House flipping – the process of buying a neglected or old home, renovating them and selling for a profit – is a trend that’s become so popular in many countries that there are even TV shows and competitions centred around it. This has inspired many people to try their luck in the South African property market – but is this process as good as it sounds? What are the risks and how can an investor minimise them effectively?
Avoiding the Worst-Case Scenario
It’s always a good idea to think about your worst-case scenario before taking the plunge. Essentially, this is that you could be stuck having spent capital on buying a home (let’s say R1 million) and improving it (let’s say another R500k) and it simply doesn’t sell. In these cases, you’re left paying off another bond or with your capital locked into a property – and you have the risk of adding to your capital gains tax for that tax season. In a slow housing market, the time it takes to sell your property could eat considerably into your profits even if it does sell eventually.
Minimising the Risks when Flipping a Property
With house flipping, it’s key to develop a strategy that minimises the risk of you ending up in the above situation. Here are some tips:
- Do your homework: Take the time to learn about the market and select the right area in which to buy. There not only needs to be a demand for homes and the type of property you are going to flip (a large free-standing home, complex, flat, etc), there also needs to be demand for the type of improvements you’re going to add. For example, a chef’s kitchen and outdoor entertainment area may be fantastic, but buyers are more interested in having good security and a standard kitchen. This is not about creating the home you’d love to buy – it’s about creating the home that meets the demands of buyers.
- Look at the market: A fast-moving market is the best in which to flip houses because it means you can sell quickly to recoup your expenses and earn a profit. Slow markets may mean waiting months before finding a buyer, or buyers offering below your ideal selling point. The state of the market changes throughout the country and even depends on property types. For example, the Western Cape is a strong property market especially in Cape Town locations, while Gauteng has seen slower growth. However, some types of property within a certain price range, location and environment may still be moving quickly in a slower market and provide good opportunities. Remember, the worst home in the best location is always better than the best home in a bad location.
- Develop a budget and stick to it: Start your house hunting process with a sound financial strategy in place – know how much you can afford and how your cash flow will work. Before buying a property, have it inspected in detail to ensure that you know exactly what work it needs, and that you uncover any structural issues before you make an offer. These types of issues can use up your entire renovation budget in a heartbeat and push your project off-course, and an inspection can help you decide if the flip will still be worth it. Start with the price that you’d like to sell your property for, based on the current economic cycle and in line with what buyers would likely pay. Plan out what renovations the property would need in detail with quotes and a contingency budget and don’t go overboard with your upgrades.
Jason Scholtz is the CEO at Envision Investments and a leader in the property and strategic investments industry in South Africa. For more investor tips and an insider’s look into the South African market, be sure to get in touch, keep an eye on this blog or visit http://www.envisioninvestments.co.za/