The Flipping & Buying of Property: Is This a Viable Strategy For A Property Investor?
Category News
This article was originally published by Real Estate Investor Magazine
What is the flipping and buying of property?
Over the years, we have seen many people buy a property with the intention of renovating the property to increase its value in order to sell it and make a profit, and that is a property flip, and very different from buying to owning, because when one buys to retain and live in a property, they bring a more personalised touch to the changes they might do, if any, on the property. It's also great to know your market when you go into property flipping, look at what kinds of properties others buy for flipping so that you know what to buy and what not to buy, and you can make informed decisions. Buying for self is very different from buying to flip, one is an emotional purchase and the other should not be emotional because you don't know who is going to live there.
What kind of property financial structure should you put in place to enable this strategy to work effectively?
Just like any game, there are rules, and you have to know the rules if you want to win. Ask yourself, Do you have an idea what to spend upfront that is, the cost to acquire, and what to reserve for repairs, costs to be covered during the repairs, your profit?
There's a general rule of thumb that says to acquire a property to flip, you should not pay more than 70% of the future selling price minus the costs of repairs, this gives some guidelines to your numbers because some renovations may be simpler ones that cost less or bigger ones that require changing the structure and layout of the property.
Doing this kind of business also means you have to create a budget and a project plan with timelines, this allows you to see how far and how realistic your money will stretch. Also have some budget for miscellaneous items, just in case you want some add-on, or you might want to get someone in to offer advice in case you're worried about something or you discovered some challenges while breaking down walls, and you need expert advice, therefore some contingency would go a long way in ensuring that your project doesn't flop. alleviating you want to be able to pay for such valuable services when the need arises. If you are going to sell using a property practitioner, you relatively should remember to put this in your budget as well because this is also a necessary cost.
Sometimes, you may get emotionally attached to the project, and this might be detrimental to the reason why you went into this business in the first place. You might suddenly feel you don't really like something, and choose to spend a little more on one item, but then also see another and spend a little more there, and once this tap is open, the profit starts to dry up. Therefore stick to the well-thought-out original plan as far as possible. Think of the bank that you owe money to, think of partners that may have put money in, and think about your next project.
Lastly, do remember to be conservative, and maybe this is one of those times when it's good to think of the worst-case scenario, as it will help in mitigating these challenges as well as expanding your thoughts.
In as much as there are potential good returns with this strategy, what are some of the cons that come with it?
There's been quite a large influx in the past of people calling themselves investors, some who knew what they were doing, and some who copied without understanding the business vision. What tends to happen with the latter, is that they would buy a well-priced property that has potential for a profit, but without considering the following:
Is the property and the type of investment into the property viable for the area it's situated in?
Is there a huge demand for this kind of property?
Can the property be maintained financially, especially if there's a Homeloan or mortgage bond until the buyer is found and transfer concluded, because if not, then all the profit may be gobbled by these costs?
Will the property be sold at the price the investor wanted or will it end up being sold at a lower price and this is a loss?
Did the investor do all the numbers? Sometimes the profit is overestimated while costs are underestimated, leading to crippling losses.
Is the renovations budget aligned with the final product or is it this question of fitting a square peg in a round hole?
Can the flipping of property intersect with rental? After having flipped, can you turn it into a rental property?
Yes, you can, but not a very good idea. When an investor goes in with an intention to flip a property, that's the business they are in. But when they buy with an intention to rent out, then that's a different ball game, and they are ready and focused on that.
However, due to market challenges, sometimes a property that was meant to be sold after repairs may sit on the market for longer than expected, and the investor might be forced to put a tenant in, which defeats the purpose of flipping- which is going in, fix, get out.
Once a property that was meant to be sold is now being rented out, it is important for the investor to rework the numbers, to ensure that all stakeholders, including the rental property practitioner, are all paid. The challenge is that there are no profits, and the investor may not know how much this property will be in the future, therefore it is vital to do your due diligence and move quickly. Property flipping and property management are two very different businesses and one should ensure that they do all the necessary checks before starting a project, therefore speed and efficiency is key.
As a Property Practitioner, what am I observing with this strategy in the current state of the property market?
Property practitioners have a responsibility towards their clients, and even though the property flipping business is the buyer's prerogative, the property practitioner still should offer advice based on what the buyer wants to do with the property. What is the correct market value, and why can this property sell for? For instance, if the buyer wants to buy a property at market value, wants to revamp it, to resell it, it's important to speak to the buyer about over-capitalization and look at the area and future growth prospects.
