Buy-to-let landlords might consider property flipping as an opportunity if they have ready cash available, because mortgages aren’t supposed to be used for quick buying and selling.
Property flipping makes it possible to earn a lump sum of money in a shorter time frame than traditional buy-to-let, but it can be risky. You should be certain that you’ve actually found a bargain, and that the project won’t take too long or go over your budget. Proper planning is important.
How do I work out profit from property flipping?
When flipping a property, you calculate profit just like you would for any other venture:
gross profit = sale price - purchase price - costs
You have to keep taxes in mind. If you’ve set up a limited company for buy-to-let and flip property through this business, you’ll pay corporation tax.
Otherwise, you’ll pay income tax as an individual. You don’t pay capital gains tax, as HMRC doesn’t see property flipping as an investment.
You pay income tax by filling in a Self Assessment tax return by 31 January each year.
How to flip a property
1. Research before flipping property
Your profit will depend heavily on the project’s costs, including how much you paid for the property. It’s best to research a property’s location and how much homes there usually sell for. Are you really getting a bargain and are you certain that you’ll be able to sell quickly at a higher price?
You should then be as precise as possible when working out how much it'll cost to refurbish the property, how long it'll take, and what exactly needs to be done.
You can work closely with tradespeople here. You might even want to ask them to view the property with you to help scope the project.
You could also take advice from other professionals, including estate agents and tax advisers – for example, how much will it cost in stamp duty and other fees? And is there a way to minimise tax?
One of the risks of property flipping is the project costing you a lot more money (and taking a lot more time) than you originally planned for. Being as thorough as possible before taking the plunge can help reduce those risks.
2. Financing your property flipping
As mentioned, residential and buy-to-let mortgages aren’t designed for property flipping. You’ll need to use cash or find another way to borrow money:
Cash: if you’ve got enough for the property purchase and improvement costs, cash can be frictionless. But as the money will be tied up until you can sell, you should consider whether you’ll need that cash for anything else (and even whether this is really the best opportunity for you to make a return on your money).
Bridging loan: a bridging loan is effectively a short-term mortgage, which ‘bridges the gap’ between buying a property and selling it a few months later. If you’ve got cash but need some more, bridging loans can help you pay for the property and the refurbishments – but they’re often expensive.
3. Making the property improvements
This is the fun part if you’re more hands-on with your properties, but you should be realistic about what you can and can’t complete yourself.
Have the answers to these questions:
Who will buy the property? Have a target buyer in mind and cater to their tastes. Call on the research you did in step one – for example, do families live in the area, or is it populated more by young professionals?
How much can you do yourself? You might want to do parts of the refurbishment, but be mindful of your limitations. Work out what parts of the project will need specialist, experienced tradespeople.
Will you manage the project yourself? You can hire a contractor to oversee the whole project or hire individual contractors yourself. While managing the project yourself will often be cheaper, be realistic about how much time you can really dedicate to the refurbishment.
How much are you going to spend? It’s tempting to cut costs, but people can often tell when fixtures and fittings are too cheap. On the other hand, spending too much will reduce your profit. This is tricky to get right, so it’s a good idea to get an opinion from local estate agents on what’ll give the property the best chance of selling.
What’s the schedule? The aim is to make a quick profit, so you should be clear about the timeline with contractors (and trust that they can complete things on time). Keep a close eye on how the project is progressing, otherwise small problems might become bigger problems later on.
Will you be able to pay for labour and materials? It’s a good idea to agree on payments with your contractors at the beginning, so they know when to expect money after submitting their invoices. Keep in mind that while you’ll need to pay for materials, you shouldn’t pay for work that hasn’t been completed.
4. Selling after property flipping
The hard work is done, but it’s important you don’t sit back at this stage. It can be difficult for new homes to feel homely, so you’ll want to make the property presentable.
This might even mean putting some furniture in place, even if it’s just sofas, chairs, and tables. It should be just enough to convince people that they’d be able to call it home.
Then you can either use an estate agent to sell the property, or try it yourself by adding the home to property listing websites.
Make sure you’ve kept up to date with property prices, as the market may have moved. Call on your original research when setting a price, but factor in the range for similar properties currently.
Remember that the trick to pricing is capturing interest. If you go too high no-one will want to buy – again, think back to your original plan and how much profit you wanted to make. If you can set a reasonable price and still make this profit, that’s the sweet spot.
Property flipping UK: let us know how you get on
Property flipping is definitely an art. You need to be able to spot a bargain, have a vision for the refurbishment, and then sell at the right price.
But property flipping can be a great opportunity for landlords wishing to branch out, as you’ll develop new skills (and hopefully make money at the same time).
Are you experienced at property flipping or just starting out? Let us know in the comments below.
Photograph 1: Paolese/stock.adobe.com
