House flipping as an art form became popularized thanks to dozens of TV home shows making it look oh so easy. The real estate flip is the process of purchasing rundown homes, investing in area-appropriate renovations, and then selling that home for a profit. While it sounds simple in theory, house flipping in the province of Ontario can be a lot more complicated than it looks.
What is House Flipping?
House flipping is a real estate investment strategy. There are two types of flips. The first is the most common, namely the renovation flip. The second and far less common is the quick flip. The quick flip focuses on finding a home for a good price when housing prices are rising and then selling it soon thereafter for a profit due to the rising marketplace, not due to anything you have done to the house other than provide enough cash to carry the home pending re-sale.
This article focuses on the renovation flip. The renovation flip requires a keen eye for the property itself and an understanding of the real estate market. You need to know whether a home is a good price and opportunity and whether it has the potential to be re-sold for more once the renovations are completed. You also need to understand what renovations to complete for the best uplift in price versus cost.
The process is not easy because you need to have a good sense of the micro-market in which the house sits. That will help you assess what the home is worth now and what the market will bear when you are done. Also, the entire process needs to be completed in as few months as possible to reduce your mortgage and other carrying costs for the house pending re-sale. If you don’t sell the house in time, the carrying costs will eliminate your profits and may cause you to suffer a loss.
In my opinion, Toronto is not currently the place for flipping houses. The entry price is too high; there are no bargains to be had, and the cost of construction is at a premium given the tight spaces and the need for construction trucks to manoeuvre downtown. Flipping houses in other parts of Ontario can be an effective way to make money if you follow the below suggestions. There are a lot of moving parts but if you are organized and disciplined, you can make a living flipping homes.
Know your financial limits
First and foremost, as with any investment, you need to understand your limits. Although it all sounds straightforward in theory, there is a lot riding on your investment. Houses are expensive and if things go wrong, it can be a major setback financially. Before you decide to try the renovation flip, there are a few financial factors to consider:
Down payment: Do you have enough cash to make a down payment of at least 20%? Lenders will generally demand at least that much for an investment property purchase.
Reno costs: Do you have enough cash to pay for all the renovations? If you depend on credit for your renovation costs, that may delay payments to contractors which in turn may delay the project and cause problems. It also involves a higher carrying cost and cash burn while you are renovating. It is far preferable to have the cash on hand or secondarily to have a line of credit you can draw upon that is not dependent on the status of the renovation for advances.
Mortgage costs: How many months can you afford to pay the mortgage on top of your own housing costs? Remember, you must pay the mortgage during the period that the renovations are underway, and then for each month until the house sells.
Having the down payment and sufficient money to pay for the renovations and carrying costs is the most important consideration in a renovation flip. If you don’t have that in place, don’t even try. Ideally, you would have the cash on hand but if you are dependent on borrowing, be aware that it puts more strain on the project and you could be in a position at the end of the renovation to have to accept the first offer proffered because you need to repay the debt.
Create a strategy
Once you are sure you have the cash or financing available to proceed, ask yourself some questions and consider the below to help you create a strategy:
What is your maximum cost for both the down payment and the renovation and carrying cost?
What is the maximum house price you can afford based on the above?
What specific cities or towns are you targeting?
What type of built form will you consider? A freehold house? Semi-detached? A townhouse? A condominium? A multi-residential property? Know what options you are comfortable with.
What is the minimum profit you need to justify the endeavour?
If you are risking the sum of $200,000 to make a potential $20,000 profit, that is nowhere near enough. The profit must be large enough to justify the risk of potentially losing some or all your capital.
Is this something you want to do once, or do you plan to make this your career?
Have you identified and interviewed the partners you will require to become successful?
At a minimum, you will need someone with design abilities; you will need an honest and reliable contractor, and you will need a knowledgeable real estate agent. Incorporate the answers to the above questions into a written strategy.
Research the Market with a Local Agent
Nothing can lead to failure faster than not understanding the market. Unless you are a real estate agent, hire one. You cannot flip houses without a good real estate agent. Ideally, find a local agent who knows intimately the neighbourhoods you want and has worked with house flippers before. They can then help you find the perfect property; they will help you identify the renovations needed to increase the value, and they will help you sell it for a profit once done.
