Starter’s guide to flipping houses
Well-known YouTuber Stephen Baron recently made a whopping R970 000 profit flipping a Johannesburg house, receiving over a million views on his YouTube channel Flipping Johannesburg. If you saw this and decided you want a slice of that pie, you may be wondering how to do it and where to start.
Essentially, flipping a house involves buying a property, giving it a facelift, and reselling it for a profit. Seems pretty straightforward, doesn’t it? Andrea Tucker, Director of online bond originator MortgageMe, says it can be, but you need to know what you’re doing. “Investing in a house in order to resell is a big decision and you need to go into it armed with as much information as possible, while keeping the risk/reward ratio at front of mind,” advises Tucker.
So, here is exactly that – some valuable information from the experts at MortgageMe to include in your knowledge arsenal before embarking on a house-flipping project.
Establish a budget
Decide what you can afford to invest (i.e., loan to fund your investment) and find a good bond originator, and why leave your house for this when you can obtain the services of a digital bond aggregator like MortgageMe. The company offers an easy-to-use affordability calculator where you can upload your recent bank statements showing your income and all your monthly expenses, and it will calculate what size home loan you can potentially afford. Your bond certificate will give you a good idea how much additional credit you can responsibly afford to take on in the short to medium term, taking your current living expenses into account.
Another factor to consider when doing your budget is the ‘after repair value’ (ARV) or the 70 percent rule, which, in the real estate world, is the estimated value of the property after it has been renovated. This allows you to build extra padding into your budget in case something goes wrong. So, the buyer should pay 70 percent of the ARV of a property minus the repairs needed. For example, the ARV is R1 million. Then assume the property will need about R250 000 in repairs. You should not pay much more than R450 000 for that property. Keep this figure in mind when looking at properties, and ensure you look within your budget.
Also keep in mind that you’ll need approximately 8% of the value of the bond available to cover the expenses incurred in the process of taking on a home loan and for attorneys to transfer the property into your name. Its best to have this amount saved so that you don’t need to take on additional credit to fund this. Build this into your budget now.
Find the right house
You knew it was coming – ‘location, location, location’– the most important factor when choosing a property. Look at the home’s proximity to good schools, retail areas and green spaces. Speak to a few estate agents in the suburbs that you’re looking at in order to understand who currently lives in this neighbourhood (i.e., singles, families, older couples) and use this information to guide your house hunting journey as well as deciding what needs to be done to a house as a part of the flip.
Vastly different from looking for your dream home as a first-time buyer, when looking for a house to flip, it is a good idea to find the worst house, but in the best area, an ugly house that ideally only needs cosmetic changes in order to transform it. Elements of a house that are relatively simple to transform include, floors, walls, roof, cabinets, countertops, and the garden. “A fresh coat of paint has one of the highest returns on investment compared to any other home improvement. But be wary of anything structural that needs to be fixed or replaced (think a leaking roof), as this is going to be costly and time-consuming to fix,” shares Tucker.
Secure your funds
Once you know what you can afford to invest and have found the property you’d like to buy, you will need a bond originator, like MortgageMe to help you to secure a loan. They can also offer advice on how much you can spend on renovations to gain the profit you’re after when you’re ready to sell.
Acquiring a loan for a second home you plan to flip is a little different to acquiring one for a home you intend to live in and some of the procedures may be a little different, which the MortgageMe support team will guide you through. Keep in mind that if you live in your flip, you will only pay one mortgage and finding finance may be easier. By doing this you can also take your time renovating and save money in the long run by finding the right contractors.
Assemble a dream team
You’re not going to want to go into this on your own, however appealing the cost savings may be. A team of experts will make the journey less laborious and possibly more cost effective in the long run.
Look around for reliable and competent subcontractors in the form of builders, architects, electricians, plumbers, painters, handymen and landscapers and get many quotes to compare prices. Get recommendations from friends or neighbours who have used these subcontractors before. And if you need, get references before committing. Contractors are great for any structural changes like doors and windows, and they have knowledgeable on building regulations, but if you like you can appoint yourself as the main contractor and rely on professional input from your subcontractors. Always be aware of hidden costs and decide on the most important upgrades to transform the house.
Be aware of home trends
When you start renovations and redecorations, rather put your own preferences aside and focus on current home trends. Kitchen and bathroom revamps can be costly but make the biggest impression on potential buyers. “Renovating kitchens and bathrooms show the best return on investment,” says Tucker. Look at improving the cabinets by replacing or repainting them, and putting in long-lasting easy to clean counters, fresh hardware, sinks, backsplashes, warm and practical floors and efficient and eco-friendly lighting.
First impressions count, so put some money aside to create an appealing garden – minimalist, indigenous where possible, water wise and low maintenance gardens are the current trend. If you have a green thumb, you can do this yourself, or hire a landscaper if the budget allows.
Paint the boundary walls and home’s exterior in a colour popular with homeowners now – do some research in your neighbourhood or speak to your local paint shop to get their advice. Another immediate upgrade is new flooring, with vinyl plank flooring popular in many homes nowadays due to its great appearance, wide variety of styles and affordability.