’t justify the eventual return
profit margins being eaten away by the cost of stamp duty – use Savvy’s stamp duty calculator to find out how much you may have to pay when you buy your first investment property
the property market taking a turn downwards during the span of the renovation project, so buyers become scarcer and the house sits on the market unsold for too long

However, some of the benefits of flipping houses are:

a substantial and healthy profit can be made year after year if you become good at flipping homes
if you have good all-round trade skills, property renovation can be a profitable and enjoyable way to be self-employed and make a substantial income
couples or families with diverse skills can work together to make money on the side of their usual occupations. There are so many different aspects to property renovating that expertise in a wide range of areas, from a trade to interior design to marketing, can be put to good use

What skills do I need to flip houses?

There is not a simple answer to how best to flip a house. People who successfully make a living flipping houses in Australia tend to be good all-around tradespeople with a variety of skills they can use and a ‘can-do’ attitude. Trade skills such as plumbing, carpentry and electrical skills will be the most useful for saving money on hiring other professionals. A qualified plumber can also install gas fittings, skills which are in demand when upgrading bathrooms and kitchens. Electricians also tend to be experienced in installing pipework to hold conduit, so can use those skills in plumbing and outdoor irrigation projects. Plastering, gyprocking and tiling experience is also very useful, as is landscaping and a knowledge of how to design outdoor living spaces and gardens.

Do I need much capital to start property flipping?

Before deciding to buy an investment property which you intend to renovate and sell, it’s always worth working out how much you’ll be able to borrow so you have a realistic budget for your renovation project. Use this borrowing power calculator to work out how much a lender may be prepared to loan you based on your current income and liabilities.

However, in addition to servicing your investment property loan repayments, you will also need spare cash at hand to pay for the materials you’ll use in your renovations, for items such as new whitegoods or tapware if you’re undertaking kitchen or bathroom upgrades. Leaving yourself short of ‘working capital’ when upgrading a house could lead to a costly delay in being able to finish the renovation project and get it sold quickly.

It could be worth talking to your lender about using the equity in your home to help finance your property flipping project – with a top-up loan or a cash-out refinance both possibilities which may help you complete your project on time.

Will I have to pay capital gains tax when I flip my investment house?

This will depend on whether flipping houses is your main source of income, or whether you do it as a side project. If you’re a full-time professional renovator, the income you make from flipping houses could be regarded by the tax office as your regular income, and be taxed at normal income tax rates. However, if you have another occupation, and renovate houses as a side-hustle, the profit you make will be regarded as a capital gain and you will have to pay capital gains tax on it. It’s important to consult an accountant or financial advisor to guide you as to how to structure your house flipping for taxation purposes.

More questions about selling houses for profit

What is the ARV of a house?

The ARV of a house is its ‘after repair value’ – in other words, what it’ll be worth when repairs on the property have been completed. Your lender will want an accurate estimate of your property’s ARV before approving your investment home loan.

What’s the most expensive room to renovate if I want to flip a house?

The most expensive room in a house to renovate is the kitchen, followed by bathrooms. This is because replacing kitchen cupboards, appliances and benchtops is expensive. Additional costs can be incurred if it’s necessary to move services such as gas, electricity and water if a kitchen is being extensively remodelled. Bathroom renovations can involve a lot of re-tiling, which is also an expensive and time-consuming undertaking.

Should I keep up to date with property fashions if I want to flip houses?

Yes – you should regularly visit new display homes to see what builders are including in new homes to make them more attractive to potential buyers. Selling houses for profit is all about understanding what buyers are looking for in the current market. Extreme colour fashions should be avoided, as this year’s magenta and mango fashion statement may turn into next year’s fashion faux pas. However, trends like turning third or fourth bedrooms into home offices to appeal to those working from home are worth taking note of and incorporating into your home design.

Is the location of a property to flip still the most important consideration?

The old adage of ‘buy the worst house in the best street’ still very much applies to flipping houses in Australia. If a run-down property is in a good location, it’ll always benefit from being upgraded and modernised so it’s brought back up to par with the properties surrounding it. Such properties stand a far higher chance of being successfully sold for a profit than an upgraded house in an area with lower demand and property prices.

Can I flip houses as a part-time hobby?

You can undertake flipping houses if you have employment elsewhere, although this will depend on the time frame you have set yourself for your renovation project. If you have an interest-only investment loan and can afford to make the repayments on your loan quite comfortably, there will be little pressure to complete your renovation project in a short space of time. However, if you’re relying on a quick turn-around to be able to afford your first investment property, trying to undertake renovations and working full-time in your main job can put serious pressure on you and your household.