Traditional thought is to buy a property, renovate it and flip it with the expectation that the simple improvements are enough to warrant a higher selling price on the property than what you paid. In most cases, this will not be true. In most cases, after taxes, you will be lucky to break even at the end of the day and in many cases, without the right strategy, you could
So how is it done? While a short blog post cannot be a comprehensive guide to the entire business of making large profits on the business of flipping homes, a few tips might get you thinking before taking the leap.
1. Look for properties in up-and-coming neighborhoods - you are looking for a mix of old and new houses...old homes that are being torn down and replaced by new, larger homes - as well as, multi-family developments in the form of townhomes and boutique apartment buildings.
An up-and-coming neighborhood will show signs of development in the form of new clusters of shops and coffee shops, restaurants and stores - when you see a few higher-end name brands popping up alongside the "village favorites" that is always a good sign. Do talk to your Real Estate Broker - we know these areas.
2. Do get a thorough home inspection. When you investing hundreds of thousands of dollars, it's well worth your while to spend a few hundred and get full diagnosis of the property. A good Home Inspector will walk you through the entire property and give you a report to use as a guide to moving forward with renovations so you can address major issues and save money down the road. Your Realtor should be able to recommend several experienced and excellent Home Inspectors.
3. In the short term and during initial renovations, consider financing a property with an open line of credit instead of a mortgage to avoid penalties when breaking the mortgage to sell. You may decide to sell suddenly and if the property is not your principal residence, you will already have to pay taxes so avoid as many fees as you can when it comes time to unload the property. However, if you know that you will be holding the property and renting it for several years, converting from a line of credit to a mortgage once the renovations are complete will allow you to save money in interest over the years. In other words, consider your options and do talk to a Mortgage Broker.
4. If you can, go for the long flip.. as with everything, real estate goes in cycles and if you can buy during the valleys and sell during the peaks, you will logically make more money on your investment as nearly all property value will rise during a peak. Patience is a virtue - especially in real estate!
5. Consider what taxes you will have to pay - a quick flip requires that you declare any profit as income. A long flip allows you to declare the profit as capital gains. The difference can be significant so talk to your Accountant BEFORE you proceed on a flipping project..
6. When it comes to renovations, consider carefully what is really important. If you're renting the property for many years, quality renovations that will cost you less in repairs over the years are a wise investment, but luxurious additions may go to waste as years of wear and tear of tenanted use may mean they look just as worn and dated as when you bought the place. Talk to several Contractors about your options.
7. Don't underestimate the cost of renovations, mortgage costs, property taxes, legal fees and maintenance costs for as long as it takes to find the right time to sell and then.. don't underestimate how long it might take to sell once you list the property! An investment is exactly how it sounds - it is an investment of you, your skills, your time, your energy and your money. It will cost money to make money.
In summary, if you plan for the long flip, invest in an up-and-coming neighborhood, renovate well and rent out the property while the surrounding area develops further into a more desirable area, the demand will increase and as such, so will the value of your property. An average of 5-10 years is typically long enough to go through one cycle and the process of growth in an area but be prepared that sometimes it may take longer. Sometimes, it can happen very quickly but either way, being prepared and knowing what options you have will help you to succeed. Good luck!