Residential redevelopment – or ‘flipping houses’ as the cool kids call it – involves buying a house, fixing it up to be a dream home and then selling it off at a tasty profit.
Sounds easy, right? Well, that’s the reason more and more people like you are getting involved in the property market all the time. But if it were really that easy, then we’d all be rich. We’d also have no more houses to redevelop.
Clearly, there’s more to it. Many investments (large investments, we might add) are lost due to inexperienced flippers attempting to get on a bandwagon without properly understanding what they’re getting into. If you’re interested in getting into residential redevelopment, then we can help you. Here are the top five things you need to ask yourself before you try flipping a house.
As with any investment in property, the market environment will have an effect on costs, and consequentially your potential to turn a profit. We strongly recommend that you research the general status of the industry on a national level before you settle on moving forward with your investment. If experts are suggesting a market crash is imminent, then obviously it might not be the best time to buy, but also keep track of any legislation coming into effect. A recent example is the April stamp duty changes that mean you’ll be paying more tax on a second property.
This doesn’t just go for the national state of the market, but also the local area. Is the property you’re buying part of a complex, or are there a lot of houses nearby for sale? Is the area particularly popular with residential developers? Be careful about how much competition you have in the vicinity, because competition drives down prices.
Estate agents are, of course, a good resource for house hunting. They may even understand what you’re trying to do and find you a good deal. However, you may want to consider buying at auction instead. Auctions are where a lot of repossessed houses are sold. Mortgage lenders don’t usually have the time to try to make a profit from repossessed houses and will try to sell them as quickly as possible to get their money back in their pockets. When someone is trying to sell quickly (which most houses at auction are) they will usually be more open to lower prices, because they don’t have time to wait for a better offer.
When the refurbishment starts it’ll be tempting to target a specific, niche market. Maybe you’ll want to make it appeal to some millionaire foreign businessman? Maybe you’ll target a legendary art dealer and you’ll want to make the apartment as modern and pretentious as possible? These guys have a bunch of cash, right?
Well, maybe it’s not the best idea. You should try to avoid going too niche because you want to make sure your market is as big as possible when it comes to sale time. Flipping houses is a hugely popular business enterprise at the moment and while there is the potential for a redevelopment to make you £300,000 selling to the rich, you’re putting all your eggs in one basket there and if you don’t find a buyer soon you could be in serious financial trouble.
Before you can think about money you’ll earn, you need to consider the money you’ll be spending. To begin with there are the upfront costs of buying a house. This would be the deposit or full cash amount, if you didn’t get a mortgage. If you did get a mortgage you’d better be sure there aren’t any Early Repayment Charges. Factor in your repayments based on how quickly you think you’ll be able to sell.
Other costs include:
Solicitor fees – for both buying and selling
Refurbishment costs – this will depend entirely on how much work needs doing, and how much of it is labour intensive
Estate Agents – your agent will be getting a commission
Tax – As mentioned above, the stamp duty changes mean that a second property will have a 3% surcharge. You can use a stamp duty calculator to estimate your additional expenses.
Once you have properly estimated how much this investment will cost, you can think about how much you expect to make. Generally you should be aiming for a 20% net profit, but even if you make 10%, you can consider that a success for your first flip!
Like any investment, there is risk. The more you fork out for the initial investment, the more profit you could potentially make, but, of course, the more you are liable to lose as well. This might sound obvious but it’s still important you take serious consideration over the risks.
But that’s not the only pressure you’ll be under. Bear in mind that renovating a house as quickly as possible can be an exhausting and very stressful experience. With property hunting, deadlines, finding/dealing with contractors and finding a buyer, it can be a trying time for anyone. That’s all without considering how many things could (or almost certainly will) go wrong along the way. We can assure you that it gets easier with experience but the first time is bound to be a bumpy road!
Don’t be discouraged about getting on the redevelopment market though. The financial return could be very large for a few months’ work and the feeling of a job well done after flipping a house will have you on cloud 9 indefinitely. The experience you gain from it will develop you as a person, and you’ll find yourself more calm under pressure, a savvy negotiator and probably better at fixing up your own house too. What we’re trying to say is that, despite the risks, there are great rewards to be had, and not all of them are financial.