What flipping is, and why you might want to do it
How to make money flipping property
Understanding the business model, and what profit margin you can expect
Choosing the right property
How to find the perfect target for flipping
Financing your flip
Getting it paid for - and why a mortgage isn't the answer...
Getting the numbers right
The most important part of the whole process
Refurbishing the property
Time to get to work
Making the sale
Finally: cash in the bank
Assess, learn, and go again
Let's start by clearing up some confusing terminology – and making sure flipping a property is the right thing for you to be doing.
What is flipping?
Flipping a property is quite simply buying at once price, then quickly selling at a higher price.
It’s also known as:
- Fix and flip
“Buy-to-sell” is probably the most useful term, because it indicates the intention clearly and sets it apart nicely from buy-to-let. But I like “flip” because…hey, it’s a fun word to say.
Flipping may or may not involve refurbishing the property. To some people, the term “flipping” only applies to situations where you don’t do any work (for example, you buy at a huge discount for some reason and immediately put it back on the market again), but I don’t discriminate: I’ll use it for every buy-to-sell scenario.
Clearly, there needs to be some reason to justify the higher sale price – and it can’t be capital growth, because the purchase and sale are usually only months (not years) apart. That’s why refurbishing the property is normally part of the flip process, but doesn’t have to be. You could also uplift the value by:
- Extending the lease
- Resolving a legal issue
- Just flat-out buying a bargain
As I said though – for the most part refurbishment is involved, and I’ll assume that it is for the rest of this guide.
Flipping a property is a great way to make a big lump of cash in one go.
Let’s contrast it with buy-to-let (BTL). With BTL, you might make a few hundred pounds in rent every month – then get a big lump sum years in the future if you sell when the price has gone up.
With a flip though, you make the whole lump sum in one go – in as little as few months after buying the property in the first place
Neither of these is “better” than the other: it’s all a question of strategy. Flipping as a model doesn’t suit everyone, but it tends to work well for these purposes:
- You want to quit your day job quickly. Building a large enough buy-to-let portfolio to replace your income through rent would take years, but you could execute a couple of flip projects each year – the profits of which could replace your salary
- You want to raise the funds for buy-to-let deposits. If you’ve got enough of a deposit for one property, that’s not a lot of good for building a portfolio: once you’ve bought one, you’re out of cash and a bit stuck. If you use that cash to flip a property though, the profit could be enough for a buy-to-let deposit – while you’ve still got your initial cash to flip again
How to make money flipping property
Understand how the flipping model works, what kind of return you can expect, and how much will be taken from you in tax.
How do you make money from a flip?
The maths behind flipping are simple to understand, because it’s just like any other business:
Profit = Sale price – purchase price – costs
Purchase price: £100,000
Costs (refurb etc): £20,000
Sale price: £150,000
That’s really all there is to it.
If you want to make things a tiny bit more complicated, you can calculate your return on investment (ROI) with the calculation:
Profit / Cash invested = ROI
So in the example I just gave, the cash invested was £120,000 and the profit was £30,000. Plugging it into the ROI calculation, you get:
£30,000 / £120,000 = 0.25
ROI is expressed as a percentage, so that’s a 25% return.
A rule of thumb
It’s very common for investors to ask: what is a good return on investment for a flip?
As with most things, there’s no one answer: a good return is a whatever you’re happy with. But a good rule of thumb that many investors use is a 20% ROI.
This is semi-plucked out of the air, but there’s a logic to it. The idea is if you aimed for a 10% return but misjudged your costs and fell short, you could easily find yourself making no money at all – or even a loss. But by aiming for 20%, even if the project doesn’t go as well as you’d hoped you should still make a profit.
Just like with buy-to-let calculations, your ROI will differ depending on the level of your investment – which in turn will depend on whether you’re using leverage.
For example, in the previous example the cash put in by the investor might only have been £60,000 – with the rest coming from bridging finance. In that case, the ROI would be (£30,000 / £60,000 = ) 50%. If that confuses you, don’t worry about it for now but do read my property investment calculations article at some point – it should then click.
Tax treatment of flip profits
A pre-tax profit is great, but the tax man will want to be rewarded for your hard work too.
If the project is undertaken by a company, the company will pay corporation tax on its profits at the end of its financial year – just like any other business.
If the project is undertaken by an individual, the profits of the project will usually be added to their other income (from employment, etc) to determine the amount of income tax they need to pay. That’s unless you can prove that your intention was actually to keep the property, and the opportunity to sell came up unexpectedly.
