House flipping is a concept which has become popular in the recent years. It is a real estate investment method that has the benefit of producing profits faster than traditional approaches. The more common way of investing in real estate is the buy and hold method, which relies on rental income to cover mortgage costs.
Of course, investors who buy and hold property are also able to choose to sell at any point, but in order to make a significant profit they often wait years before selling. Because of this, they are at risk of the property becoming vacant for periods of time, and will have to factor in the cost of mortgage and rental management into their investment strategy.
How House Flipping Works
In comparison, house flipping aims to avoid the inconvenience of rental management and liability and reduce the risk of vacancy costs by selling the property quickly after purchase. The way a profit is formed in this quick turnaround time is by buying the property for less than it can be potentially sold for.
There are two methods of achieving this. The first is finding a property that can be purchased below its current market value due to financial distress of the owners, whether they are unable to maintain their property or are at risk of defaulting on their mortgage loan. Investors who choose this strategy are able to then sell the property for a more favourable price.
The second approach to house flipping is the fixer-upper method. This relies on identifying properties that need improvements. Normally the issues will the property will be significant enough to deter other buyers and reduce the cost of the house as a result. Once purchasing a fixer-upper, the investors will then enhance the property so it is more appealing to future buyers. This allows the property to be bought low, and then after making improvements sold at a much higher rate.
The Benefits to House Flipping
At face value, house flipping may seem to have less profit potential than the hold and buy method of property investing as it doesn’t have the benefit of generating ongoing income. However, when done right it can be a successful investment method that returns large profits.
Potential for profit, faster
This is the main factor that encourages people to flip houses. Not only is there a high potential for profit in the right circumstances, that gain is returned much quicker. On average the house flipping process takes around half a year, although this will vary based on experience of the investor and complexity of the building repairs.
Less potential risk
By default, flipping houses is a safer form of investing as the capital invested is not kept at risk for as long as investment properties used for rental profit. As soon as the property is sold, the capital gain is returned to the investor and able to be used elsewhere. This means investors who choose the house flipping method are not as reliant on market fluctuations as they aren’t at risk of the real estate market dropping for long periods of time.
Additionally, house flipping doesn’t require any of the additional management or maintenance costs involved with owning a rental investment property. Not dealing with finding tenants and potential vacancy can save an investor time, stress and money.
Although house flipping requires a lot of effort, it is also a very rewarding process. People who decide to take this approach can be completely hands on, fixing up the building themselves. This is often the most cost effective method of house flipping as it ensures the outgoing costs aren’t too high during the improvement process. Being involved in the home improvement process will bring personal satisfaction to the investor, during the period of renovations or upgrades, and also at final sale of the property.
House flipping by nature is a form of active income as it requires a of minimum management of the upgrade process, and at most can involve full time manual labour. The skills and satisfaction that come from this are often what draws people to choose house flipping as an investment method.
If you are considering undertaking the process of house flipping as an investment opportunity, you will require a property valuation report to calculate your tax liability. As tax requirements can greatly affect the overall profit of your investment pursuits it is imperative that your property is accurately and honestly valued. The last thing you’d want is to pay more than you should.
Our team of expert property valuers in Melbourne are API certified with over 20 years of experience each, so you can have complete assurance that your property valuation report will be well-informed and accurate.