Tips and Advice

The Flip Side: The advantages to house flipping and how to finance it

How hard can it be? We’ve all heard of people buying a home in need of some TLC at the right price, renovating it to a suitable standard before selling it three or six months later for a tidy profit. Is it still doable?

Well, it is, and people are taking these projects on. So far this year, across New Zealand, 0.9 percent of sales made were held for less than six months. In 2022 it was 1.0 percent, while in 2021, it was 1.8 percent. Those who made a profit in the first quarter of 2023 had a median gain of $305,000.

While this quick profit might sound easy, there is no guarantee of this, and there’s more to a successful house flip than you may realise.

Have you ever been tempted to put your DIY skills and talent for interior decorating to good use and flip a house? Is it really money for nothing, or is it a lot harder than it appears? Our five-part series starts here. Over the next five months we find out about investing in the right house, the top priorities, the finishing touches and how to market it. This month we look at the advantages to house flipping and how to finance it.

Why consider a house flip?

Whether you already own a home but want to buy another as a project with the plan to sell it for a profit, or you want to do up your existing house, then sell it, is it worth the hard work?

Christchurch resident Ami Muir believes it is. Now onto her 14th house flip, she and her partner, Cain, purchased homes, living in them while renovating, repeating the process a few times. “Then we had kids and used the equity we’d built up to do another house flip without living in it.”

Ami, who details her journey on her Instagram account @mypropertydiary recommends house flipping to get financially ahead with only a part-time commitment. “As a mum, I could bring my baby to meetings and it didn’t stop me from being involved in home life. Plus, I could still earn some money. I enjoy renovating, making something better than it is.”

Ami initially thought house flipping didn’t look financially rewarding, but she soon changed her mind.

“The catalyst was when I assumed I couldn’t make money doing up a house and on-selling it. After analysing deals, I couldn’t see how to make a profit,” Ami says. “But then I decided if I could break even, it would be a positive because I could learn along the way. With our first flip, we learned so much.”

She bought a Christchurch property for $346,000 and sold it for $439,000 after spending $13,080 on an agent, $2073 on a solicitor, $1722 on holding tax and $25,115 on the renovation work. “The only way to learn is to do it. You speak with people and gradually build good contacts. It’s fun. I love it.”

Tyge Dellar, owner of Demo to Reno in Auckland, has flipped 12 houses and believes buyers don’t need DIY experience to undertake the process. They do need a broad idea of renovation, though.

“You can get sub-contractors to do the work for you, of course, but you need a basic understanding of the process. You can ultimately project manage it yourself.”

The obvious reason to house flip is to make a profit quickly. Ilse Wolf, director of Opes Partners, says that potential financial gain is the drawcard for all the hard work.

“Compare this with how long it takes someone in a 9-5 job to make those savings – that’s the appeal of flipping,” she says. “You might buy it for $400,000, spend $60,000 on reno, then revalue at $600,000. So, you could hold and rent it out, but if your goal is to build up cash, you might decide it works to put it on the market and make a $140,000 net profit. Buying, renovating and getting it back on the market to sell, usually, that person would be trying to complete the reno in three months. If you could make $100,000 every three months, you’d build up money quickly if you do it several times.”

How can you know if you’ll make a profit?

Although Tyge isn’t undertaking any house flips this year due to the market status, he has flipped 12 houses in the past nine years. By then he’d come up with a formula to help him meet his financial targets.

“When we started, my formula was accurate – spend $100,000 on renovations and make $100,000 profit. This formula proved itself accurate on properties under $1,000,000. The turnaround was quick – about six weeks. If you were to buy in a high market, and it dips suddenly, then you’ll lose.”

“You need to spend 90 percent of the time analysing the market and understanding what things are selling for, who is buying what at that time; and if they are they first home buyers or downsizers. You want to focus on the market with the most people in it at that time.”

Ami recommends making a move to buy when there is as little competition as possible. “It might take 10 offers on 10 properties to get one that sticks,” she says. “You make money when you buy, so you need to buy well in order to make money at the other end. You want a property nobody else wants, which is either too much work for others or you’ve seen something in it they haven’t. Buy under market value, add value with a renovation and get an understanding of the market right down to the street you are operating in.”

