In a recent interview Don R. Campbell was asked the following questions:
Can you provide some top-line information on the topic of Flipping houses?
What types of buyers are involved in flipping?
What should people be wary of when flipping?
What are some property qualities that people should be aware of when purchasing in order to flip? What should they avoid?
In your experience, what are the benefits of renovating a home and then flipping it?
Do you have any final thoughts on flipping houses?
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1) Can you provide some top-line information on the topic of Flipping houses?
Flipping houses is a business fraught with risks and is not actually investing in real estate, it is pure speculation. Although they make it look somewhat easy on the multitude of TV shows, it really isn’t. That is why HGTV are changing the formats of a number of these shows because the risks have recently really started to take their toll on the people in the shows.
Key points that are not discussed much (as a matter of fact, not discussed at all in many cases.):
Renovation estimates are varying wildly right now. In fact, due to the labour shortages across the country it is becoming increasingly difficult to get reliable suppliers and contractors who can actually finish on-time and on-budget.
Every time there is a delay (and there will be!) the person who bought the property loses another month of outbound cash (i.e. mortgage payments, taxes, heat, electricity etc)
Every time there is an increase in the budget (which there will be) it takes directly away from the speculator’s profit.
Often time speculators over-estimate their selling price and underestimate their reno and carrying costs. often forgotten:
Closing costs at purchase (legal’s, tax adjustments, appraisals, mortgage costs, title insurance etc)
Mortgage and tax payments during the holding period (could be substantial) with an extra 3 month buffer in case there is reno delays or it doesn’t sell right away
Vagaries of the market. Every real estate market goes through short and long term plateaus. If you happen to time your property wrong you could be trying to sell your finished project at the exact wrong time. (i.e a dramatic increase in listings on the local MLS or a major layoff notice given to a major employer in the town.) A buy, hold and rent person will have analyzed this and have a long term hold view. A Flipping Speculator has only a short term outlook and can get caught in the micro cycles that the market always goes through. As Warren Buffet says: “It’s easy to see who has been swimming naked when the tide goes out.”
A critical piece that is NEVER discussed is the tax implication of flipping property. When buying a property for a buy-hold-rent strategy – a long term strategy- the ultimate profits that you make are, in most cases, taxed as Capital Gains (i.e. only 50% of the profit is taxed at your tax rate). However, as a buy-renovate-flip speculator, the CRA is very clear that any profits will be taxed fully as business income – that is tax on 100% of the profit (not 50%) PLUS the flip-property can be deemed as ‘inventory’ by the CRA and therefore they can disallow the carrying costs of the property while you renovated it (i.e. you won’t be able to write off the mortgage interest or any other carrying cost). OUCH! That sure cuts into the flipper’s bottom line substantially. But most don’t factor that in when running their budgets.
2) What types of buyers are involved in flipping?
Short-term speculators and those just interested in trying to make what they perceive to be easy money. However the above four points need to be brought to their attention so they factor them into their plan (and thus may not be as much money or as easy money as they think)
3) What should people be wary of when flipping?
See above 4 points. PLUS, if they are not experienced in the building and renovations trades, underestimating their costs could be financially devastating. In our Renovations Secrets Package we provide investors with complete checklists (Flip Analyzer and Costing Sheet) and Building Inspection Forms along with very detailed estimation tools so they don’t get caught ‘swimming naked.’ In fact we even tell them exactly how to analyze the market BEFORE they buy.
4) What are some property qualities that people should be aware of when purchasing in order to flip? What should they avoid?
<<Answer, different color>>
Although most properties can be repaired (at a cost) in order to avoid the big surprises they should make sure they avoid at least the following (source REIN™ Renovations Secrets):
1. Foundation issues:
- Vertical Cracks that are larger than ¼” wide and if there are more than 5 per basement. More than that spells potential huge trouble
- Horizontal Cracks – A sign that the wall is under stress from inward or outward pressure and buckling. Bottom line, unless you have very deep pockets and you don’t mind solving huge potential problems, avoid these properties at all cost.
- Disintegrating Concrete – If you can rub your hand on the wall and it starts to crumble or fall apart, this house very likely will need MAJOR foundation work, which means major costs.
2. Bowing Roof Trusses. If the roof line is bowing or sagging the house quite possibly will require new roof trusses or extensive structural repair $$
3. Extreme Settling Problems. If windows or doors are not closing properly, door jams look crooked, floors are very uneven these are signs of major settling issues and repairs could be very expensive. In these cases a professional engineer inspection should be done before you buy the house.
4. Additions that are not done correctly. Many older homes have additions that have not been built on proper footings or pilings, they slowly start to pull away from the house as the two parts of the building settle at different rates. Sometimes this is an easy fix, but in most cases it involves a major cost/reno to fix it.
5) In your experience, what are the benefits of renovating a home and then flipping it?
If done right, and the speculator has learned all of the strategies and is following a proven system (rather than hoping for the best) that covers everything from what properties to buy, to accurate renovations estimations, to what to renovate and what to leave, to selling the house fast, to profits tax considerations; flipping can lead to some good profits, but at a relatively high risk. The key is, if you are going to attempt this, don’t just jumpin; use a Canadian proven system, or learn directly from someone with extensive experience (who ISN’T trying to sell you a property or do a Joint Venture with you because then they may be just getting you to ‘do the work’ for them). And have a large buffer account for the inevitable hiccups.
I speak to thousands of investors and speculators every year and one of the biggest regrets I hear is the money lost on what they believed was the perfect flip opportunity. The 2nd one is “If Only I Had Hung On To The Property and rented it out, I could have made SO much more money over the years.”
6) Do you have any final thoughts on flipping houses?
I think that there is some money to be made in the buying and flipping of properties, however it is not as easy as it looks on TV. The key is for the potential investor to ask them selves:
1. Do I have the talent, experience and the time to get the property accurately estimated and renovated if my contractor doesn’t show up or finish on-time?
2. Am I OK with the risk of trying to sell the property fast in whatever market condition exists when it is ready?
3. Could I make more money (after the different tax benefits and holding periods) buying an older property, fixing it and then renting it out over the long term?
4. Who, Exactly am I going to sell my property to? (that way you know what renovations will be important to do and which ones you can ignore)
5. Do I wish to add more stress to my life?
6.Can I afford to hold on to the property if the market is soft at the time I wish to sell it?
I do know some people who have done very well with flipping, but in every case they were experienced in construction and they took the business seriously; it wasn’t just an expensive hobby (which often times is what these projects turn into). Even then, these successful flippers worked towards building their buy-hold-rent portfolio with their reno’d properties as they quickly identified the lower risk and higher return this gave them over the long term.