House prices have risen by an average of 13.2 percent over the last year, with a noticeable surge in property investment having a sizeable impact on demand, and ultimately prices.
Those looking to make money from investing in safe assets such as bricks and mortar will have benefitted greatly from a market reinvigorated by the temporary removal of Stamp Duty, and the number of people reassessing their living spaces following months of lockdown.
But in such a competitive space, many investors have turned to ‘property flipping’ to ensure they maximise the opportunities available to them.
What is property flipping?
‘Property flipping’ is a term generally used to describe the act of buying a house at below market value, renovating it, and then very quickly selling it on again at a sizeable profit.
There is some concern that property flipping can have an adverse impact on housing stock as properties usually lie empty for lengthy periods. The process can also grossly inflate the market as ‘flippers’ often have the financial means to edge out other prospective purchasers with less borrowing power. But having said that, property flipping remains a highly profitable endeavour for property investors, many of whom are currently experiencing returns of up to 20 per cent on their most successful projects.
Property flipping is a process that requires fast finance and the ability to turn projects around swiftly. It is by no means straightforward and takes a lot of planning and research but the returns can be sizeable if handled properly.
But what is the key to a successful property flip? How can you maximise your money, reduce risk, and turn-out a lucrative property flipping project? Here are our top seven tips:
Research
You do not want to find yourself saddled with a property that you are unable to renovate or sell on as you wish. You should ask your property lawyer to review the title and/or legal pack (if at auction) before hand to ensure there is nothing onerous that prevents you from doing what you want to do and thus delay or stymie your future sale. Be wary of any mentions of existing covenants, rights of access, or restrictions on development. This will help you to decide if the property is a going concern and a viable candidate for flipping. You also need to make sure that, if you are moving quickly, your lawyer has the capacity and the expertise to handle your case.
Finance
The most common and swift way of obtaining the fast-finance needed for a property flipping project is to obtain a bridging loan. Loans of this ilk, often negotiated on a 12-month repayment deal, often offer investors the cash they need to snap up properties at reasonably limited notice, whilst still allowing ample time to undertake refurbishments, before reselling at a profit.
Many high street lenders often have strict lending criteria which prevents them from providing finance on dilapidated properties, which is why many investors will turn to specialist lenders to complete the deal.
Expert property lenders, such as ourselves, are able to structure loans specifically to the project, regardless of how complex the renovations might be. This could include providing finance not only for a straightforward property flip, but also on HMOs, former retail units, and empty office spaces where the intention is to turn them into homes for resale.
Because we specialise solely in this type of finance, we can remain a lot more agile than a high street bank, can offer more competitive terms, and can turn a deal around at much shorter notice, making us the ideal choice for a property flipping project.
Budgeting
If you are inexperienced in the art of property flipping, it is easy to fall down the rabbit hole of overspending.
Paying too much for a property you intend to flip is one of the biggest errors an investor can make. If you pay a smart, low price, you will still have wiggle room with the cost of construction work. Too much, and you will have nothing in reserve to save a project from potential failure.
When renovating, you will almost certainly encounter urgent or unforeseen issues which will require your attention. You can plan for most things, but not everything, so having a contingency budget is paramount.
It’s important to recognise the changes to the construction industry. The cost of building materials is currently at an all-time high, with some reports indicating a price increase of 40%. There are shortages in the supply chain of certain products, delays in build projects and manpower itself is at a premium and often needs to be secured far ahead of time, which is not entirely complimentary to the fasted-paced process of property flipping.
As such, it’s imperative to factoring in increased timescales and consider how all this can impact the project’s finances, the amount of any loans, and the repayment terms on financing deals.
Getting the work done
This is so important. The idea of undertaking the renovation personally might sound cheaper on the face of it, but unless you have the requisite time and skills to undertake substantial building work, you could be setting yourself up for a fall. In property flipping projects you should remain aware of your limitations. With a light refurb, there will be some things you can do, but if you want a high spec finish that will bring in a premium resale price then you need to ensure you engage a team of professionals, who you can trust, at the right price.
Be sure to instruct tradespeople with experience in similar projects to minimise risk. There are currently many websites available where you can check a construction company’s credentials and customer ratings.
Specifications
The whole purpose of property flipping is to move swiftly and make a profit, so getting bogged down in the desirability of dressing a property is a common error to make.
Renovations should be clean and simple. The standard of work should be high, but that doesn’t mean you need marble work surfaces, or top-of-the-range rain-showers. A neutral, stripped-back finish will be enough for your workforce to get in and out quickly, whilst also allowing potential buyers to picture themselves in the space. Anything else, and you will not only increase costs but discount a certain percentage of buyers through personal taste alone.
Do your research on the area you are investing in. Consider speaking to local agents to ask what they think prospective tenants in that area will look for. Understanding the profile of your intended audience will also play a key part.
Where and what
Taking your time to monitor regional property trends is a worthwhile way of assessing where any upcoming hotspots might be.
Remain mindful of how different property types are performing, and what the local demographics are. Assessing the need or want in the market will be paramount to offloading the property for a profit in the end, as it is often the failure to recognise this that is the downfall to many a property flipping scheme.
It’s also usually best to avoid ‘unique’ properties, such as those on clifftops, forests, hillsides, historic buildings, or anything architecturally quirky. These are the properties that are the most likely to throw up unforeseen issues during renovation, take longer to complete construction work on, and will inevitably not be desirable to everyone, limiting resale opportunity.
Exit strategy
Projects can go wrong, even with the best will in the world. If you find yourself in the depths of a property flipping scheme that is not coming together or is breaking the bank, cut your losses, sell-up, and move on to the next one, even if that leaves you a little out of pocket.
Bad deals will just cost you more the longer you hold on to them. But you could find yourself able to resell for a similar amount you paid for it, and reinvest into a more viable, profitable property.