Who hasn’t watched an episode of Flip That House or Income Property and thought: “I could totally do that!” With interest rates at an all-time low and ever-increasing property values, many amateur investors have gotten in on the house flipping game.
A growing trend in the Canadian housing industry, buying a fixer-upper or investing in new construction with the intent of selling the home without ever moving in for a tidy little profit is referred to as ‘flipping’ a house. It has proven to be a lucrative process for many, but can also be fraught with problems.
On a number of occasions, I have seen well-intentioned, hopeful flippers lose money. Let’s face it, there is a lot that can go wrong when buying a neglected home or one that hasn’t even been built yet. Often the cost of renovations, mortgage payments and invested time ends up amounting to more than the eventual profit margin.
In this risky game, it’s important to remember that you get what you pay for. We’ve all heard it before but it’s easy to assume that you’ve gotten the steal of the century when a home in a great neighbourhood comes on the market for significantly less than other homes on the street. Most ‘flippers’ buy these homes and soon find a host of unanticipated problems lying under the surface, anything from foundation cracks to termites, mold, faulty wiring or even asbestos. Having a back-up budget just in case renovations do not go as smoothly as planned or unexpected costs arise is always prudent.
Mortgage companies owning a property want to get rid of it as quickly as possible. In this case, homes are often sold or auctioned at a price considerably lower than its market value. Frequently, the house is sold only for what is owed on it. But often through auctions and foreclosures the house is sold ‘site unseen’. Which means you could be buying a home with a serious number of problems, again leaving you without profit.
Though flipping houses is fun and can be very profitable, flipping a home too quickly may result in a tax audit. If the money made off a house flip does not immediately roll into a similar investment, i.e. another house flip, your profit may be subject to a capital gains tax.
Flipping houses does indeed have the potential for unlimited income. Success depends on one’s financial situation, skill in evaluating real estate for purchase, knowledge of home renovating, negotiation skills and a little luck. Know your market, pick the right time to buy and sell and flip it quick!