Is house flipping still viable as an investment? Due to the combination of new tax legislation and rising real estate prices, most people wouldn’t consider flipping to be “easy money” anymore. Investors who plan on buying a house, slapping on a quick coat of paint and immediately selling it for a huge profit may be disappointed.
However, renovating and repairing distressed properties into aesthetically-pleasing and structurally sound homes creates genuine value for buyers in the market today. When you regard house flipping as a real business strategy, it can be a fulfilling and financially rewarding investment.
Do You Have What It Takes To Succeed as a House Flipper?
As with most professions, building a real business by flipping houses requires a certain amount of skill, experience, and knowledge. A healthy dose of risk tolerance will also help!. We’re going to go over some things you can have in your toolkit that will give you every possible advantage as you scour the market for your next investment. Note: You don’t require all of these attributes, but the more you have, the better. For skills you don’t have, find a professional you can trust.
- Being handy can be a huge advantage. You can do a lot of the work yourself and save money on labour.
- A network of skilled tradespeople is also important. Part of a successful flip is keeping the carrying costs down by selling as quickly as possible. You don’t want to be held up because your plumber isn’t available for six months.
- You need extensive knowledge about the real estate market and neighbourhood you are searching in. A good Realtor® can help ensure that you buy the right house in an ideal location for resale.
- Keep your emotions in check. Determine what your “walkaway” price is and stick to it. This can be easier said than done if you fall in love with a particular property, but the numbers are everything.
- Having a flair for design will help. If you don’t, your Realtor® or a good interior decorator can help select the right finishes.
- A good flipper will seek and listen to the advice of experts.
While in the midst of a flip, successful investors often work long hours to minimize the amount of time before they can sell the house. This reduces your carrying costs and minimizes your risk of the market changing.
Think of trying to predict the weather. There’s less chance of being accurate the further out you go. Therefore, be sure that you have lots of time to dedicate to each project before placing an offer.
Understanding the market overall can make you a better investor and house flipper. The related reading below will help:
- How to Ignore Bad Real Estate Advice Without Losing Friends
- Straight Talk About Second Mortgages and Refinancing
- Real Estate 101 for First-Time Buyers
Costs You Should Account For When Flipping A Home
Flipping a house can require more time and money than you may realize. You want to make sure you look at all the costs involved in each project. Many inexperienced investors can miss certain costs, which can cause your bottom line to dwindle.
We like to break down the costs of flipping into three categories:
1. Costs of Procuring the Property
Your cost of procuring a property includes more than the purchase price. You must also anticipate legal fees, appraisal fees, home inspection, other inspections like well, septic, electrical, title insurance, and land transfer taxes. A quick rule of thumb is to set aside 3% to 5% of the purchase price. So if we paid $400,000, our closing costs would be $12,000 to $20,000.
2. Cost of Renovating and Carrying the Property
When calculating renovation costs, be sure to include all material, equipment rentals, delivery charges, permits and an hourly rate for your labour.
Carrying costs include accounting fees, utilities, property taxes, and home insurance. The length of time that you would be carrying your home is dependent on two things.
- How long does it take you to do the renovations?
- The length of time it will take to sell your home and the closing date. If you put your home on the market late fall, it may take longer to sell than in the spring market.
3. The Costs of Selling the Home
The last set costs are what it takes to sell the home. These include real estate commissions (approximately – 4% to 5% of the selling price), lawyers (about $1,000) and staging costs ($2,000-$4,000 per month). Some real estate services, like our team, include staging in the Realtor® fees.
Accurately estimating all of your costs gives you a better chance of choosing properties with the most potential for profit.
What To Look For In A House You Are Planning On Flipping?
Now you know what it takes to be a successful house flipper and how much investment may be involved. The next step is to choose projects that can be successful and profitable. Here are a few things that might indicate a house is a good candidate. Remember to be objective and judge by the potential, not by the outside appearance!
Mechanics:
Look for a home that has updated windows, furnaces, roofs and other mechanics. These are expensive to replace but don’t necessarily add resale value. As a result, you may not break even on these repairs.
Outdated or in Poor Taste
You want to find a home where you can bring up the value through minor cosmetic improvements. Look for ugly paint, outdated flooring and cabinetry, unappealing light fixtures, or closed traditional layouts. Interesting fact: Painting is a high impact renovation that is inexpensive to do but can dramatically change the look of a home.
