The hardest part of flipping is finding the right property at the right price so that you know you can make a profit. You need to find something that needs work doing, but ideally nothing too structural. Checking estate agents listings, online, word of mouth and auctions are a good place to start, and if you spot a property that has potential, you could also try contacting the owners directly.
But the property itself is just one factor – you also need to consider are the area and the situation.
The area needs to be one where properties are selling quickly. You will tend to get a better price from someone buying to live in the property, rather than invest, as they are more emotionally tied, while investors will have a budget or yield return they will need to stick to.
You can find quick moving areas like this by asking local estate agents and keeping an eye on Rightmove etc. But the general rule of thumb will be desirable areas with good transport links, good schools, green areas etc.
The type of property you actually go for will depend on what you want to do. For example, if you are looking for a house that you want to put a new bathroom, kitchen etc. in and then sell onto a family, something like a three-bed semi is ideal. It can appeal to both 1st-time buyers and 2nd-time buyers so there will be a lot of potential buyers, which could start a bidding war and push your profits up.
Bungalows can also be a good option – they are very popular with older people looking to downsize, and are rare, therefore, people are willing to pay quite a lot for them. The type of people looking for a bungalow generally don’t want to have to do any work on the property, so they can be ideal for flipping.
If you are looking to develop a bigger house or a commercial unit into flats or an HMO, then you will be looking for a property that has the potential for a completely different layout. For example, you may want to cut a large bedroom in half to create two, or if you are looking to create an HMO, perhaps a house with 2 large reception rooms, you could turn one into a bedroom.
The situation is also very important. For example, the property market has its highs and lows and there are points when no one is interested and other points when you could almost name your price. You also need to know the personal circumstances of the seller – ideally you want someone who is looking for a quick sale so is not able to wait for a better offer.
How to finance a flip
Bridging is the ideal way to finance a flip – it allows you take out a short-term loan, so that you have the funding to do the flip, but you are not tied into a mortgage.
Bridging loans are generally taken out for a term of between six months and a year, and you can normally borrow at around 75% LTV. Some bridging lenders will offer a higher LTV, depending on your history of refurbishing properties and the predicted rise in the value of the property after the refurbishment has been completed.
Hope Capital are specialists in refurbishment finance for flipping properties and are able to offer short-term loans which take into account the work due to be undertaken on the property and the increase in value that this would have. When we offer a bridging loan to a client, we closely monitor the refurbishment works throughout the project and effect on value throughout the term of the loan, an in many cases, this can bring the LTV down to under 60% LTV.
There are many types of projects that we finance, and each client’s needs are different, as a result, finance has to be diverse. Unlike high street lenders that have investors to answer too, Hope is 100% privately funded so we are able to make our own decisions. We can look at each case with a more entrepreneurial eye and find the right solution, term and repayment method.
The most important thing to recognise when considering options for a client is that if there is a time limit, whether it’s speed of completion or term, then there is usually a bridging lender that can help. As the saying goes ‘If you don’t ask, you don’t get’ and when it comes to bridging finance this is true in more cases than you might have considered.
How to stick to a budget
Just like with any project, you will need to have a budget and timelines and you will need to stick to them religiously. You will also need to have a buffer so that if things get delayed- which they seem to in most cases – your project will not be adversely affected.
While higher than planned costs for the work on the property will obviously leave a hole in your budget, timescales are just as important to consider. For example, if the project runs over and you only have a six-month bridging loan, you may be forced to sell before the project is finished, or sell for a lower price than you wanted because you need a quick sale.
Ideally, this situation will not arise as you will have factored in delays into your timescales, but we actually have a bridging loan called a ‘marketing bridge.’ This type of finance allows the investor to extend the loan to allow for delays and to market the property/properties so they can wait for the best price. This works particularly well if you have bought and refurbished a block of flats, or turned a property into an HMO, as you need more time to sell them all.
Most common improvements to make to a property/what to avoid
The most common improvements to make to a property are new kitchens and bathrooms. These make a huge difference to the property and are very attractive to potential buyers. This is because they know these are the most expensive and disruptive improvements to make to a home, so knowing they will not have to do this themselves can be a huge pull.
Other common improvements will include changing the layout of the home, either making it open plan for the illusion of more space or changing the number of bedrooms, which could mean chopping a large room in half to create more or using a smaller box room to create an en-suite for the master bedroom. You may also want to consider making green improvements, and improving the outside of the property – ie repainting the exterior.
The types of things you should avoid doing is any expensive work that won’t increase the value of the property, for example, a pool or a hot tub in the garden.
If you have bought a property which you plan to turn into an HMO, changing the layout to create more rooms will obviously make this more profitable.
What profit should you expect?
There is no one answer to this as it completely depends on the property you are flipping, the improvements you have made, the market, the location, etc. and therefore, as long as you are happy with the return, then it has been a good investment. But many investors would use around 20% as a rule of thumb.
You will also need to consider the tax implications as this will affect profit – if you are flipping a project as an individual, the profits will be added to your income, and then you will pay income tax on that.
If the flip is undertaken by a company, they will pay corporation tax on the profits at the end of the financial year. When looking at the tax implications, corporation tax is lower than higher taxpayer income tax, so it is potentially more tax efficient to set up a company for flipping a property, especially if you are planning to do it more than once. That said, you should always take advice from a specialist tax advisor on issues like this.
How quickly do you need to move/ when should you put the house back on the market
This really depends on your finance, but on the whole, flipping should be a fairly quick process. You need to ensure all the work done on the property is completed before the end of your loan term, which gives you some time to play with to ensure you are not forced into a quick sale.
Hope offers a ‘marketing bridge’ which allows the investor an extension on the loan to give them time to market the property and get the best possible price for it. This type of finance can be particularly useful if the investor has converted a property into flats as it generally takes longer to sell multiple properties.