There’s something inherently appealing about flipping a property. Some people are drawn in by the excitement of finding the right property at a great price, and renovating it quickly for what they hope is a quick sale and healthy profit. Others enjoy having an external project to work on, outside of their normal nine-to-five routine. For those who enjoy decorating, the ability to put their mark on a home before selling it on, is also very appealing. No matter the reason for your decision to “flip” a property, the important thing is to keep your focus on the bottom line – and ensure that the costs don’t outweigh the final sales price.
Investing directly in a property to expand your investment portfolio could see you make a healthy profit, but you could just as easily make a loss. There are risks involved, and that’s why it’s important to give careful consideration to every aspect of the process. As we’re passionate about educating our clients, we wanted to share five steps that you can take from the start, to give your investment the best chance at a positive outcome.
1. Set your budget upfront then stick to it:
How much do you want to invest? When “flipping” a property, you need to factor in the acquisition cost, renovation cost, carrying costs, marketing costs, and sales costs (including any taxes you will need to pay on the sale). Remember that you will need to cover the costs of owning the property for the duration of the time that it is in your name, so these carrying costs such as financing, insurance, rates and taxes, and utilities including electricity, water and sewerage supplied to the property will need to be covered for the duration. This will impact the amount you can invest when you purchase the property.
2. Work out what your maximum allowable offer can be on your potential property:
Property costs will vary depending on the area and the condition of the property. The associated closing costs will vary too, depending on where the property is located. Every country has different requirements associated with real estate transactions. It’s important to do your homework thoroughly before putting in an offer to purchase. Speaking to an expert in the area that you’re planning to buy in is always a good idea, so there are no hidden costs to surprise you when closing.
We work closely with our clients when deciding whether a particular property is viable as an investment or not. The assessment process is very detailed and refined, and takes all potential costs, as well as associated factors into account. For example, the expected time to complete renovations is a factor that can have a major impact on the returns.
If you’re wanting a quick, rough, ballpark-estimate of what a potentially suitable offer might be on a property, you could calculate what 70% (or whatever percentage you would be comfortable with) of the after repair value (ARV) of a property minus the rehab costs would be:
Maximum Allowable Offer (MAO) = (After Repair/Renovation Value (ARV) x 0.70) – Repair Cost
Let’s say you’re looking at a property on the market for R500, 000 which only needs cosmetic renovations (such as new paint, carpet, minor repairs, new lights, refinish floors, new toilet bowls, new vanities, and new faucets (no extensive plumbing, electrical, or foundation work). It’s a duplex within a complex and you’ve seen comparable but freshly renovated units in the same complex that sold for R650, 000.
MAO = (ARV R650, 000 x 0.70) – R50, 000 (theoretical repair costs)
MAO = R 455, 000 – R50, 000
MAO = R405, 000
Remember that the difference between the purchase price, plus the repairs and your sales price doesn’t mean profit as you will have many other costs to account for such as transfer costs, water, lights, rates and taxes, insurance, estate agent commission, tax etc.
Ideally it would be good to secure the property for less if possible, but the MAO is as high as you should go, or you could put your investment at risk.
This is by no means the comprehensive assessment that should be done prior to making an offer, but it gives you an idea of why it is important to know how much you want to invest. It will help to guide you in terms of the type of property you can invest in, what you can afford to put in for renovations, and thus what your maximum asking price should be.
3. Educate yourself on what it costs to renovate a property:
One of the most important aspects of flipping a property is understanding what you plan to do with the property from a renovation perspective. Do you want to do a “roadworthy”, a renovation with some meat to it, or do you want to do a major overhaul, or something in between? Perhaps you want to do additions, or add another storey. The more complex the renovation, the more complex the viability assessment, and the potential profit calculation.
The different types of contractors that you may need to hire include: a general contractor, an electrician, a plumber, a handyman, a painter, and a landscaper (because curb appeal can mean the difference between a fast or slow sale). Some contractors will include the cost of materials needed in their quotes while others will allow you to purchase your own and will charge either a day rate or a project rate. You will need to negotiate the best rates, and ensure that a detailed contract is signed with the contractor to ensure that the scope of work, timelines and penalties are clearly understood, and agreed upon, by both parties.
Should you choose to purchase the materials yourself, you will need to include these costs in your calculations, as well as the delivery fees for those materials. They can add up faster than you think. It’s a good idea to find a single supplier that has reasonable rates who will be able to supply most of your requirements for one delivery fee. If you’re planning on installing new appliances in the property, the cost of the appliances and potentially the installation fees also need to be accounted for in your calculations.
If this is going to be your first property flip, then it’s a good idea to start with a property that only needs cosmetic rehabilitation. Once you’ve gained experience from that, you can move on to one that needs more moderate or extensive repairs.
Cosmetic renovations can make a big difference. For many buyers it can be difficult to see past the need to paint a property, or to replace flooring. By starting with a more manageable rehabilitation project, you will find that your material and labour costs will be lower and that you can turn the project around in a shorter period of time.
