4 reasons why renovation flips often flop
It happens every year.
The TV show “The Block” inspires a new wave of investors keen to get involved in renovating and “flipping’ properties.
Just to make things clear “flipping” is where you purchase a property and then sell it within a short period of time for a higher price, usually having added value through renovations.
Sounds good, doesn’t it?
But it doesn’t work!
It is a speculative strategy that is not recommended, especially at this more mature stage of the property cycle.
The major issues with this strategy are:
1. Transaction and Holding Costs
When you consider the high transaction and holding costs such as stamp duty, selling costs and interest repayments (remember your property will be vacant while you renovate it) you may find that on a $500,000 property, your transactional costs could be as high as $60,000 eating away all your Profits
2. Tax
Even if you do make a profit, you then need to pay tax on it and you don’t benefit from the capital gains tax discount available if you hold a property for a longer period of time.
3. ‘Flipping’ in a Fickle Market
I’ve seen investors make money flipping properties in a strongly rising market, but this is usually because the market has been rising strongly – not because of any special skills they’ve got.
On the other hand, to flip for a profit in a flat market is very hard to do.
4. Unrealistic Expectations
I’ve seen investors come home from “get rich quick” seminars hoping to buy a property for $650,000, spend $60,000 doing it up and immediately sell it for $850,000.
It just doesn’t work that way.
Forget what you see on “The Block” – TV reality shows aren’t real.
Firstly, you can’t do much of a reno for $60,000 anymore and if you did and added $85,000 to the value of your property, you’re doing very well.
Others are hoping to do renos and flips as a job – again this is unrealistic
On the other hand…
Buy, renovate and hold is one of my favourite property investment strategies
I enjoy taking a dwelling that’s been a bit neglected and breathing new life into it, making it into a home my tenants will love and want to care for, more importantly, it’s a great way of manufacturing equity for my property investment portfolio.
This strategy requires a lot of planning when it comes to successful execution, but over the last decade, numerous prime-time television shows have glorified the idea of buying a derelict hovel, throwing tens of thousands of dollars at it and selling for a tidy profit.
Making it all seem terribly easy and glamorous.
But the thing with property is this:
The way you make money out of property is not by buying, renovating and flipping.
As I said, after stamp duty, interest, holding costs, selling commission and tax there is rarely any profit in this strategy.
On the other hand buying, renovating, refinancing and holding for the long term is a time-tested investment strategy that works.
Why dispose of something you’ve (often literally) put so much blood, sweat and tears into – only to sacrifice profits to selling costs and possibly Capital Gains Tax – when you can hold onto it and use the power of time and leverage to realise its maximum wealth accumulation potential?
If you renovate and retain property you stand to gain so much more, with the potential to:
- Manufacture thousands of dollars in equity and fast-track your investment’s capital growth,
- Make your newly refurbished rental property attractive to a wider range of potential tenants
- Receive higher rental as your newly improved asset shines against its competitors.
- Get the tax benefit of extra depreciation allowances..