Ilse says the most crucial factor in doing a flip is knowing what the market will pay after you’ve done the renovation. “The most crucial factor is to track local sales for three to six months, find out how much each house sold for, how many bedrooms and bathrooms it had, and in what condition. You’re then aware when you go to market in that spot. It’s a calculation of if I renovate to a standard I know it will be based on comparables (properties with similar characteristics) in the past few months. To get a house to the value of $600,000, knowing I need to spend $60,000 and that I want to make $140,000, my buy price is $400,000.

The best time for flipping is in the next growth phase – if someone tracked sales now and was on top of data, knowing what each house was going for, they’d be well equipped to go into the growth phase. As well as the value you add through renovation, if the market carries you up, that’s an extra value buffer that will add to the profit. This gives more availability to overspend without it being detrimental to your profit margin.

The bright-line test

Anyone selling a residential property they’ve owned for less than 10 years now has to pay income tax on whatever financial gain they have made from the sale. The bright-line test applies to properties bought after 1 October 2015. Depending on when you purchased your property (two, five or 10 years) defines which bright-line period is applicable. “You factor that in, but don’t let it hold you back because no matter how you earn money, you have to pay tax,” says Ami.

Who to approach for a mortgage?

Banks tend to offer a range of mortgage choices, the variables being interest rates – which are usually at the low end – fees and repayment terms. They also may provide you with incentives such as a cash-back deal. They may be less inclined to lend to you if it’s short-term for a flip. Also, you’re entering one conversation for approval, and if you don’t fit their criteria for a mortgage, you’re still at square one.

Mortgage brokers work between the person borrowing the money and the bank or mortgage provider. Brokers know about different lending relationships, policies, and interest rates and can devise a suitable mortgage for an individual’s situation, researching and comparing various options to save you time. A broker can package your application, so it appeals to the right lender. Loan Market mortgage adviser Emma Boyd says you may need to pay a service fee for this type of lending. “It will depend on your personal situation such as if your loan is short term or long term, and what it’s lent against. This is because an adviser is normally paid a commission by the bank. However, this commission would be clawed back if the loan is repaid within a certain amount of time, i.e. a couple of years. When a loan is for a house flip, it will normally be short-term, hence commission would claw back. There could also be a fee charged from the lender, depending again on who it is, if it’s long term or short term and what it’s lent against,” she says.

Private non-bank lenders are organisations you might talk to you if you cannot meet your bank’s lending criteria. They tend to offer higher interest rates and higher fees for short-term finance as they know they won’t make much interest in a short space of time.

What types of mortgages do house flippers typically take?

House flippers generally aim for conventional bank mortgages on a floating rate that are interest-only to keep funding costs low. “The goal isn’t to pay down the principal debt like owner-occupiers who would be repaying both the principal and interest,” says Emma.

Is the process different to getting a mortgage for your own home?

The process to apply for a home loan, and the paperwork and information required, is the same whether a customer is purchasing their own home or an investment property, says BNZ external communications consultant Will Edmonds. “The key difference is the deposit required. Investors require a larger deposit versus 20 percent or less for customers purchasing their own home,” says Will. This is more like a 35 percent deposit for a house.

“Ensure you have some cash/equity to put in toward your new property for the deposit plus the renovation cost. You also may need to factor in GST depending on your accountant’s advice. The rules have recently changed and you now only need a 35 percent deposit rather than 40 percent if buying a house as an investment property. The criteria will depend on your personal situation so it’s best to seek advice from your adviser.”

What will the mortgage provider need from you?

You’ll need to provide the same information as you would with any loan, such as proof of income and equity, bank statements, identification and confirmation of existing debts.

How can I present myself in the best light to a lender?

“If you are planning a property trade/flip you need to know your numbers, how long the work will take, how much it will cost and what the holding and funding costs will be,” Emma says. “Seek your accountant’s advice to confirm what entity will own the property and borrow the funds, for example, the person’s name, company etc and will these entities be GST registered? What is your plan to manage the flip if you are working; who will do the work on the house and what experience do you have? An adviser can assess your personal situation and advise on your options.”

Words by: Catherine Steel

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