Flipping property is popular on reality television. It is a very attractive idea when viewers get to follow fit, healthy couples that have taken a hefty chunk of time off work to feature on a reality television series. Those that are still trying to juggle employment while renovating, entertain viewers as they have a melt down or two along the way.
Do you have the time and know-how to flip a property in a few months or is a long term property investment strategy a better lifestyle fit?
On the go? Here’s 30 seconds of key take outs:
- Flipping property for profit is a full-time job and the ingoing and outgoing costs, including capital gains tax, are considerable.
- Long term property investment is a slower burn strategy but will enable you to kick both short and long term lifestyle goals while securing your financial future.
Keep reading >>
Are you in for the long or short term when investing in property? To answer this you need to be clear on your goals. Are you investing for growth, or for income, or both? Are you looking to raise capital?
Buying a property to rent it out is a popular form of long-term property investment. Houses, town houses and units are easier to understand than many other types of investments. There is rental income to be earned; tax benefits to be gained that translate to cash flow into your budget and capital growth and equity to tap into, over time.
If you’re only in the property investment game for the short term, let me help shed some light on what this means, from my personal experience.
My mum and dad are property flippers. They buy under market value property in need of some TLC. They ‘flip’ – that is buy, renovate and sell – up to three properties a year.
They have capital behind them. This is critical in a short term property investment strategy as there are months ahead of funding renovation costs, on top of your living costs.
They move into each property and take a couple of months to do the renovations. On average, they make $50,000 – $80,000 each property after taking out the multitude of costs for materials and trades. For the inexperienced, this profit and more could very easily be absorbed by unplanned materials and trades expenses.
How to invest in property for the short term
With a short term strategy you must buy below market. This will usually mean that the property will be a ‘fixer up’ type property with potential. Cosmetic changes like a lick of paint, and a bathroom and kitchen refit, may be enough to lift the market value.
Prioritising where to invest renovation dollars for optimum return does take some skill. You need to be savvy at estimating renovation costs and in project managing the trades to complete the makeover without overcapitalising.
Kitchens and bathrooms are idea places to increase appeal for buyer interest, but is a double edged sword, because the equity lift can be eaten away with the costs of the renovation.
Ideally, you’ll want to be close by or on site to monitor progress and manage costs.
Be prepared to invest considerable time and effort
Flipping property consumes a LOT of time. Be prepared to allow up to four months to complete renovations and the sale of the property. Planning, ongoing demands and project management can quickly turn into a full-time job – a real challenge when you are juggling other employment. If you’ve long service leave up your sleeve, you may need to use it.
Be prepared to tap into savings or find additional income
You’ll need to fund the holding cost during the renovation and while the property is on the market. The longer it takes to list the property for sale, the lower your profit will be.
Be prepared to cover upfront purchase costs
Before you make the move to buy a renovator, make sure you can cover all of the purchase costs. Allow at least 5% of the purchase price. The costs you’ll need to cover upfront include:
- Stamp duty
- Solicitor fees
- Bank fees
- Deposit (5%, 10% or 20% – depending on your lender and your financial position)
- Disbursements such as council rates and water rates.
Keep track of all your costs
You’ll need to keep a list of all the costs that you’ve coughed up for along the way. By knowing your total costs, you can work out your net profit. This is important because as part of your due diligence you’ll need to work out the market value of the ‘end product’. The sale price of your renovated property minus your initial purchase costs, renovation materials, trades costs and selling or ‘out’ costs equals your profit. In most cases short term investors don’t include their own project management fees and time in calculating profit.
Don’t forget to add ‘out costs’ to your total costs
Out costs are the fees associated with selling your renovated property. These include:
- Solicitor fees
- Bank fees
- Disbursements (outstanding council and water rates)
- Real estate agent’s fees
- Real estate marketing costs
- Furniture staging costs
- Capital gains tax.
Once you calculate all the associated costs of a short term property investment, is it all worth it? If you’re trying to hold down full time employment and flip properties, there won’t be much time for anything else. And then you need to start the process all over again!
Turn your income into a secure financial future
A long term or ‘yogi’ property investment strategy – ‘yogi’ because you’re realising lifetime goals that are of great personal value to you – will give you a more balanced lifestyle than work on top of work!
With a long term property investment strategy, there is only one initial cost to get into the market, the holding cost will be partly or fully covered by the rental income coming in, and there are a considerable tax breaks you can start to claim throughout the year.
…and you won’t be paying capital gains tax each time you flip a property throughout the year, if your strategy is to hold on to an investment property.
Get some experts around you to help you on your way: Pinnacle Program Support