Because the rate of corporation tax is lower than the higher and additional rates of income tax, it could be considered more tax-efficient to set up a company for flips – but of course, this isn’t tax advice and you should speak to an accountant to find out what’s best for you.
Choosing the right property
Learn which factors make for the perfect flip target.
Finding a suitable property to flip and securing it for the right price is – at the moment – probably the hardest part of the whole model.
There are points in the cycle when nobody’s interested in property, and you can pretty much name your price and hoover up whatever you want. At the moment though, there’s a lot of enthusiasm about property – meaning lots of people to compete against you and potentially outbid you.
We’ll look later at how to work out how much you should be paying. But to find opportunities in the first place, you can look at:
- Finding properties that look empty or distressed, and contacting the owners directly
- Local marketing like leaflets and small ads
- Online marketing
- Your network of other investors who might have spotted a deal that doesn’t quite fit for them
None of these is easy. Like I said, finding a suitable property and getting it for the right price is hard, so expect to put a lot of effort into one or more of these channels before you start to see meaningful results.
Before you can really start looking though, you need to know what you’re looking for.
There are three factors that need to come together for the perfect flip target:
- The right area
- The right property
- The right situation
When you get to the end of the project, you’ll want to sell the property quickly – so of course, you should be buying in areas where you can see that the market is moving quickly.
You also want it to be an area where properties are selling quickly to owner-occupiers, rather than investors. Investors (should, at least) have a price that they’re not willing to exceed – whereas owner-occupiers tend to get more emotionally committed to a property, and will pay more than they originally planned if they get caught up in a bidding war.
How do you find areas like this? A good starting point is to ask an estate agent to tell you where on their patch properties sell as soon as they come onto the market: any agent will know this, and shouldn’t have a problem telling you.
You can then validate this for yourself by keeping an eye on Rightmove and Zoopla, and seeing how long after a property is listed it starts showing as “sold subject to contract”.
These areas tend to be desirable family neighbourhoods with good schools, good transport links, and close to lots of economic activity. In fact, if you know a town reasonably well you can probably predict the areas where property will sell quickly – but do validate this by doing your research.
The ideal property to flip will be one that appeals to the largest numbers of buyers – because you want to sell quickly, and you want to have people fighting over it and bidding each other up.
Something like a three-bedroom semi-detached house would be ideal, because it could apply to both first- and second-time buyers: you can imagine it being someone’s first home, but equally someone might be trading up from a flat or a smaller terraced house. By appealing to both markets, you’re more likely to sell quickly.
Other types of property – including flats – can work too, but mainstream is the name of the game. One slight exception to this is bungalows: bungalows can work extremely well, because there aren’t many of them so they tend to be in high demand. People buying bungalows also tend to want to move into a property that’s been newly refurbished rather than fixing it up themselves, which makes it work even better for flippers.
Clearly, you need to be looking for a property that needs work doing: there’s no potential for uplift if you buy it in mint condition (unless you’ve spotted one of the other more unusual angles I mentioned earlier).
Ideally, you also want to target property where the vendor can’t or won’t hold out for the best possible price. If they’re in a hurry to get rid, that’s good news for you. Proving that it’s an ill wind that blows no-one any good, if the vendor is in financial distress that’s definitely good news for you. Properties where the owner has died are also good, because the beneficiaries are often keen to get rid quickly (to pay the taxes and get their hands on the cash) than to wait for higher offers.
The bad news for you, of course, is that everyone else who’s looking to flip will be targeting the exact same properties you are for the same reasons. You’ll therefore do better if you can find a property that puts other flippers off for some reason: like serious-looking (but easily fixable) structural work, or a heavier-than-usual refurb.
The other tool you can use to secure a property that’s in high demand is access to cash – which we’ll come to next…
Financing your flip
Paying for the project is – of course – pretty important. And to complicate matters, getting a mortgage is unlikely to be suitable...
You can use a mortgage for a flip – but you’re not supposed to. Even if you don’t have an early repayment penalty, the lender will have given you the money on the basis that you’ll be holding the property for the long-term and renting it out.
So the first time you repay the mortgage after six months because you’ve sold the property, maybe you’ll get away with it: plans do change, after all. But the second time? There’s a high probability of the lender noticing the pattern, refusing to lend to you again, and sharing that information with other lenders too.
Another reason not to use mortgages (not that we need one) is that they won’t lend on properties that aren’t currently in a lettable condition – which many properties that make for suitable flips aren’t. And just to throw in a bonus third reason, speed is often important when it comes to sealing the deal – and mortgages are nothing if not unbearably slow to arrange.