If the property you are considering purchasing needs moderate repairs, such as updating a kitchen or bathroom, or redoing the electrics throughout, you might be able to purchase it for a significantly lower price. Remember that your timeline to sale will also be affected as the repairs are more complicated, and as a result, your carrying costs will also increase.
Extensive repairs, which are needed if the property isn’t structurally sound, needs an additional bedroom or bathroom to be more appealing to buyers, or hasn’t been cosmetically updated in decades, mean that the property needs a serious renovation to ensure it is ready for sale. Just like with moderate repairs, it should lower your acquisition costs, but will also increase your material and labour costs. Your timeline will extend even further, and so will your carrying costs.
4. Decide on how you will market your renovation project
When it comes time to sell your renovated property, there are two main options – to sell the property yourself, or to engage with a real estate agent to handle the whole process for you. If you plan on selling it yourself, then all marketing and sales costs will need to be paid by you, upfront. If you choose to go with a realtor, then they will carry all the advertising costs and will draw their commission from the settlement proceeds.
If you are going to market and sell the property yourself, there are a few things you can do to make it more appealing. These include ensuring the garden is neat and tidy, and that it has curb appeal, as first impressions can make a huge difference to potential buyers. Staging the home using furniture rented for the purpose is another way to help buyers to see themselves at home in your property. Sometimes it is hard for buyers to envisage the spaces when the property is empty. You’ll need to be sure you’ve priced the property competitively in comparison to the surrounding market, and you’ll need to take advantage of all avenues of online marketing to ensure as many potential buyers as possible see your listing.
If you choose to go with an agent, a lot of the stress can be taken off your shoulders. The real estate agent’s fees are usually paid by the seller. It is important to select the right agent. Don’t simply go with the agent who will charge the lowest fees. You need to select an agent with a strong network of potential buyers who has a good track record of getting the best price for the seller in the neighbourhood in which your property is located. Remember, the faster they sell your house (for the right price), the lower your carrying costs at the end of the day. The fees include their commission (which vary quite a bit from agent to agent these days as many are negotiable), and the marketing and sales costs.
5. Decide how you are going to finance your project
Should you have the cash on hand to cover all the costs, then you can save a lot on your project in terms of finance fees, and this could increase your return on your investment, however not everyone has that kind of liquidity, or wants to risk tying up their cash on a projects for the time it could take to renovate and sell.
If you choose to finance the project, you could potentially have multiple flip projects happening at the same time too, if you have the capacity to manage them.
Traditional finance institutions such as banks might either take too long to decide on whether they will grant you the loan, or to make the funds available which could mean losing out on the property you wanted to purchase, and sometimes they are not keen to finance “flip” projects too as it can have implications on the interest they gain from offering the loan.
Non-traditional lenders, such as private mortgage lenders, are becoming a popular alternative as they are often able to perform their due diligence faster, and are comfortable in arranging shorter repayment terms – for a higher finance rate of course. These hard money lenders provide short-term financing solutions and typically focus on lending to real estate investors. The loan is an asset-based loan, where the purchased property acts as collateral for the loan.
Flipping a property is easier with the right partner
Flipping a property is not for the faint-hearted, despite how attractive and exciting the process can be made to seem on reality TV. There is a lot you need to know, and a lot of time that you will need to invest in the project to ensure its success. Even if you’ve followed all the right steps it could still encounter problems that reduce the return on your investment. If you’re considering investing in a buy-to-renovate-and-sell project internationally, rather than locally, the process can be even more challenging.
Finding the right partner to manage your project and your investment helps to make the process less stressful for investors. For nearly two decades, YDL Property Investment has provided solid, top quality, and profitable, local and international residential property investment opportunities, and value added services to our property investors. Our investment team is at your side for every step of your international property investment journey. We are passionate about educating, and carefully guiding each of our clients through the challenges involved in international property investment. It is for these reasons that many investors have chosen to work with us time and again, to expand their property portfolios.
Based in both South Africa, and Atlanta, Georgia, USA, YDL Property Investment focuses its operations on the hands-on management of Private Mortgage Lending, ‘flipping’ (buy-renovate-sell), and buy-to-let investment deals. We work independently of any agencies, and offer a turn-key service that is based on in-depth local market knowledge, to cater to your specific investment needs. We’ve gained a solid understanding of the Private Mortgage Lending, speculative, and buy-to-let residential markets in the USA, with a particular focus on Atlanta, Georgia. Our operations in Atlanta include a network of long-time residential property investment professionals, who know their city well, which is important as the US property market operates very differently to the South African market. Our strength lies in having local experts on the ground who assist in guiding us through the process.
Contact YDL today to arrange a personal consultation, and discover more about investing in international property.
Some Past Deals
- Private Lending-Wholesale (USA)
- Private Lending-Rehab (USA)
- Flipping (USA)
- Buy-to-Let (USA)
- Speculative (SA)
- Buy-to-Let (SA)