TV shows, building suppliers and greed are feeding the inexperienced consumer with the confidence to enter the real estate investment market. “Fix and Flip” has become a popular idea where buyers buy low and sell high when the market is rising. But, do you really know what you are getting into? There are many positive and more negative aspects in flipping a house – and it is not as easy as it seems.
Underestimating costs or the time it takes to complete your project can be financially devastating. Unforeseen structural problems, building permits, inexperience and lack of real estate knowledge are the main pitfalls. If you are not an experienced contractor – investing in a flipping project is “pure speculation”. The risks are high. Understand and follow the “golden rules”. First of all, be sure you know the real estate market secondly, understand the improvement costs necessary and thirdly, know the time it will take and most importantly stay on budget. An error in any one of these will result in lost opportunity and money.
You must be able to determine quickly what the property will need for improvements – what will these improvements cost- what are the land transfer taxes, carry costs, closing costs and annual taxes? How much profit do you expect to make? These are all most important questions you must answer before you venture into the world of flipping a house for profit. To find out the purchase price for a property subtract these expenses from your budget, this will help you to find the price range you can be looking in to find the right house. The TV shows make it look simple but, is it? You must know and understand the following:
1. Costs of renovations
2. Time it will take – delays result in an increase in budgets due to extra mortgage payments – additional labour costs, taxes and utility bills
3. Know your real estate market and stay tuned to the economic scale. An unexpected fluctuation or downturn in the market could catch you off guard.
4. Understand the tax implications – Canada Revenue Agency taxes the profits as business income, which means 100% of the profit is taxed at your income tax rate. In addition, mortgage interest and carrying costs are not eligible for write off expenses. Check with your financial advisor or your accountant for specific details.
When you go to sell it remember the commission and legal fees.
If you are budgeting for a substantial profit – you must ask yourself is the risk worthwhile? Renovations such as flooring, painting, landscaping and new counter tops or cupboards are the easiest way to increase property value. Homes with structural or foundation issues should be avoided. Vertical and horizontal cracks are signs of walls under pressure and disintegrating concrete means the foundation may be grumbling. Bowing or sagging roofs could mean serious challenges – check uneven floors, windows and doors that don’t open or close.
Location, location, location – check with your real estate agent – after the renovations what will the house be worth? It’s difficult to sell a house for more than the homes in the neighbourhood. Budget and timing are important. A more practical option may be to purchase an investment property, complete the necessary repairs then rent the property to realize a long-term cash flow. Build a buy-hold-rent portfolio – this option is lower risk and higher return over the long run.
Tips to Improve your Chance of Success
1. Taupe is the hottest paint colour. Re-paint throughout.
2. Area rugs add warmth and brighten hardwood flooring.
3. Built-ins like shelves and entertainment limits increase storage space and make a room appear larger.
4. Lightening can change the feel of a room.
5. Blinds, curtains and drapes can add privacy and warmth.
6. Landscaping is huge – the buyer will judge the inside of the home from the outside appearance.
7. Cleaning, uncluttered and neat and tidy will add improvements to the list price.
8. Be sure you have a good lawyer, accountant and real estate agent.
9. Pay for a home inspector, if necessary an electrician and a plumber – don’t be get got with surprises – delays and unforeseen problems cost $$
10. Don’t get sucked into going over budget
11. Be sure to account for the seasonal changes and winter months – remember the real estate market slows down but the carrying costs don’t.
12. Contractors are the most successful at “Flipping Houses” as they do the work themselves and understand the costs, timeline and requirements.
It is important to keep in mind “broad appeal” when renovating – don’t get too specific with paint or wall paper. Keep it simple; avoid trends and pitfalls when decorating.
By in large, a professionally landscaped home results in a 5-10% increase in property value. A properly landscaped home frames the house and gives it curb appeal. Who wants a house if it looks awful, cluttered or barren on the outside?
“Good landscaping most certainly helps sell a home more quickly, especially during the warm months when the flowers are out and the beauty of your work is overwhelming”. According to canadianhomes4sale.com upgrading or installing landscaping can offer a 30-60% payback on your investment. Remember landscape the house with the style of the house in mind. It should complement the architecture of the house. Lifestyle is an important factor when designing your home garden – is it maintenance free or weekend labour intensive? Are you prepared to be a slave to your garden?
Backyards and the landscaping are now considered an extension of the home. Some people are opting out of the 3-4 hour drive to the cottage and instead adding sunrooms, extensions and outdoor living environments to increase value and get the desired living space and sense of tranquility.
Outdoor living has become an important part of today’s lifestyle. Building a deck can add 73% return on investment, according to canadianhomes4sale.com be creative – the design possibilities are endless. Explore ideas, browse through magazines and get an idea of what other people have done. By adding a range of features like patios, decks, walkways, gazebos, gardens, pools, ponds and fountains properties can increase in value.
Hottest trends in 2008 (according to Canadian Real Estate www.remag.ca)
- Anything to do with water, ponds, fountains or falls.
- Roof top gardens, living walls and green roofs are combining the ecologic home owner with ecstatic beauty and function ability.
- The most dynamic change is the moving away from the lawns in the front yard claims, Dan Blair, a spokesman with Home Depot towards a simpler lower maintenance concept of shrubs, trees, and perennials that are low maintenance and water efficient.
- Experiment – add outdoor lightening – it may be perfect to the solution to extend your evening into the wee hours of the morning.
Above all have some fun and experiment with your ideas. Enjoy your home – an investment in your largest asset is often the best money you can spend.