There’s not much that needs to be said on the subject of using cash: if you’ve got enough in the bank to cover the purchase and all your costs, it’s a quick, easy, and sort-of free way of financing the project.
Why only sort-of free? Because there’s always an opportunity cost: when you tie up that money for six months, that means you lose out on the return you would have made by using that money for something else. If all it would have done is sit in the bank earning 0.25% annual interest, that lost opportunity is next to nothing. But if another great deal comes along next week and you’ve already tied up all your cash, that’s a very real opportunity cost.
The final thing to say about cash is that not all of it necessarily has to be your own: you could joint venture on the project instead.
Read my article about joint ventures here
Bridging is effectively a short-term mortgage, and is perfectly suited to flip projects. As a general rule of thumb, you can probably borrow around 70% of the purchase price – and with some lenders you can also borrow money towards the refurb costs.
This still leaves you putting some cash in – but a lot less, and you can reduce it even further by using some clever bridging techniques.
Rather than getting into bridging in detail here, you can read this massive article covering everything you need to know.
Bridging is quick, it’s appropriate, it’s convenient…but it’s not cheap. The interest and fees will need to be factored into your costs, so you can be sure that the project is profitable after your finance costs as well as your refurb and other costs. More on that later…
Getting the numbers right
Flipping a property is a lot of hard work – and there's no point unless you're pretty sure you'll make a healthy profit.
In a flipping business model, there are three main “levers” you can pull to get the result you want:
- Sale price
- Purchase price
Pretty obvious: from any starting situation, you can make more money by buying cheaper, selling higher, or reducing your costs.
Let’s take a closer look at each of these in turn.
The sale price is the lever that you have the least control over. Any given property has its market price – and nobody is going to pay you £20,000 more than the market price just because you messed up your calculations and you really need that number.
Of course, there are things you can do to increase the sale price – like adding amenities, extending or finishing to a higher standard – but these will all increase your costs too.
So once you have a property in mind, start by working out what you could expect to sell it for once the refurb is done. The key to doing this is finding comparables.
A comparable (or “comp”) is a similar property, nearby, that’s sold recently. When you think about it, it’s obvious: if an identical property next door sold yesterday for a certain price, your property is almost certainly going to sell for a very similar amount. You’ll rarely have a comp that exact, so instead you’ll look at a few different comps and try to come to some kind of average.
You can find comps by going to Rightmove’s “sold house prices” section, popping in the postcode, then setting the search radius to 1/4 mile. If you don’t get any results you can open it up to 1/2 mile, but be aware that this will make your results less exact.
Ideally, you just want to be looking at very similar properties that sold within the last six months. The further back you go in time, or the more different the property from yours, the less you can rely on the results.
Hopefully, there will be at least a few reasonable comps that you can use to develop a feel for what your property would sell for. If not…that could be a warning sign that not many properties are selling in this area. Of course, you want to buy in an area where properties sell quickly – because that’s exactly what you’ll be trying to do when you finish your project.
As well as your own research, a friendly estate agent might be able to help you with comps too. It can take a few months for transactions to show up on the Land Registry (which is where Rightmove gets its data from), so an estate agent might know about sales that were agreed recently that haven’t appeared online yet. This is valuable data, because they’re recent sales so you can put more stock in them.
We haven’t mentioned looking at properties that are currently for sale…and there’s a good reason for that: the asking price of a property won’t necessarily bear more than a passing resemblance to the eventual selling price. If you looked just at properties currently for sale and assumed that you could actually sell for that price, you might be over-confident and make bad decisions as a result.
By all means take a look at “for sale” properties as another data point, but don’t allow them to swing your judgement too much.
So now you have a good idea of what the property will sell for once it’s been brought back into move-in condition. The next lever is how much it will cost you to achieve that result.
There are five main categories of cost that we need to look at…
When you buy the property in the first place, there’s likely to be stamp duty to pay. You can calculate how much here.
You’ll need to pay:
- Solicitors’ fees, for both the purchase and the sale
- Estate agent fees for the sale, unless you decide to sell it yourself
- Broker fees for arranging your finance, unless you use cash or go direct to a lender
- For any surveys you decide to get done
These can add up to a fair bit, but you should be able to get fixed quotes so at least they’re knowable from the start. Just make sure you factor them in.
As already discussed, if you use bridging finance there will be fees and interest to pay. You’ll need to know what this all adds up to, and include them as part of your costs.
The big one! On most flips, the refurb budget is going to make up the lion’s share of your costs.
It’s also the easiest cost to get out of control: both because of unexpected problems, and the temptation to keep blowing the budget on high-end fittings to maximise your selling price.