Once you identify a city or town you want to work in, it is crucial you become intimate with the current market. Sign up for notifications for any house that meets your criteria the moment it hits the market. After you review each of those houses over two or three months, you will have a sense of the specific market and what is a good deal and what is not.
Identify a few micro-markets that you desire. In a small town, there may be proximity to downtown that you desire, or you may want a lake or river nearby. In a city, you may want to be close to transportation. Identify the specific neighbourhoods where you are interested in buying.
The main challenge is pricing. We’ve all heard the adage “buy low, sell high” but that is usually difficult to achieve.
What your agent can help you with is looking at the initial price but also looking at what is required to make the house more desirable and thus worth more. A common mistake is to spend too much on renovations for the area. A good agent will give you a clear indication of the maximum price you can expect from the specific area in which you are buying. They will tell you what that buyer wants to entice him or her to purchase the house.
A good agent can help you find good value when purchasing. They can identify market-appropriate renovations to be completed, and they can achieve a sale after renovations that will generate sufficient profits to justify the process.
You want a home inspection before buying. That way you avoid learning after the fact that your structure is sagging, you have faulty electrical outlets, and your plumbing is crumbling. You also want a reliable estimate from a contractor of what it will cost to renovate. You don’t want to buy a money pit. You want as much input as possible from your inspector, your realtor, your designer and your contractor before making an offer.
Avoid becoming emotionally attached to a house or a negotiation process. Always be prepared to walk away. This won’t be your home forever. This is not going to become a fundamental part of your life. This is a business decision. Set limits on what you can afford to pay and walk away if you cannot meet those limits.
Remain calm and professional, always referring to your strategy when the negotiations become intense and when you are put under time pressure. There is an expression “buy in haste, repent at leisure.” The simplest way to eliminate profits is to overpay for the house. If you overpay for the house, you are always playing catchup.
Make Smart Renovations
Hire good trades. If you have friends who are handy, pay them to help you. Watch YouTube videos to learn about yourself. Speak with seasoned contractors you know. Secure as much knowledge as possible so you can decide what you are doing and who is doing it. The more you know about the construction process as a renovation flipper, the better.
You only need good enough, not perfect. Focus on a few areas of the house you must update, usually including the kitchen and bathroom. Don’t insist on perfection. Don’t rip things out because they aren’t exactly as you wanted them. If you overpay for renovations, you are still stuck with whatever the market will bear in the re-sale prices and you will lose money.
Have a good and clear plan. Put the plan in writing. Pay for good drawings. You cannot be on-site all the time and good drawings will answer many of the questions your trades and contractors need to know.
Make design decisions quickly. The more decisive you are, the faster the renovation process will go. Choose neutrals as opposed to dramatic colours and materials. Neutrals can always be spiced up with accents whereas fundamental design decisions that are dramatic are harder to change.
Always be available by phone or text when you are not on site. Having an electrician stand around because he doesn’t know that what you want to be done is an expensive waste of time.
You may want to video or photo document the process. It will help you the next time you flip a house and will also provide an interesting timeline and process for estimating the next time around.
Stage and sell for a profit
Don’t try to sell a house before the renovations are done. Finish everything then clean the house completely so it is spic and span. You want someone to walk into the house and fall in love. You want everything completed and in place. You don’t want people distracted by unfinished work or a dirty house.
Stage the house. You don’t need a lot of furniture but you need the house to look pulled together and aesthetically pleasing. You are trying to appeal to someone who is going to live in the house, likely for a very long time, so you need to key into the emotions and energy required to create that sense of wonder and awe when they walk into the space.
Set minimum prices that you will accept to garner the profit required and stick to those minimums. You either need the ability to drop your price or wait out the market if the offers you are receiving are not enough. If you have followed the advice above, it is likely that your house will sell for a tidy profit once you are done.
The beauty of house flipping is that you can make a lot of money in a lump sum, usually quicker than other types of employment. The challenge is that you are playing with a large amount of your savings so you have to do it right, otherwise you lose money that took you time to save. Once you complete your first house, you will know if it is for you as a profession.
There is something innately satisfying about taking a tired house and updating it to bring in new life and energy. There is a sense of pride in the process. Best of luck with your first house flip!