Opening walls can turn a traditional looking home into a modern home instantly. A non-load bearing wall is the best. Still, a load bearing wall may be worth the extra cost of support beams to open it up.
Swap dated flooring with a modern hardwood-look-a-like such as laminate. This will do wonders! Depending on the price point you may want to use genuine hardwood. Keep as much of the flooring the same throughout the house to create a better flow. Most buyers prefer a seamless look from one room to the next, even in foyers and kitchens.
Kitchen/Bathroom:
Redoing the kitchen and bathrooms are game changers for many buyers. However, these can also be high-cost renovations. You’ll want to run your numbers carefully to ensure each upgrade is worth it. Knowing where you can save money will also help. For example, expensive cupboards aren’t usually necessary as long as they offer high-end features like soft close drawers, moulding, undermount lighting, and a garbage drawer.
Now let’s talk bathrooms. For many buyers, an ensuite is non-negotiable. Adding an ensuite or walk-in closet to an older style home will vastly increase the number of potential buyers. These are the things that have been the money makers for many successful flips.
Avoid Structural Damage:
Run, run as fast as you can away from home that have structural issues. These tend to be money pits and can suck all the profit away from you. Though you might be able to claim it as a loss on your taxes, that’s not the goal of this project.
Keep the End User in Mind
Potential buyers won’t know or care how much you spent remodeling the home. They only care about the value it brings to them. In other words, investing $40,000 in repairs does not guarantee you will earn it back once the house sells. That’s why it’s always recommended to work with a real estate team who is up to speed with what buyers want in the current market.
Invest for the Long Term
The idea of flipping is to buy a home, repair it, and sell it in a short period of time. However, everything doesn’t always go according to plan. In that case, a house with rental potential can also be valuable. You can generate rental income to help cover your carrying costs if it takes longer to sell than anticipated or the market changes.
Best Types of Homes to Flip
Choosing the right style of home is very important for successful flipping. Certain housing types are easier and more profitable to sell. Below are a few of our favourite housing structures to look for when watching for your next opportunity.
Side Split
Side split style homes make it relatively easy to go from a closed space to an open-concept floor plan. Opening up the kitchen, living room and dining room allows you to create a spectacular living space that is perfect for entertaining. Adding an island between the kitchen and living room provides definition while still feeling open.
Bungalow
We love bungalows! Especially ones with a side door to the basement or a back door with stairs going into the kitchen. These are perfect for making a legal secondary suite. Creating income potential is one of the best ways to increase the resale value of any home. This is one feature many potential buyers will happily pay extra for.
Four-Level Back Split
Four level back splits are also fantastic for creating resale value through income potential. You could build a two-unit house where both apartments have fairly equal living spaces. Accessory apartments are in high demand due to the prices of homes going up as well as interest rates.
A house with income potential can also be more accessible for first time homeowners, which opens up your pool of potential buyers even more. Before going for for the two unit flip, make sure the basement has the correct height. In Guelph, this is 6ft 2 inches. You can add egress windows but the basement height is not changeable. Also, make sure the driveway is double wide or can be made into a double wide driveway.
The resources below can also help you find and remodel the right home for your flip:
- Buying an Older Home? Here Are The Red Flags To Watch Out For
- What is the Importance of a Final Walk-Through?
- 5 Quick Updates That Add Resale Value
How To Pick A Good Neighbourhood For A Flip?
Now you know what makes a good candidate for a flip. However, there’s more to your project than the house itself. A good location can be even more crucial. You want to search in neighbourhoods that have the highest price for square footage.
For the most profit potential, we recommend buying the ugliest house in the nicest neighbourhood. This leaves you with room to increase the value of the home.
- Family-friendly neighbourhoods are also ideal because they appeal to the largest pool of qualified buyers – those upgrading to a larger home. Respectable schools are magnets for affluent buyers.
- Established neighbourhoods can be great as well. It is harder to find renovated homes in a mature neighbourhood. Many buyers want the best of both worlds; the large lot with mature trees and the modern interiors of a new build. A flip in one of these areas can give the buyer everything they’re looking for.
- Lastly, neighbourhoods with access to major highways such as the 401 can be a draw for Toronto and Mississauga buyers in search of more affordable houses, especially in Guelph and other cities outside of GTA. Remember, picking the right neighbourhood is key!
How Much Should You Pay For a House You Are Flipping?