In an ideal world, before making an offer on a property you’d have a fixed-price quote for what the refurb will cost. That would allow you to treat the refurb as a fixed cost along with all your others (professional fees, finance costs etc) when working out how much you can afford to pay.
In the real world…that’s tricky to pull off. You should have at least a pretty good idea of the likely cost, and err on the side of caution. If you’ve got the necessary skills to do the work yourself, you can probably come up with a reasonably realistic set of costs. If not, try to take a builder with you to view the property and get at least a ballpark estimate of what it will cost.
Once you’ve got your cost estimate, add at least 10% for contingencies. In every project, there’s always something unexpected that increases your costs – and if you haven’t anticipated this happening, your profit will be reduced.
While the project is running, you’ll have certain costs associated with ownership:
- Utility bills
- Council tax (unless you’re in an area where it qualifies for an exemption)
These won’t be huge, but still need to be factored in.
The third “lever” is the purchase price. Remember – you can either:
- Sell it for more
- Reduce your costs
- Buy it for less
The purchase price is the lever you have most control over. Sure, you can’t force someone to sell you a property for a certain price because that’s what you need to pay – but you can set your upper limit, negotiate to buy below that upper limit, and refuse to buy at all above it.
The upper limit is set by the other two factors. Returning to our simple equation from earlier:
Profit = Sale price – purchase price – costs
We can rearrange this as:
Sale price – Costs – Profit = Purchase price
In other words…
- You know how much you can sell it for at the end
- You know how much it will cost you to execute the project
- You know how much profit you want to make
- …so the upper limit of the purchase price calculates itself
Let’s take an example. Say you’ve found a property that will be worth £200,000 once it’s all done up. Your costs (including refurb, finance and everything else) will be £50,000. You’ll be investing cash of roughly £150,000 and want to make a profit of 20%, which is £30,000.
Sale price: £200,000
Minus costs: £50,000
Minus profit: £30,000
= Purchase price: £120,000
If you pay any more than £120,000, you won’t achieve the profit you want. If you pay less (and still sell for the same amount and control your costs), you’ll make more profit than you wanted.
The challenge you’ll often face is that after calculating back to the purchase price you need, it will be much lower than the vendor is willing to sell for.
More often than not, you’ll be outbid by someone who either:
- Can do the job for cheaper (perhaps they’re a builder themselves)
- Is willing to make less of a profit
- Doesn’t care about making a profit at all because they want to live there
- Just hasn’t worked out their numbers properly!
Unfortunately, there’s nothing much you can do about it: unless you can find a way to spend less, accept less profit or sell for more, your maximum selling price is set in stone.
It might not feel like it, but it’s better to miss out on a property than to over-pay and spend months working on it only to make very little money.
Refurbishing the property
With the property secured at the right price, the next step is to get the refurbishment or development done. If you've got connections in the trades or are a handy type yourself, this is the fun bit – but for more hands-off investors, this is the scary part where invoices for various costs seem to come in with alarming regularity.
Whichever group you fall in, it’s vital to stay on top of this part of the process so the budget doesn’t get out of hand and you end up with a property enticing enough to spark a bidding war.
Main contractor or individual trades?
There are two ways to run any project:
- Hire a main contractor to run the project, who will hire in sub-contractors as needed
- Hire individual contractors directly, and project manage yourself
Being your own project manager should work out cheaper, because a main contractor will either build in a margin on the subcontractor’s fees or charge a higher fee in the first place to account for project management time.
However, your time has a cost too – and if you lack in relevant experience, delays caused by your poor planning could cost you more than you’ve saved.
Which is right for you? Only you can decide…
Get the spec right
Getting the spec of the refurbishment right is a tricky line to walk. If you go for fixtures and fittings that are too expensive, it will reduce your return because you won’t get enough extra on the sale price to make up for it. Too cheap though, and it will cheapen the look of the whole project and make it harder to sell.
The best bet is to get advice from local agents before you start, so you can have the standard of the spec (and therefore the budget) locked down early – and before you get a chance to get carried away and try to upgrade everything later.
Agree the timeline
If you’re managing the project yourself, you’ll need to plan out each stage – making sure everything happens in the right order, and enough time is allowed at each point.
Or if you’ve got one main contractor managing the whole thing for you, you’ll need to agree a schedule with them and make sure the schedule is realistic but not overly drawn-out.
Just like you need a contingency because every project always goes over budget, you’ll also need to build in a time buffer – because something always happens that will knock the project off schedule. Whether it’s a particular trade not turning up, a delay with materials or an unexpected hitch, it’s almost guaranteed to take longer than it “should”.
