updated 4th October 2016
Flipping is a risky investment strategy, but with the right amount of skill and precision, it’s possible to make tens of thousands of dollars in less than a month
The entire process should happen within a few weeks or a few months. Often the initial buyer will make a few minor cosmetic enhancements before on-selling. “Flips are more like property trading than property investing,” explains buyer’s agent Patrick Bright. “Flips sound great on paper, but actually doing one is very risky.”
Types of flipping
This is when an investor purchases a property at below market value and then sells it quickly to a second investor at a profit, before or around the initial contract settlement. In theory, to create a win-win situation for all parties involved, the property should be resold at a higher price that is still under market value.
This strategy relies heavily on the original investor having a qualified database of ready-to-buy investors, who are happy to pay the higher price for the property in order to be handed good deals without having to research and run around themselves.
While there are investors who make decent profits through contract flipping, the strategy is very high-risk – and many believe that finding a severely underpriced property in the current market is unlikely.
Dick Crampton, real estate agent with Shead First National in Chatswood, Sydney, says that the opportunities to turn over a property in a short period of time without renovations are few and far between. “It can be done, but in my experience [in Sydney], if you’re talking about selling again at a profit after a short period of time … it doesn’t happen very often,” Crampton says. “From an agent’s perspective, we look after the vendors – so our duty is to get the best possible price for the property.”
Because of this, contract flippers often buy into off-the-plan developments, aiming to on-sell their interest in the property before construction is complete. “If it takes 12 months for the development to be completed, you could make $100,000 or more in one year,” says William Bronchick, real estate lawyer and author of Flipping Properties: Generate Instant Cash Profits in Real Estate. “Of course, the opposite is also true – you could end up losing money if the local economy tanks, and you end up with a worthless property that you can’t sell for more than you paid. Use this approach very carefully.”
Heather Seitz from FixingandFlipping.com agrees, warning investors who see flipping as an opportunity to make a quick buck to be cautious. “Real estate is simple, but not easy, so if you’re looking for a get rich quick scheme, you’re probably going to get yourself into trouble with flipping,” she says.
Fix and flip
This is the most common flipping strategy in Australia. It involves an investor who obtains a property in need of major repair at below market value. The investor makes the necessary renovations and refurbishments and then sells the property at or nearer to the market value, hoping that the sale price will be higher than the purchase price plus costs of repair and financing.
This approach works particularly well in more established, well-located areas that are experiencing capital growth. It’s important to remember that simply renovating a property doesn’t guarantee that you’ll make a profit; renovators need to be careful not to overcapitalise and spend money on refurbishments that are inappropriate or add little value to the property. For this reason, it’s critical to research the market thoroughly to be sure that your property will achieve a profitable sale price once renovations and purchasing costs are factored in.
In order for this strategy to work, Heather Seitz says you need to be prepared to get your hands dirty. “Make a consistent effort to really look for houses that are overgrown and in need of paint … these are going to be your best bet for flipping real estate.”
Also, according to Seitz, being organised is crucial, and careful planning throughout the project will save you time and money. “Keep track of all of your receipts and costs,” Seitz advises, “so that you’re always on track with your budget – as every dollar you spend over-budget is a dollar less profit.”
Seitz explains that her ‘personal best’ for renovating and flipping a property was a $10,000 profit, achieved in just 53 days from date of purchase to date of sale. “But, make no mistake, those types of deals are few and far between, so be forewarned,” Seitz says. “Flipping real estate takes work, but the rewards can be huge.”
Critical flipping factors
“From my experience, it’s difficult and time-consuming to find a suitable property to flip,” warns buyer’s agent Patrick Bright. However, it’s possible, even in a soft market, to find properties for sale at less than market value, such as urgent sales due to the vendor’s divorce or terminated employment.
Don’t just flick through the real estate section in Saturday’s paper, but actually invest a large portion of time in getting to know the market in different locations; speak to local real estate agents. The local council can also give you a heads-up on any new developments, growth or infrastructure. “If you do your research and know fair market values, you’re much less likely to get ripped off,” advises Bright.
Finding someone to flip to is essential in a contract flip, because if you don’t lock a buyer in before the holding period expires, you’re going to be stuck paying the mortgage. The safest way to complete this transaction is to find a purchaser before you buy the property yourself – which is why keeping an extensive, qualified contact list of property investors is vital.
There are considerable costs associated with flipping, including legal fees, taxes, finance and purchasing costs, and other expenses. Budget carefully and realistically.
Tax and legalities
If you do manage to orchestrate a flip successfully, the applicable taxes – stamp duty, capital gains tax and potentially land tax – will diminish your profits significantly.
Stamp duty will effectively be paid twice – first by the initial buyer and then again by the secondary buyer. There may be ways to avoid this, such as buying an option to purchase the property rather than agreeing to buy the actual property, but the legalities are complex; consult a solicitor.
Capital Gains Tax (CGT)
You can reduce the CGT payable by 50% simply by holding onto the property for 12 months. By flipping the property within a short timeframe, you won’t be eligible for this discount.
Land tax is a state tax levied annually by each state and territory of Australia, except Northern Territory. Generally, your principal place of residence, or land used for primary production, such as a farm, is exempt from land tax. It’s payable by the owner of any interest in freehold land, if the value of all land interests exceeds the relevant threshold. This threshold varies from state to state and is reviewed annually. It is currently $600,000 in Queensland, $352,000 in NSW, $250,000 in WA and $200,000 in Victoria.
If you’re conducting a contract flip – that is, on-selling the property before you have acquired ownership of it – you may be legally required to be a licensed real estate agent to complete the transaction. Check with your solicitor to ensure you’re operating within the law.
A $55,000 book profit can be whittled down to just $20,000 after tax and expenses