What is property ‘flipping’? Investment terms explained
Property flipping is when an investor purchases a property with an intent to sell, or ‘flip it’, quickly to make a profit.
How they go about this varies from investor to investor, but essentially if someone tells you they’re looking to flip a property then it means they’re looking to buy and sell quickly.
You might also see it referred to as house flipping, or as a quick flip.
Usually, to generate a profit, some form of renovation or improvement is involved in flipping properties. A few years ago the term became notorious after investors purchased US properties on the cheap, made a basic cosmetic fix, and then sold on to Australian investors as good yield options at inflated prices.
Not every market can sustain a flip
Property flipping has become increasingly popular, often replacing the mantra of “buy and hold”. However, it doesn’t work in every market. Fast moving “boom time” conditions are far more likely to allow investors to on-sell for a greater price – especially as the market pushes the price up – however, slow moving markets provide little room for making mistakes.
If the market is slow, and fewer buyers are looking, you may be facing a longer waiting period to generate your profit. Similarly, buying and planning on a quick sell that may not eventuate could see you holding a property in a downward market. The same due diligence still applies.
It’s risky business
Observer Mark Armstrong has been plain about property flipping – it offers a good opportunity to make a quick buck, but it comes with a hefty amount of risk.
Due to high in-costs and out-costs of property in Australia, and the likelihood you’ve borrowed to invest, you’ll have to crunch your numbers to make a profit.
To start with, you’ll have the property vacant without income while paying the loan’s interest repayments during the renovation period.
You’ll pay the real estate agent around 2% to 3% in commissions to sell, Armstrong explains, and another 1% on advertising costs.
Not to mention stamp duty when you initially purchased the property.
Your renovation needs to push your purchase price up by those holding costs and buying/selling fees, as well as by a substantial profit to make it worth your time and the funds spent on the renovation itself.
No small feat.
While for some areas the buy/flip strategy can be successful, particularly for those building capital earlier on in their investing years, Armstrong recommends that most consider holding the asset or reconsidering entirely.
“If the holding, transaction and time costs add up to more than the property’s likely sale price, you may need to reconsider whether it’s worthwhile undertaking the project,” he said.