A property practitioner will also see when there are serious structural problems with the house, especially lately with the mandatory requirement to sign the defects disclosure document, it would therefore be important to alert the buyer, even though it could come at a cost for the property practitioner, who earns a commission for successful sales. I personally believe that helping someone trying to get into property flipping, will in time pay you as the property practitioner much more than the commission you may have lost on the one deal.
In the past, property flipping especially in my area was quite prevalent and there were lots of property investors in the market. However, currently, we still have property investors, but they are more seasoned and I could probably attest that to the tough socio-economic period we've just gone through as a nation, and how during that time most people could have thought differently about their business.
My observation is that the current investors also bring quality properties, that are well built and easier to sell, and on top of that with the fair commission payable to the property practitioner. It was indeed very sad in the past when investors cut the property practitioner's commission to the core, and due to desperation, many property practitioners accepted the lower commission payments.
Often with the flipping of property, you deal with house contractors, how then do you navigate poor workmanship since it has the potential to affect the value of your property and its overall state?
The greatest rule is to get the 'right' contractor and check if they are registered and compliant, this can offer some recourse should there be some serious challenges with the contractor. You might also want to look at it as a partnership, especially when you don't have experience. Have a contract with them that outlines deliverables, and that clearly shows who's responsible for what, what powers or decisions can contractor make without you, who buys what and what quality finishes and what style you as the investor wants.
Some novices get into property and they have the energy and interest to make it work, and they've already calculated the profit, so they might choose someone cheaper to do the work, but they also might end up paying much more for the mistakes the cheaper contractor has created. Contractors are as good as what you're willing to pay, your choice of a contractor will give you what you paid for. When mistakes happen, the first person to look at is you, did you do your due diligence, did you see previous work by this contractor, and what were your reasons to take on this one? Ask the contractor to refer you to their previous jobs, if they are keen, then you might have a win, but if they show reluctance, that might be your cue to move on. One of the biggest lessons I've learnt is that you would rather pay for professional services, pay a little more, and get little profit, within realistic timelines. Or to have a mentor during the property flipping process who has the experience and knows how to manage the project and close loopholes. Even the best still get challenged, but they are able to navigate better to find quicker solutions. This will be far better than making 10 times the money on paper but in reality, losing out on everything even your own savings and what you've invested in a property.
The bottom line here is that you may have a signed agreement with your contractor, and agree on terms and payments and timelines, they might tell you that they will complete the project, and you will usually know that you've put yourself in a quagmire, but it might be too late. Sure you can sue your contractor, but what happens to the project at that time? Who bears the costs? Also how sure are you that you will win the case? Deep down you may know you chose the cheapest when other contractors quoted you realistic amounts, you may know and you will choose to keep it in, while it eats you up.
So in conclusion on contractors, do your homework, you get what you pay for, listen to experts even if you know a lot, and pay for a mentor, it doesn't make you less successful or less intelligent, it helps you move quickly forward.
Closing remarks on ensuring this strategy works for you as a property investor in the long term?
It is important to note that property flipping may look profitable, but you must know what you're doing. It is hard work, but rewarding.
Consult experts if you've never done it, or even if you've tried and failed, do consult someone who has the experience and not someone who says they know, but someone whom you can do some verification.
It's true you can use other peoples' money, but it will be very difficult if you're not willing to put some of your own equity. Some people believe equity is only financial, but building a business requires equity, it requires time and research and expertise, and that's what you must bring, if not, pay the right people who have invested time to know.
Have a realistic budget for what you want to achieve so that you don't end up taking in a desperate contractor who would mess things up because the money is just not enough
Once you decide you're in the property flipping business, learn as much as you can so that you don't make silly mistakes because these could be costly.
It's also important to build relationships with Property practitioners, they can source a buyer from their database of clients.
It's important to remember that property flipping, when done badly, could be a flop that can take you down and destroy your finances, make a clear decision and commit to it.
Lastly, you have to earn the right to be an investor and learn how to manage money, because if you're emotional and losing money gets you out of control, then perhaps don't start. Also, it's key that you only start investing your own money, after you have learnt to save money over time, and you have reserves, and you can allocate certain portions of money for specific projects, when you can do that, then you will treat your property flipping business as one of your vehicles to build wealth, and understand that it's not necessarily a hand to mouth business, but rather a wealth building system.
Author: Matseleng Mogodi