It is very important that you do not overpay for the property when buying with the intention of flipping. Investors make their money based on the ability to buy a home under market value. If you overpay for a house, you are setting yourself up for failure because you will struggle to sell it for a profit.
The 70% Rule
A guideline for many flippers is not to pay more than 70% of the value of the home after upgrades minus the costs of renovations.
For example, imagine you are looking at a property that you estimate will be worth $500,000 when it is fully renovated. You calculate that renovations will cost $50,000 to get the house ready for the market.
70% of $500,000 equals $350,000. Now subtract the $50,000 renovation costs, which brings you to $300,000. This means that you shouldn’t be paying much more than $300,000 for that property.
- $500,000 (Value Once Renovated) X 70% = $350,000
- $350,000-$50,000 (Renovation Cost) = $300,000
- $300,000 is the maximum you should pay for this property
Many flippers make the mistake of overestimating what they will be able to sell the home for, which results in them losing profits. Accurate research and estimates are essential. An experienced Realtor® can help you determine a realistic “after renovation” value.
How To Get The Best Price For A House You Are Flipping?
We have five rules that will help you secure a house at the best possible price:
- Buy a house that others are unwilling to buy. For example, most people tend to avoid houses that have odours like pet urine or smoke.
- Look for a home that has been on the market for a while and has had at least two price adjustments. Ideally, you want the most recent price adjustment to be 20-30 days ago. This indicates a motivated seller that may be willing to take a lower offer.
- Buy a home off-market. High producing teams like GoWylde Real Estate often have have pocket listings available. These are homes that have signed a listing agreement but have not listed yet. This allows you to get a great home without any competition.
- Find out what is important to the seller. It could be a quick closing. Or it may be an estate sale (or downsizing) where they can leave behind heavy items they no longer want. Be flexible, and you may get a better price.
- Never get emotionally attached and remember that home flipping is a business. Stick to your budget no matter what. If you can’t get the price you need to be successful, it’s time to move on.
These tips will help you purchase a home at the best price allowing you to maximize your profit margin!
Four Ways to Finance Your Flip
Financing your investment can be a little different than with your primary residence. Fortunately, there are options besides the major banks. Here are four ways that you might decide to finance your flip:
Private Financing:
Private lenders are not regulated, which can provide a great deal of flexibility. The terms and rates can vary substantially depending on the lender. Often, you can reduce carrying costs through interest-only payments. However, this comes at a cost, usually in the form of higher interest rates. It’s common to see rates between 8%-12%, plus an additional 2-5% in loan structuring fees.
B- Lenders:
Some alternative lenders in Ontario provide mortgages specifically designed for flips. These loans are usually open term, which means that you can pay back the funds at any time without a penalty. Interest rates are typically lower than with private loans but higher than with a conventional mortgage.
B-Lenders will typically provide 75-80% of the property value, and you will be required to make monthly payments on both the principal and interest. Rates can start at 5.99% and there is usually a 2-4% charge upfront for structuring the loan.
Conventional Mortgages:
Conventional mortgages are usually the way to go for your primary residence since they offer lower interest rates and minimum set up fees. However, flippers often go through a lot of red tape and can’t always get a conventional loan. If your credit is not great or you are already leveraged, traditional lenders will not likely approve you..
HELOC:
This is a home equity line of credit. This is by far the easiest and cheapest way to finance a loan. Basically, what you are doing is borrowing against the equity that you have in another property. This line of credit will have the lowest rates, allow you to make interest-only payments, and can be paid off at any time without a penalty. The catch is that you must already have a substantial amount of equity in property that you own to qualify for a HELOC.
Cash:
Lastly, you can always flip houses with your own cash. However, this ties up vast amounts of money and can leave you ill-prepared for your next investment. Although there are no interest rates or loan fees to worry about, paying for a flip in cash is not really leveraging your money wisely in most cases.
How Much Profit Should You Expect When Flipping a House?
The amount of profit or return on your investment that you should expect from a flip will vary depending on the current real estate market and how much rehab the property requires.
As a general rule of thumb, flippers in the Guelph area aim to make a 20% or higher return on their investment. If you are spending $200,000 in costs, then you should walk away with around $40,000 in your pocket after all your expenses.
More complex projects with extensive renovations and longer carrying times represent more of a risk. Therefore, the potential for reward should also be greater than 20%. On the other hand, you may buy a house where you only have to do a few cosmetic repairs that will be low investment in both time and money. In these cases, a 15% return might make it worth your while.
