The one thing that will lose you money when you ‘buy to flip'

by , 22 September 2017
The one thing that will lose you money when you ‘buy to flip'
Buying a house, renovating and then selling it (called "buy to flip") can be one of the most rewarding investments for property investors…

You buy an old home for say R1 million, spend R250,000 on renovations and then sell it for R1.6 million or more.

Most investors believe the biggest secret behind a buy to flip is getting the best deal on materials for your renovation.

That's the biggest mistake.

In fact, even if you can complete a renovation below budget, you could still end up losing money.

You must know what the ‘neighbourhood price ceiling’ is if you want to renovate a house

 
I always say that the price you pay when you buy will determine whether you make a profit on a property or not.
 
And in the case of a buy to flip, it stays true.
 
It’s all about the "neighbourhood price ceiling".
 
Let me explain:
 
Say you buy a R1 million home, renovate it for R250,000 and try to sell for R1.6 million.
 
The house might be worth this amount, considering what is inside it. But the problem comes in with the area.
 
If you live in an area where the typical house only sells for R1.1 million, you’re going to struggle selling your place for R1.6 million. In fact, you’ll struggle to sell for R1.25 million to break even.
 
So, the neighbourhood price ceiling is the maximum price houses fetch in an area.
 
You can get these stats from several websites (at a price) or you can request an estate agent to pull them for you.
 
If the average selling price in a neighbourhood is R1.2 million with the highest price fetched being R1.4 million, I can tell you that you’ll struggle selling at a higher price.
 
So, that leaves you with one of two choices – you would’ve had to pay a lower price for the house in the first place. Or you should look at another neighbourhood where you can fetch a better price.

Always remember to do your research before buying

 
So, next time you look for a property to buy and flip, first get some info on the area it is situated in.
 
I typically pull a report for a suburb and for the town here.
 
You’ll get information like
  • The number of properties sold in the area per year for the last couple of years
  • The average prices they fetched
  • Whether it was full title or sectional titles
  • The ages of people buying in the area.
All this information is relevant.
 
For instance, if neighbourhood sales are slowing down, you don’t want to be left sitting with a property you want to unload quickly.
 
Or, you don’t want to renovate a property to a trendy modern style when most buyers in the area are older people.
 
Do this bit of research before you buy next time. It’ll cost you around R110 for the reports, but it can save you hundreds of thousands!
 
Here’s to unleashing real value
Francois Joubert

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