Flipping property is a well-worn investment technique that serves some investors well, while others prefer a more long-term approach to get the most out of their purchases. Paresh Raja, founder and CEO of Market Financial Solutions, outlines some of the pros, cons and considerations.
Property flipping has become a staple of British TV schedules thanks to shows like Homes Under the Hammer or Flipping Fast. While these programmes make for good entertainment, they are not necessarily accurate, and portray a somewhat basic image of the industry.
In reality, with interest rates and inflation rising higher and higher, the process of flipping property (buying, renovating then selling in a short space of time) is a lot more complicated. Despite this, in it is estimated that 19,000 properties were flipped between March 2020 and late 2021, boasting an average profit of £48,190.
Clearly, the flipping market can be highly profitable for investors. That said, there are key considerations that investors must take to avoid losses and boost profits.
The potential benefits and downsides
The main benefit to flipping property is that property prices are increasing in the UK, which makes securing a profit an easier task. Indeed, ONS statistics showed in April 2022 that the average house price had grown by £31,000 in just 12 months, pushing the average sale price to £281,000.
Combined with the fact that 75% of flipped properties sell for more than they were purchased for, it is clear that success in this sector can be achieved, but a quarter of flippers still miss out on the potential positives such investments can bring.
Indeed, there are some potential downsides that investors must be aware of before embarking on a flipping project.
As always in the property market, any potential increase between the purchase and sale prices must be carefully balanced with the costs incurred when renovating or refurbishing the property.
With the renovation of a three-bed home costing £76,000 on average, investors need to factor in the fact that these costs can often grow by 10%-15% should anything go wrong, and there will be additional costs like tax and admin charges that could unexpectedly exceed an investors budget.
Moreover, investors often come across problems when dealing with dubious contractors and issues with supply chains (a particularly prevalent issue at present), while managing properties in such a competitive and fast-moving market is often more difficult than some investors imagine.
Factors to consider before flipping property
Bearing in mind these benefits and downsides of flipping investments, what are the top factors that investors must take into consideration before embarking on such a project?
Firstly, investors should be aware of the trends that are dominating today’s property market, as they should influence the features and specifications that their flipped property will include.
For instance, green homes are increasingly in high demand, with 63% of prospective homebuyers saying that they want their next home to be sustainable.
As such, installing environmentally friendly features will meet the demand as climate change becomes an increasingly important issue and will maintain its value despite any green legislation that might be implemented in the years to come.
Secondly, as the old adage goes ‘location, location, location’ is of the utmost importance to flipping property. For example, purchasing a building in an area where prices are declining or stagnating could seriously impact the profitability of a flipping project.
Therefore, investors must be aware of which areas of the country are enjoying the fastest price growth if they are to get the best return on investment.
Finally, investors must decide whether their flipping project will be sold when completed, or whether they will rent it out. Certainly, there are pros and cons to both options.
For those who choose to sell, they will enjoy a faster return on investment and limit the amount of property management that they will need to carry out; however, capital gains and other sales taxes could impact profitability.
As such, those who choose to rent will need to manage their properties (or hire an agent) but could benefit from a steady income and an asset that might grow in value over time, provided that it does not remain vacant for long periods of time.
How to finance a flipping project
Due to the broad range of circumstances that can occur, any foray into the property investment sector requires financial products that best suit the needs of the investors.
Investors must find a lender that can best cater for their individual situation and the competitive nature of the market; they should look for lenders that can provide them with the most speed and flexibility when flipping property.
For instance, many flipping projects begin in an auction house, where there is a 28-day deadline for payment. However, many traditional and high street lenders take months to consider applications for mortgages or home improvement loans, which could jeopardise the purchase of an ideal flipping property.
As such, by employing the services of a specialist or bridging loan lender – many of whom can consider applications and deliver loans in a matter of days – investors can ensure they do not miss out on their target.
Furthermore, high street lenders often have strict parameters and conditions within which the loan can be delivered, so acquiring finance on an undervalued or derelict property can be a difficult task.
Alternatively, lenders who underwrite from the start of the application process and consider applications on a case-by-case basis will be better placed to consider the future value or income of a flipped property, allowing them to deliver loans that traditional lenders might refuse to.
At the end of the day, there is currently a property shortage and affordability crisis in the UK. Therefore, flipping properties can help alleviate this issue and boost housing stock in this country, but investors must be supported by their lenders and carefully consider the various elements that can make or break a flipping property.
Those who do so can not only enjoy the profitability that such projects often deliver, but can also help improve the availability of much sought after housing.
Paresh Raja is the founder and CEO of Market Financial Solutions (MFS) – a London-based bridging loan provider. Prior to establishing MFS in 2006, Paresh worked as a senior professional consultant in one of the top five management consultancy firms, and also set up an independent investment group.