It is estimated that 19,000 properties were “flipped” between March 2020 and late 2021.
This means bought, refurbished or renovated, and promptly sold. And, on average, these flipping projects attracted profits of £48,190, reflecting how successful this form of property investment can be.
Indeed, for many people, flipping is the quintessential view of property investment – something fuelled by television programmes like Homes Under the Hammer and Flipping Fast.
However, these shows present the process in a rather simplified manner; one that could be misleading to would-be flippers.
In reality, during the current climate of higher interest rates and soaring inflation, property flipping has become a more complex process.
As such, for any investors who are contemplating an endeavour in the property flipping space, its vital that they are aware of how to limit risk and maximise profits in today’s economic landscape.
The benefits and downsides of property flipping
The main benefit to a flipping property investment is the profit it can secure.
As mentioned above, the flipping property market is strong at the moment, with 75% of properties selling for more than they were bought for.
Yet at the same time, this shows that for one-in-four projects, the result is not always positive.
Given how quickly property prices have grown in the last few years, attaining a profit certainly seems to be an achievable goal in the current market.
Indeed, in April 2022, the ONS found that the average house price had grown to £281,000 – an increase of £31,000 on the year before.
The capital growth based on market movements is, of course, greatly accentuated by the mark-up achieved by making significant improvements to the property itself.
There are particularly attractive investment opportunities in various areas of the country.
In the Southwest, for example, the average property takes just 19 days from being listed to agree a sale, while Manchester’s property market is enjoying a combination of rising prices and existing owners choosing to sell their properties.
That said, there are some downsides.
Like many property investments, acquiring a profit depends on the costs incurred in the redevelopment process.
On average, a renovation of a three-bed house will cost investors £76,000, but this figure can rise by 10-15% should investors encounter unexpected issues.
Indeed, tax and admin costs (such as estate agent fees and capital gains tax) will also impact profits.
Elsewhere, many flipping investors can encounter difficulties with questionable contractors or supply chain issues (building materials are not easily sourced right now), while others struggle to manage their properties in such a rapid market.
As such, it is vital that investors can acquire a property that can give them the best chance of a successful flip.
So, what should investors consider before entering the flipping market?
Buying a property in an area where prices are stagnating would make it more difficult to turn a profit, so being able to track property prices in different areas is a must.
For example, with central banks hiking interest rate, many buyers have flocked to London’s ‘super-prime’ market to get ahead of potential economic slowdown, increasing prices to a six-year high.
Indeed, property flippers could seriously benefit from a trend like this.
Investors should consider the features that their flipped property will include and make sure that they fall in line with the current market trends.
For example, demand for green homes has never been higher, with 63% of prospective homebuyers wanting a sustainable home.
As global warming becomes an increasingly pertinent issue in the housing market and energy prices rise sharply, investors who choose to install environmentally friendly features will benefit from increasing demand and stand their investment in good stead for years to come, ensuring a profit can be made despite any green legislation that is implemented.
It is vital that investors hire professional builders and workmen to carry out any work for them.
In the long run, paying a little more for a reliable contractor will better ensure the property is finished to the highest standard, going some way to then achieving the best possible return on investment.
Indeed, signing a legally binding agreement for the features and quality of work the contractor is expected to fulfil will help in this regard.
Investors must also decide whether they will sell or rent any property that they flip.
Indeed, there are pros and cons for both approaches.
For example, if an investor chooses to sell their flipped property (as is the usual approach), they will get a quicker return on investment and will not have to manage a property in the long term.
However, they will not gain a consistent income and will need to factor in capital gains and other taxes.
Alternatively, those who choose to rent their property will enjoy a monthly passive income and a property that will hopefully grow in value over time.
That said, investors run the risk of periods of vacancy that could impact profitability and would also have to manage the property or pay an agent to do so.
Finally, investors must consider how they will buy the property.
Certainly, those hoping to embark on a fix-and-flip property – where undervalued or potentially derelict buildings are flipped into desirable assets – could certainly benefit from acquiring their property at an auction, where derelict and underappreciated properties are more readily available.
Financing a flipping investment
How investors finance their flipping projects will depend on their particular circumstances.
Thus, it is vital that investors can find a lender and financial solution that best matches their needs.
In most cases, flexibility and speed are vital attributes for any lender they choose to acquire finance from.
For example, an investor who buys a property at auction with designs on flipping it for a profit will typically need to pay the agreed price within the 28-day deadline.
High street lenders, whose application processes can take months, may not be able to deliver a mortgage in time for the landlord to complete the purchase.
Therefore, investors could look to specialist or bridging loan lenders to help – these firms can deliver loans in as little as three days.
In doing so, investors can give themselves the breathing space to complete the auction purchase and refurbish the property, before selling the asset or finding a long-term financial solution for their property if they intend to rent the property out.
For flipping projects that start as an undervalued or derelict property, finding a financial product from a traditional lender will be almost impossible because of their strict criteria for loans and mortgages.
A flexible specialist lender, which treats each application on a case-by-case basis, would better be able to account for the future income or value of a refurbished property.
As such, a financial product can be delivered to cases that traditional lenders might shy away from.
Ultimately, widespread property flipping could go a long way in helping to alleviate the housing crisis in the UK.
It will help bring derelict and run-down properties back onto the market, increasing housing stock.
As such, investors who choose to go down this route would not only benefit from the profitability of such investments but will also be contributing to a more equitable housing market.
However, they must carefully consider the factors listed above and ensure they have the right finance in place to make a flipping investment a successful venture.