#AskAdam – Question 6 – House Flipping

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Q.

 
Hey Adam, I’ve been loving all the advise and you’ve really inspired me. I’m currently looking into property as a way to get into investing and was wondering what your thoughts are on renovating and then selling, so basically flipping houses? I spoke to a few people and they said giving a property a cosmetic update won’t really add any value. In your experience is this true, and what is the best way to add value to a house without doing an extension or loft conversion? Thanks for your help in advance.  
 

A.

Hey,

Thanks for the question.

I think it’s a great idea and has good potential for growth, if you do it the right way. 

A lot of people get caught in the trap of buying something and then renovating it to a standard that they would live in. I personally don’t think this is the most profitable way to go about it. Treat it like a business.

It should be an in and out job, ideally within 6 months (unless extending). Due to the short time period you need to be committed to the cause. 

I think the first thing you need to do is think about how much you want to gain from it.  Do you want to make 20K or do you want to make 5K after costs? 

A reasonable expectation is to make a 20% profit minimum, this gives you a margin of error should you underestimate costs etc.

  • Purchase price: £200,000

  • Costs: £50,000

  • Sale price: £300,000

  • Profit: £50,000

So to work out your return on the investment 50,000 / (£200,000 + £50,000) = 20%

Then I would ask, is that profit amount enough for the amount of effort and time required?

I think there are 3 potential options depending on the work needed:

Option 1

I don’t think basic cosmetic works, such as painting and decorating, would make a huge difference in value. You could make a small profit if it is in a really bad condition, but I don’t really think it’s worth the time or effort. 

A good cosmetic job could add around 5% on the value of the house.

Option 2

I think a property that needs a new kitchen and new bathrooms as well as decorating will produce a good level of growth. A new kitchen could add 10% on the value of the house, a new bathroom maybe 5%, plus cosmetics of another 5%. The chances are that if you find a property needing all of these things, you’ll probably get it for a discount to its true market value in a normal condition.  The discount and the added value could help you meet your 20% profit target.

Option 3

Anything that needs extending and new a kitchen/bathroom could make a larger profit, but could also increase your potential for misjudgements on costs. 

A single story extension may add 8% and a double 12% roughly.  You would need to weigh up the costs and time to complete this work against the value added. 

 

Final Comments

I would be more inclined to go for option 2. It’s a good mix. 

I would look for a property that is in need of updating internally but ensuring that it is sound structurally.

Find a property that is undervalued compared to other properties on the market.  You can use Zoopla house prices to get an indication of the value of the property and others in the same street. It will also tell you of properties that have sold recently (you can change the time period to the last 3/6 months).

If you can find a property that needs:

  • a new kitchen,
  • bathroom,
  • painting,
  • decorating,
  • flooring &
  • modernisation

One that is undervalued in its local market and that can, after works, give you a 20% profit.

If you can meet these criteria then I’d say you’re onto a winner.

 

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