When calculating your return, factor in all additional expenses above and beyond the renovations such as carrying costs, financing, real estate fees and your time. Overestimating your costs while being conservative about your expectations can help keep you on the straight and narrow where you only undertake flips with the best chance of success.
Addicted to learning all about real estate investing? Here is some more related reading you may enjoy:
- How to Generate Passive Income From Your Primary Residence
- Growing Your Wealth Through Real Estate Even in a Recession
- A Complete Guide to Real Estate Investing in Guelph
What Are The Tax Implications of Flipping a House?
Flipping a house can be a great way to make money in real estate. However, whenever you make a profit on any home other than your primary residence, the government will want its share. Below, we’ll outline some of the tax implications that you should be aware of before searching for your next flip.
As we mentioned, your primary residence is exempt from capital gains and income taxes. Some flippers use this as a loophole. They buy a house, move into it, renovate it and then sell and buy another home right away.
These tend to be people who are doing flipping as a secondary income, not their full-time job. However, the CRA is starting to crack down on this. So you have to be careful. Doing this too often could result in an audit.
Capital Gains Versus Business Income
For any other type of property, you will be required to either pay business taxes or capital gains. The difference is only 50% of your profit is taxed under capital gains. If you have to report your profits as business income, 100% is taxable.
When selling a secondary property such as a vacation home, or income generating investment property you will pay capital gains tax. However, flipping is almost always considered business income under new federal legislation called the Residential Property Flipping Rule.
Under this 2022 legislation, any gains from buying a house that is not your primary residence only to sell it less than 365 days later are now considered business income and taxed as such. In addition, any losses are deemed nil, which means you won’t be able to claim them on your taxes.
Before this legislation, 50% of the profits from any sale were subjected to capital gains. Now, the entire profit is taxable, with only a few ways around the rule:
- A house you live in as your primary residence is not subject to business income tax or capital gains..
- If you sell a second property you have owned for more than 365 days that you are renting out, any profits will be subjected to capital gains, but not considered business income. You can also claim any losses to offset capital gains.
When purchasing a house with the intent of fixing it up and selling it for a profit, any gains are added to your yearly income and taxed at your applicable tax bracket.
How the CRA Evaluates Your House Flipping
How does the CRA know your intent for the property when you bought it? They will look at a few different factors to determine whether to consider your profits as capital gains or business income:
- How many renovations were completed?
- How long have you owned the home?
- What is your occupation? If you are a contractor you will have more difficulty getting away with claiming a capital gain.
- How frequently do you buy and sell houses?
- How much money did you borrow to purchase the home?
When flipping houses, it is very important to have a good accountant to help you structure your flipping business so that you pay the least amount of taxes possible.
Looking for more ideas to maximize the value of your home when selling? The resources below are a great place to start:
- Refining Your Offer Strategy When Selling First House
- Home Inspections: Friend or Foe When Selling Your Home?
- Best Practices for Selling a Home in Today’s Market
Should You Stage A Home You Are Flipping?
Yes, absolutely! Staging is a proven technique that can help you sell a house faster, which reduces your carrying costs and increases your potential for profit.
Remember that buying a home is an emotional decision for most people. If you want someone to absolutely fall in love with your house and pay top dollar, staging is a must.
Contrary to popular belief, a properly staged room actually looks bigger than a vacant room. Only 10 percent of the population can walk into a room and visualize where they would put their furniture and belongings when there is no framework to draw from. Many people also overestimate the space a bed and end table will take up in the room.
We can’t tell you how many times a buyer has looked at a vacant bedroom and said it is too small. Fast forward to the next house, and they will say a furnished bedroom is a good size. The caveat? It was either the same size, or the staged room is even smaller!
Staging also makes for superb marketing and promotion when the time comes. Since most people start searching online, you want photos of the kitchen, bathroom, bedrooms, and living rooms to shine. Vacant rooms tend to be boring, whereas a home that is staged to sell makes buyers want to rush to see the listing in person.
Interesting story: When the National Association of Realtors (NAR) ask buyers why they purchased a home, one of the most frequent responses is that it “just felt right”. This is a 100% emotional response. A furnished home is warmer, homier and more inviting than a vacant home.
Do you have more questions about investing in Guelph real estate or the Tri-Cities? We’d love to help! Reach out today to info@gowylde.ca or call 519-826-7109 to get started.
