Economists are predicting interest rate hikes, and it seems that it has become even more expensive to build your own home. With these market conditions prevailing, is it still possible for South Africans to make money “flipping” property?
If done correctly, flipping a home can deliver excellent yield, however, it can also end up costing you more than you make. So how should you proceed?
According to Carol Reynolds, Pam Golding Properties area principal in Durban, Durban Northand La Lucia, flipping homes can work well, depending on the area and the buying price.
She says it works best with professionals who are in the trade, for example builders who are able to build at cost to realise greater profits, architects who are able to save on the cost of plans or even real estate agents who are knowledgeable about the market and know a good buy when they see one.
This doesn’t mean it is an impossible undertaking for those of us without the skills, but research is key. “I wouldn’t recommend flipping unless you are extremely well-researched and well-equipped to minimise cost and maximise gain,” says Reynolds.
What you should do
Ultimately, Reynolds says you need to buy well, renovate cheaply but effectively, transform the house with clever cost-effective changes, and then present it beautifully to the market to attract a “top dollar price” on the resale.
And, ideally, all of this needs to be done in a short time frame to minimise holding costs. Here are some tips:
– Buy below market value. This is integral to your success, and means you have to do your homework. Find out what properties are selling for in the area. Is the house you’re looking at really a bargain?
– Ensure that the price ceiling in the area is high; ideally you want the worst house in the best area.
– If possible, go for a project where some TLC is required, like painting and cosmetics. Look for a property where small finishing touches will make a big impact, rather than attempting a massive structural rebuild where costs could escalate out of control, and plans and regulations could create delays.
– It is preferable to have the cash flow to fund the project, so that you are not paying too much interest.
What are the property flipping pitfalls?
Reynolds says potential home flippers need to watch out for the following:
– Borrowing too much money on the property in the first place leads to big problems down the line. This means your holding costs start to escalate, and before you know it the project has run at a loss.
– It is important that you factor transfer costs into your calculations. Transfer costs are high, and every time you acquire property in this country, you pay.
– Plans are becoming more and more problematic, as new energy-saving legislation results in greater expenses when you plan to do an upgrade.
– Municipalities can be slow in passing plans, and when you are flipping properties, time is money.
– If you haven’t researched the market properly or ensured that you have secured a good buy, the chances of making a profit are not great.
Worst case scenario
So what is the worst that can happen if your project is not successful?
Fortunately bricks and mortar are tangible, so whilst this could go wrong with the project running at a loss, there will always be value in the property as an asset, says Reynolds.
The risks are big if you get it wrong, however, and the property may take time to sell and your costs will mount as you wait for a buyer.
You may overspend on the renovation and may not be able to recoup the costs. In addition, acquisition and disposal costs are high and these may not be taken into account, she says.
“The bottom line is, you need to be supported by professionals at every point in the process to ensure that you minimise risk and maximise return.”
Success! To the victor goes the spoils
Reynolds says she knows of various property flipping success stories.
“One of our clients bought a home in central Durban North for R2.5 million. She renovated it for approximately R1 million and resold it for over R5 million,” she says.
“Another bought in Glenashley for R2.2 million, spent R800 000 on the build and resold it for over R4 million.”
Reynolds says she has personally flipped one property Cape Town and one in upper Durban North, and made R1 million profit on one and R500 000 profit on the other.