Four reasons why renovating flips frequently fail


Sep 26 | 2 minutes read
Four reasons why renovating flips frequently fail

Just to be clear, "flipping" is the practice of buying a house and then selling it quickly for a profit, usually after making improvements to increase its value.

Particularly at this later point of the real estate cycle, it is a speculative approach that is not advised.

The main problems with this tactic are:

  • Holding and Transaction Fees

When you factor in the high transaction and holding expenses like stamp duty, selling fees, and interest repayments (keep in mind that your home will be vacant while you repair it), you can find that on a $500,000 property, your transactional costs might be as high as $60,000, eroding all of your profits.

 

  • Tax

If you do make a profit, you must pay taxes on it and are not eligible for the capital gains tax break that results from holding a property for a longer period of time.

tax fees

 

  • Flipping in an Uncertain Market

Investors have been known to profit from property flipping in an environment when the market is substantially growing, but this is typically due to the market's strength rather than any specialised talents the investors may possess.

However, it is extremely challenging to flip for a profit in a flat market.

 

  • unreasonably high standards

First off, you can't do much renovating for $60,000 any more, so if you completed it and increased the value of your home by $85,000, you did extremely well.

Others want to work on renovations and flips, yet this is unrealistic.

unrealistic expectations renovating selling

 

You stand to gain so much more if you renovate and keep the property, with the potential to:

  • Create thousands of dollars' worth of stock to accelerate the capital growth of your investment,

  • Make a larger spectrum of potential renters interested in your recently renovated rental home.

  • As your newly enhanced asset stands out against its rivals, you will receive higher rental.

  • Get extra depreciation allowances for tax purposes.


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