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House flipping, which the industry refers to as “fix and flip”, can add up — in theory. But will the renovation reality mirror the profit vision?

First things first. What is property flipping? 

It is an investment strategy that involves three strategic steps: finding an undervalued property to buy; renovating that property to maximise its appeal (and selling price), and selling the property to profit over and above your total purchase and renovation costs.

Typical investors share common denominators. 

Flipping can be useful for those who have a foundation portfolio with good cash flow. Buying to flip can help them to pay down their existing mortgage debt quicker, thereby increasing their positive cash flow.

Flipping houses is an alternative investment strategy to buying a house and renting it. 

When you take a ‘flipping houses’ approach to investment, you’re looking to maximise your capital gain as quickly as possible. 

Patience is a virtue 

House flipping is a business, like any other. It requires knowledge, planning and patience to be successful.

The most common mistake novice investors make is underestimating the time or money the project will require.

For example, costly kitchen and bathroom refits do not necessarily equate to a quick sale. Nor do they guarantee a big increase in property price. 

Do your research and find out how to emphasise quality and financial control in your renovations.

How to get started

The house flipping process should begin with detailed research to find an undervalued property. 

This property should also have renovation potential if you want to follow a ‘fix and flip’ strategy to maximise your profit.

Flipping tactics that work

Pinpoint potential properties:  Divorces, deceased estates, bankruptcies and properties that are heading into foreclosure are prime targets. Consult real estate agents for potential properties in this category that require prompt sales.

Contact the owner and arrange a meeting: Find out about their situation, price requirements and reasons for selling.

Verify the homeowner’s word: Don’t just rely on what you have been told. Do your research into the factors that will affect the initial sale price and ultimate resale value. This includes conducting a thorough property inspection.

Do the maths: Calculate the potential value of your investment. Analyse your costs and profits. Work out what you could pay and the projected profit margin, given your anticipated sale price.

Negotiate with the owner: Try to arrive at a price that is mutually agreeable. It’s important not to exploit the situation while remaining mindful of end-result profitability.

Consult reputable lenders and lawyers: You will need to secure finance. Depending on the type of sale (mortgagee in possession, etc.) you are likely to be dealing with lawyers as well.

Short sale and final price are essential: Set up, check and structure a short sale for the homeowner and present it to the lender to gain approval.

Protect your interests: Seek financial advice about protecting your new property and avoid last-minute surprises.

Fixed to budget: Many distressed homes require only a minimal outlay to become a superior sale prospect. In other cases, you may wish to carry out substantial renovations to realise an even greater profit. But do so prudently.

Sell or rent it: Align your sale for maximum profit, while minimising the lending period. Alternatively, your plan might be to rent the property, negatively gear any expenses and gain in capital growth.

Knowing when and where to buy property is the basis for wealth creation. Some investors adhere to a standard principle: rather than “timing the market”, they attribute the financial gain to “time in the market”.

But there is a smarter way, with many preferring to take matters into their own hands.

Successful investors often focus on uncapitalised areas. It is widely viewed that real estate will inflate over time — and astute buyers would rather learn where the market is going to serve them best and buy there.

Capital growth lesson

The real estate lesson for investors is that, if you have capital, you need to work that capital as fast as possible.

Analysts predict that you must move money and follow the upward-trending areas. You need to manage your money by understanding various markets and where to buy next.

Australia and New Zealand are replete with different state-based property market cycles that all have different patterns. This evolution allows investors to move their money to the next must-have location. Check official industry guides in your targeted region.

The counter-cyclical equation

There are two principles that excite or deflate a market. One is affordability and the other is sales volume.

Experts say that sales volume has a direct correlation with the sentiment. We all know that sentiment is the most exciting and dangerous side of any marketplace. It serves to reason that when people aren’t buying, investors can secure a smart deal.

Similarly, when people are buying, they can sell and make a profit. So the psychological purchasing lesson is: you need to run counter-cyclical to the mindset of other buyers.

If you follow the crowd, the market drawback can be harmful. The boom-or-bust economy of the Dubai property market around a decade ago — with skyscrapers rising in line with buyers flipping properties before completion — is a case in point. 

Know your limitations

It doesn’t take an expert to realise that everything has a limit; usually, this is because a market can only sustain so much before it either becomes too expensive or oversupplied. The principles of the market will then change.

It is safe to say that local markets don’t suffer the extreme highs and lows of global megacities such as Dubai.

Most markets perform strongly and steadily, without following boom-or-bust patterns. This is true of well-balanced regions with diverse economies, which tend to inflate and deflate — yet still, rise in value. This has been shown consistently, with the current property average at roughly 11 per cent yearly growth (as measured over the past century).

Opportunity knocks quickly 

Research shows that up to 80 per cent of buyers purchase real estate too late in the cycle. The following guidelines indicate future boom areas. This is when smart investors pounce on market capitalisation:

• Interstate investors buying into the area (which will push prices up);
• Auction clearance rates are high;
• Local investors are beginning to return to the market.

Remember that when opportunity knocks, it usually indicates ‘timing the market’, rather than ‘time in the market’. In other words, if the masses are buying, astute owners are selling.

The marketplace is comprised of many volatile components and you need to understand them, and avoid extremes, to analyse market sentiment to the best advantage.