Buying, renovating and selling homes is what Tom Hall does for a living. In the past 10 years he has flipped five houses and made an enviable profit.
His most recent project was a four-bedroom house in Melbourne’s bayside Hampton, which he purchased for $1.25 million in 2013. Hall made major improvements to the house, including a revamped al fresco dining area and new kitchen, at a total cost of $230,000.
He’s hoping to recoup these expenses and turn a sizable profit when the house goes on the market for more than $2 million this spring.
Hall, an electrician and former real estate agent, says successful house flipping takes hard work, perseverance and a handful of simple rules. Start small
Amateur renovators shouldn’t bite off more than they can chew. Select a small property as your first project with a view to buying a bigger one for your second.“If you start with something small there’s less risk,” Hall says.“I started with a one bedroom apartment in Carnegie. I had to earn my own deposit, bought it, sold it and doubled my money in three years so it was a good start.” Buy at the right price
Research the property market to find a place that offers good potential capital growth. Familiarize yourself with sales data so you know a good deal when you see one.Thorough research could see you bag a bargain, which means reaping a bigger reward once the renovations are complete.“One of the most important things is buying at the right price, that’s one of the main things I look for,” he says.Negotiate a long settlement period
A 90-day settlement will give you time to draft designs and organise trades well in advance of your start date.
“If you have a 30-day settlement, you haven’t got as much time,” Hall says.
Tailor to a target market
Some renovators make the mistake of customizing their improvements for their own purposes. But Hall recommends keeping a specific demographic in mind. A couple without children was the prime market for a one-bedroom property in Windsor, which he purchased for $475,000. Adding a loft-style bedroom for guests or to use as a study helped fetch a sale price of $850,000.
Every little bit counts when it comes to shaving down costs. Always ask for a trade discount when you’re buying supplies, keep an eye out for sales and make the most of connections who can offer you wholesale prices.
What properties can you fix & flip?
These are properties where you buy under market value and then re-sell them for a profit. usually by adding value to it before re-selling it by renovating it or rehabilitating them.
How to fund and finance fix and flips?
You can use your own cash at hand.
You can form a partnership with a cash investor and if you are the investor, you can partner up with an experience contractor.
You can apply for a hard money loan or rehab loan where typically you have to put 30% of the purchase price and most lenders will cover 100% of the rehab or renovation cost, and they will charge you a 4% origination fee.
Plan your cost:
- Closing cost: both buying and selling. The sale fees can come out of the proceeds of the sale
- Carry costs: factor in the monthly payments on your loan, property taxes, insurance and utilities if any.
- Rehab and/or Renovation costs: labor and materials
- Unexpected delays: allow 10-15% of the total rehabbing or renovating budget for unexpected works and delays
- Real Estate agent: if selling on the open market, budget for marketing fees and 3% for sales commission.
- Permits and Certificate of occupancy: required if you’re going to list for sale on the open market.
What profit should you look for and what profit is attractive to a lender?
A good profit to aim for a 30% net profit.
A perfect scenario should be something like this:
Purchase price = $120,000
Total costs = $40,000
Sale price = $208,000
Net profit = $48,000 = 30% of your whole investment
How to find the perfect property?
Networking, get in the game go visit all real estate realtors events and make friends with your local realtors and developers this way you can use real estate agents and developers to source your properties. It can take a while to develop credibility with them but knowing your market and giving them a budget and your property preference is Single family, multi-family, commercial, mixed use can help you narrow down your search.
Be in charge of your project. Contractors can deviate on material cost or change the renovation plan!
Do your research, read and got to Home Depot, Lowe’s any supply store where you can a budget for a full new kitchen and bathroom, also some custom builders and most important get 4 or 5 estimates from different contractors.
This is one of the toughest part of fix and flip houses, to find a trustworthy, efficient and who can manage a budget.
If the rehab and renovation project only needs new floors, new bathrooms and kitchen, you should be able to estimate this cost. Now electric, pluming, central heating and other more complex task you need a license and code knowledgeable professional who can work in order and using common sense, meaning do not close any electrical or pluming without passing the proper inspection.
If the property is particularly run down or in need of structural work, you need to be getting your builder in to estimate. Do this before you commit to buy, to avoid any nasty surprises later on. You’ll be able to feed the quote into your financial plan to make sure that the project will be profitable enough to proceed.
How to flip a house – Tip
A great way to ensure that your builder is completely focused on your project is to offer him to joint venture on it with you. This way he gets a share of the profits instead of being paid as you go along.
Always get two or three quotes for the work. Specify what you need done in writing so that each company is quoting for exactly the same work. If possible get the quotes in writing, although this is easier said than done!
Those that know how to flip a house also know that builders and tradesmen are notoriously hard to keep to an agreed schedule. This is because they’ll often have more than one job on the go. To combat this, you might think about building in a bonus if the job is completed on time.
The best way to sell… fast!
Always check with estate agents before you begin to see what they think the re-sale potential of the property is. What do they think it can realistically achieve and how long might it take?
Don’t rely on the opinion of the agent selling you the property because they might be over optimistic in order to clinch a sale!
If you sourced your property from an estate agent, re-sell it through them. They’ll be far more likely to think of you when the next one comes up!
How to flip a house – Tip
It is always best to sell quickly than to hold out for the best price, so that you can get onto your next project. If you aim to sell for 5-10% less than similar properties in the area, you should secure a sale faster.
Staging the property can also be a big help as buyers will then be able to imagine themselves living in the house. Lighting plays a big part in this too.
How to Flip a House – Summary & Resources
Speed is of the essence when flipping properties for profit. If at all possible, don’t take on projects that are going to involve major delays like obtaining planning permission. But if you do, factor the extra cost into your plan.