Flipping is one of the fastest ways to make a profit from property – but it’s also one of the riskiest property investment strategies.
“There are plenty of TV shows that focus on the financial rewards of flipping property, but few highlight the important research involved when doing so,” warns Parkers Managing Director Toby Phillips.
“Lots of money can be lost very quickly if you don’t do the research and planning required.
“Things like understanding your market and having a budget contingency are key, but you also need to know what fees and taxes you're required to pay both as a buyer and a seller.”
This guide reveals everything you’ll need to consider before flipping a property, looks at the taxes you may have to pay and examines the pros, cons, and dangers of property flipping.
What does property flipping mean?
Flipping is the process of buying a property and selling it on quickly for a profit.
Most flips on done on properties that require renovation, but some simply see the buyer purchase at a low price before selling immediately for a profit.
Property flipping can mean making a lump sum profit in a short space of time, but the process is risky.
Can you make money by flipping houses?
Flipping houses to gain a profit
Flipping a property can be profitable and a good way to earn a lump sum quickly.
However, flipping can also be risky and costly, too.
To work out a property’s potential flipping profit:
- Gross profit = sale price = purchase price – costs
In simple terms, if you buy a property for £120,000, spend £20,000 on your renovation, with £10,000 in other costs, then sell for £170,000, you’ll have made £20,000 in profit.
What is the 70% rule in flipping?
The 70% rule is used by property flippers to calculate the price they should pay for a property.
First, you work out the potential after repair value (ARV) of the property – which is what it is likely to sell for once renovations have been completed.
Then calculate 70% of that ARV and subtract the projected cost of the renovation, plus other costs.
The result is the maximum price you should pay for the property initially.
For example, if a property’s ARV is £210,000, 70% of that ARV is £147,000.
If you’re planning to spend £30,000 on renovations and other costs, your maximum buying price is £117,000 (210,000 x 0.70 = 147,000 – 30,000 = 117,000).
What tax do I pay when flipping property?
As well as your costs, you’ll also need to factor in taxes when flipping property:
1. Income tax
Property flipping is generally considered to be a trading activity, so if you flip as an individual, you may have to pay income tax on any profit you make.
2. Corporation tax
If you buy, renovate, and sell a property through a company, you’ll need to pay corporation tax on any profit.
Any money you extract from your company could also be subject to income tax.
Additional costs when property flipping
It's important to consider all the other costs you’ll face, which are likely to include:
- Stamp duty
- Solicitor fees
- Estate agent fees when selling
- Survey fees
- Finance costs, including interest
- Utility bills while renovating
- Council tax
Funding a property flip
Most mortgage lenders will refuse to lend to a buyer looking to flip a property.
- The property may not be in a liveable condition when purchased
- You may have early repayment penalties on a mortgage
- Most lenders stipulate that you must own a property for at least six months before being able to sell it
Other funding options that could help you flip a property, however, include:
1. Cash purchase
Using cash to purchase and renovate your property flip is often the easiest way to fund the project.
However, you’ll need to think about how long your cash is tied up for if you’re keen to move on to another project quickly.
If you’re unable to sell your flipped property, your money will remain tied to the property until you’re able to find a buyer.
2. Bridging finance
Bridging loans are short-term finance options often used for property flips.
This type of finance is a good way to borrow towards your purchase and even renovation costs.
But bridging finance can be expensive with high interest rates, so you’ll need to think carefully about how long you need the finance for as the payments could eat into your profits.
How to find properties to flip
Finding a property to flip isn’t as simple as looking online in the same way you would if you were looking for a new home.
To find potential flip properties, you should:
1. Speak to local agents and landlords
Contact your local estate agent and start to build a relationship.
Often, finding a good property to flip is about having good contacts, so speaking to agents and landlords in the area you’re searching.
Let your local agent know that you’re looking to buy quickly, as this could appeal to sellers looking to do the same.
2. The online portals
While online portals like Rightmove and Zoopla are more commonly used for buyers looking for their next home, there are often some gems to be found if you’re looking to flip.
Search for properties listed as being in ‘poor condition’, and also look for listings with a high square footage to low bedroom ratio – such as a 3,000 square feet property with three bedrooms.
These properties are likely to have space for additional bedrooms, which could have a positive impact on your post-renovation sale price.
3. Property auctions
Auctions can be fertile ground for property flippers, as houses in need of major renovation work often come up as lots.
Be aware, however, that you’ll probably need fast access to cash if you’re buying at auction, with a deposit available on the day of the auction.
Key things to consider when looking for flip properties
The key to success when flipping properties is in your research.
You should consider:
Even if a property looks to be a great buy with potential to make a profit, it’s crucial you buy in an area where buyers are active.
Those buyers should also be people looking to buy a home, rather than investors who may only be willing to pay below your post-renovation asking price.
When researching an area to buy a flip property, you should:
- Speak to your local agent and find out more about property sales in the area
- Keep an eye on the online property portals and see how long it’s taking listings to be sold
Other factors that could affect an area’s suitability for a property flip include the proximity of:
- Transport links
2. Buyer appeal
Think about the type of people who are buying properties in the area you’re keen to flip in.
Are they families looking for houses with a certain number of bedrooms?
Or are they young professionals or couples looking to buy their first home?
By understanding who your target market is and what they’re looking for, you’ll be able to ensure your renovation and property layout matches their expectations.
3. The seller’s situation
When you’ve found a property you think will work as a flip, try to find out as much as you can about the seller’s situation.
Knowing how keen they are to secure a quick sale will give you a great idea of where to pitch your offer, maximising your profit potential.
4. Purchase price
Put simply, the price you pay for your flip property is the major factor that will affect your profit margin.
Buying too high could wipe out your property before you even start your renovation work.
5. Renovation, timelines, and other costs
Another major factor that can affect your property flip profits is the amount you spend on renovations.
Think about who you’ll be selling to, what they might be prepared to pay for the property and what they’ll expect if they’re to pay a top price.
Consider the finish and specification of the property and speak to your local agent about the level of finish your potential buyers demand.
Your renovation timeline is also key.
The longer your renovation takes, the more money you’ll be spending on things like bridging finance repayments and utility bills.
Find out more about major factors you’ll need to consider before buying a property to renovate.
6. Sale price
Understanding what your property is likely to sell for when renovation work is complete is crucial to flipping success.
Speak to your local agent and look online for the sold prices of comparable local properties of a similar finished standard so you can work out an average sale price you’re likely to achieve.
Remember not to search further back than six months, as market changes could skew your figures.
What is the danger in property flipping?
Property flipping is an investment strategy where the rewards are high, but the risks are equally high.
Flipping requires large amounts of money up front and if you fail to make a profit on your flip, that money could be gone forever.
Factors that can affect your profit, that are also out of your control, include:
- A dip in the property market
- Economic factors
- Soaring renovation costs or time
- Unexpected renovation problems
However, a successful property flip can mean a large profit in a very short space of time.
- Your guide to buying a property to renovate
- All the fees you need to know about when buying
- What your renovation will cost – room by room
Still have questions? Contact your local Parkers branch today.