This is especially important to bear in mind if you’re using bridging finance. The longer the project goes on, the higher your finance costs – so you should do everything in your power to keep the timeline down. Also though, if you’re too optimistic and you arrange a finance term that’s too short, you could find yourself over-running your agreed term and being slapped with penalty interest charges.
Keep checking in
With any project, the biggest mistake investors make is to leave builders to it and assume that if they come back on the agreed finish date, the job will be done.
The reality is if you take your eye off the ball, things will grind to a halt. Either your builders will go off to finish another job where someone is shouting louder than you are, or they’ll hit a snag and not be able to make any progress until you make a decision.
If you’re project managing, you should be on site a couple of times per week and checking in with the relevant parts of the team every day. Even if you’re leaving someone else to manage, you should be in contact at least weekly asking for updates.
Your tradespeople will need payment regularly throughout the project, and will need it quickly: if you don’t pay on time they might not be able to buy materials or pay their subcontractors.
You should, however, only be paying for work that’s actually been done: apart from materials, you should never be paying ahead.
If you’re working with a main contractor, it’s best if you agree a payment schedule with them at the start and get into a rhythm. They should know that if they submit their invoice every Wednesday, for example (along with evidence of work done if you’re not there in person), they can expect to have the money in their account in time to pay their team on Friday.
Making the sale
It feels like all the hard work is done – but you should be giving just as much attention to selling the property as you did every other stage. Here's what you need to do...
Stage the property
Take advice from local agents, but in most cases staging (using furniture and props to make the property look “lived in”) makes a huge difference in converting viewings to offers.
Quite simply, most people can’t see an empty house and imagine it feeling “like home”. If you can get them over that hurdle, they’re far more likely to fall in love with it – and if you get two families falling in love with it, you’ve got yourself a bidding war!
If you’re doing regular projects, it’s probably worth buying a set of furniture and other bits and bobs, and carting it from house to house. If it’s more of a one-off, you can sometimes rent furniture from specialist suppliers.
You don’t have to go all-out: for example, you could stage just one of the bedrooms. I’d also stick with the minimum furniture needed to make it look homely, without adding enough to make it seem smaller than it is – so no wardrobes.
Appoint an agent (or don’t)
As you come towards the end of the project, it’s time to start thinking about who’s going to sell the property. You might want to have a crack at doing it yourself using one of the many services that allows you to list on Rightmove and Zoopla directly and do the viewings yourself, or you might think an agent will add more value than they cost you.
If you decide to use an agent, interview several to gauge their knowledge and also check their stats: on Zoopla you can see stats of how long each agent in an area takes (on average) to sell a home. Also check their reviews on Allagents to get a feel for what the service is like. You’ll probably want to pick an agent who’s very active locally and has properties similar to yours, because they might be able to introduce buyers who’ve registered an interest in other similar properties they represent.
Decide on your pricing
As we said, before you even buy the property you should have a good idea of what you can sell it for. But conduct all your research (online and offline) again when you come close to the end, just in case the market has moved while you’ve been working on it.
There’s likely to be a range of what seems achievable. Where you place yourself in that range is up to you. (Just don’t go above it, or you won’t get much interest.)
An estate agent will normally encourage you towards the higher end (or beyond), because they think it’s what you want to hear. But without discounting their knowledge completely, don’t be swayed: if you want to go lower in the hope of a quick sale, do it.
My personal approach would be to go towards the bottom of the range to capture a lot of interest, and hope to unearth two interested parties who bid each other up. If the property sits on the market for too long and you have to cut the price, not only does it cost you money (because you’re paying your holding costs for longer) but it signals to prospective buyers that you’re struggling.
Force it through
Once you’ve got an offer you’re happy with, the work seems to be done…but isn’t. Not only do over 30% of sales fall through, but they can also drag out for months longer than they should.
Because every day is costing you money and keeping your cash tied up so you can’t move on to the next project, you should be doing everything in your power to keep things moving. I won’t endear myself to solicitors or agents here, but I’d be calling both of them pretty much every day: it’s all too common for everyone to be sitting around waiting for each other due to some misunderstanding, unless you intervene.
Assess, learn, and (hopefully) go again.
It’s a very simple business model, but there’s still a lot to learn. You definitely won’t get everything right first time, and really you’ll probably still make mistakes even when you’ve got tens of projects under your belt.
Whatever you do, start by buying at the right price. That’s the one thing that you can’t change as you go, and if you bag a bargain it will give you a buffer against the unexpected costs and overruns you’re guaranteed to suffer.