Today’s reality television shows make flipping homes look glamorous because in many cases, the shows’ hosts are able to turn a significant profit in a short period of time. This has made flipping (buying a home with the intention of turning a profit) an increasingly popular property investment strategy among Canadians.
The inability to fund a project in the time it takes to renovate (fix) and sell (flip) is one of the most common reasons flipping a home fails. This makes fixing-and-flipping a risky investment. For this reason, it’s important to consider a number of factors before purchasing a house to flip. Otherwise, your profit can quickly turn into a shortfall.
This blog post will examine five of the top factors that most commonly turn a flip into a flop.
1. The buyers
Knowing who you’re renovating a property for can go a long way in selling quickly for your desired asking price.
- Are you selling the property to another investor? If so, a 5,000 square foot waterfront property might not be the best decision.
- Is your target buyer a single professional or a young couple? If so, what types of properties are they looking for and in which neighbourhood?
- Is your desired area a common retirement neighbourhood? If so, it might be wise to steer clear of multi-story properties.
2. The market
When flipping homes, the time is takes to sell a property can have a direct impact on your profit or your ability to fund future investments. For this reason, it’s critical to know your market inside and out.
- How long does it take to sell comparable homes in the neighbourhood?
- How much are comparable homes selling for?
- How popular is the street you’re looking at compared to the rest of the neighbourhood?
- Is the neighbourhood composed of single or multi-family properties?
- Are there schools nearby?
- Will your total costs fall above or below the neighbourhood’s price ceiling, if applicable?
3. The work
Start by determining your level of involvement in the project and what type of work the property requires. Are you more interested in making cosmetic changes, or are you looking for a true fixer-upper that requires contractors? Knowing your involvement ahead of the search will help you focus on the properties that closest fit your needs.
- How much of your own time do you plan to spend on property?
- Who will do the majority of the work?
- What kind of property are you looking to flip (single or multi-family)?
- What types of properties are in demand in your market?
4. The costs
There are many different costs that account for a fix-and-flip property, so it’s important to account for them when considering a potential fix-and-flip property.
- Mortgage costs
- Insurance costs
- Utility costs
- Borrowing costs
- Legal fees
- Closing costs
- Income tax. This is a figure that’s often miscalculated. The profits from a flipped property are not considered capital gains. Instead, your profits are taxed at your marginal tax rate, which could easily diminish any perceived profits if you’re not aware of this.
5. The funding
It may be difficult – or impossible – to acquire traditional funding to purchase a property that you intend to fix and flip. Traditional lenders can lend up to 80% of an existing property but this amount can decrease significantly for properties that require significant renovations.
- How much of your own money can you invest?
- Can you qualify for traditional financing?
- Do you have investors?
- Can you afford the higher costs associated with private lending?
- Do you have funds available in case costs overrun your budget?
It’s important to consider all aspects of a potential fix-and-flip investment, from the property, neighbourhood and buyers, to the costs and funding. If you know the investment inside and out, chances are higher that you’ll be able to flip the property quickly, adapt to unexpected circumstances, and maximize your profit.
Want to learn more? Contact me to discuss your upcoming fix-and-flip project.
Ofir Varsulker, B.A.
Specializing in alternative lending solutions