Admit it – no matter how home renovation-averse you are, at some point you’ve probably considered flipping a house. HGTV makes it look so easy – buy a fixer-upper, throw a little money at it and voila – you’ve just made $50,000.
Of course the reality of flipping houses for profit isn’t quite as simple as ‘reality TV’ would like to make us believe. We’ve worked with contractors and renovators since our early days in real estate, and if you’re considering buying a house to flip it, there’s a lot you need to know:
1. It’s all about the math. When it comes to deciding which property to buy, you need to do a lot more than determine fair market value. How much will your renovations cost? What will your closing and selling costs be? What are your carrying costs? What is the tax implication of flipping? (NB: if you flip frequently or are a REALTOR, your profit may be taxed as income instead of capital gains). Don’t get emotionally attached when purchasing a property – you’re an investor, not an end-user. Don’t pay $100K over asking unless the house was underpriced by that much in the first place.
2. How much can you sell it for? This is one of the most important factors in choosing what property to buy (and one of the reasons you want to work with an experienced REALTOR). Buyers don’t care what you paid for a house or how much money you put into it or how much profit you want to make. Find out what prices the street can carry and don’t over-renovate for the street. If you buy a house for $600K , put $100K of renovations into it, on a street where the most expensive ever sold is $700K, prepare to lose money.
3. Location, location, location. To really see a profit from a flipped house, you need to buy in a HOT neighbourhood that has a low supply of renovated homes and a high demand from Buyers. Easy access to transportation, parking and shops/restaurants/services will all be factored into how much a Buyer will be prepared to pay for your house.
4. Time is of the essence. While you’re renovating your home, you need to remember your carrying costs: mortgage, insurance, taxes and utilities. If it takes you 12 months instead of 6 months to complete the project, your costs have just gone way up (and you’ll be paying those costs out of your profit margin.)
5. Your contractor is key. If you aren’t a contractor yourself, make sure you align yourself with someone you know, like and trust. Their ability to manage costs and a timeline will impact your profitability, and if your contractor does shoddy work, you’ll feel that in your pocketbook.
6. Focus your renovation dollars in the right places, for example, kitchens, bathrooms, floors. You’ll likely have unsexy money to spend too, and don’t forget that the Buyer who buys the renovated house doesn’t want to worry about the furnace, the electrical or the roof either. Here’s a link to a blog we wrote about What to Renovate and Why.
7. Always remember your target Buyer. If you’re looking to sell your renovated house for $800K, remember that Buyers at this price point will have definite expectations of features and finishes. Too often we see cheap flips that don’t sell because of poor quality materials and workmanship.
8. Permits, permits, permits. No, you can’t just tear down walls and change out the knob and tube electrical because you want to. Most buyers will want to see that your renovation was done on the up-and-up, and that means permits (and permit headaches). Buyers will pay more for a home that was renovated with permits. Click here to see when you need a building permit for in Toronto.
9. There are no guarantees. Yes, some people make a lot of money flipping houses in Toronto, but not everyone makes a profit.
10. Flipping houses is a second job. Don’t fool yourself: flipping a house for profit takes a lot of time. You’ll be picking finishes, managing workers and timelines and need to check in on the progress frequently.
11. Have a plan, a budget and stick to it. This isn’t the time to get creative and make it up as you go along.
12. Make sure you work with a REALTOR who has experience guiding people through the flipping process. As always, we’d be happy to chat!