Forget Stock Markets – Think House Flipping

Forget Stock Markets – Think House Flipping

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The flippers’ perspective

Alison Steven and her husband, Stewart, purchase one house every year to renovate; using the proceeds from their sales to pay for their children’s school fees. They have been successfully following this formula for four years.

What’s the best way to finance your flipping project?

We use the access bond on our personal home, which is almost fully paid off, to finance the houses we buy to flip, so we don’t need to take out another bond.

The advantage of this approach is that we don’t have to wait for a bond to be approved; plus, as cash buyers we’re in a stronger position.

A bank might be reluctant to grant you more than one bond, as you become a greater risk for them. On the other hand, we’re now bearing the risk. If the project goes pear-shaped, we stand to lose our home.

Related:  Top Tips on How to Flip a House

What are the costs involved?

The bank will lend you the amount that the property costs, but it won’t give you money to cover the holding fees or renovation costs, so you need to factor these in. You also need to budget for transfer fees, which come to around 8% on any amount over R600 000.

 

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So, if you buy a house for R1 million, you’ll pay transfer fees. Then, there’s interest on your bond, building costs, and it will take around two months to do the renovations.

Then say it takes three months to sell the house and the further costs if you sell through an estate agent (5% commission plus VAT).

All of this eats into your final profit, and makes margins quite tight. We choose one estate agent to work with but we don’t issue a sole mandate; that way, we can advertise on Private Property. Of course, we don’t mind paying an estate agent if they can get a higher price that covers their commission.

How much should you look to spend on renovations?

Alison-and-Stewart

We usually spend around R200 000 to R350 000, which covers refurbishing the kitchens and bathrooms, re-tiling the unit and repainting the property. A bathroom will cost between R30 000 to R60 000, depending on finishes. Painting the exterior and interior costs about R60 000.

Kitchen renovations cost between R60 000 to R80 000, depending on whether you instal cupboards or re-use the existing cabinets and replace the doors. You also need about R20 000 for new light fittings. Labour and building costs come to around R40 000.

This may include jobs like replastering and moving doors. We also redo the gardens, putting in new grass, and we spend a further R20 000 on staging the property for sale.

This isn’t always necessary but we’ve found that people need help visualising and conceptualising rooms – often, they don’t know how a space should be used. Rooms also look bigger when they have furniture. This helps the property to sell more quickly, so you pay less on holding fees.

How do you avoid investing too much in the renovation?

When I purchase a property, I ask to see a Lightstone report, or similar. This is obtainable, free of charge, from any estate agent.

This tells you the amount that was paid for all the properties in the area, when they were sold and the size of the land and the houses. This is important information, because the asking price seldom matches the selling price.

How much profit can you make?

We usually purchase houses for around R1 million to R1,5 million and sell for about R2 million to R2,5 million. It really depends on what we have to spend and what, realistically, the market will pay.

We only buy in our neighbourhood (Douglasdale/Olivedale) because we know the area extremely well. I have visited almost every house on show over the past eight years, so I know what properties sell for.

What are the potential pitfalls?

It all comes down to the quality of your contractors. My husband has experience in construction and we have a building team that we have worked with for many years. We actively project manage every renovation, so this mitigates risks.

The good thing about spending so much time on site is that you can see if something needs to change and accommodations must be made, which is important because building is not an exact science.

All the same, it’s difficult to find electricians, plumbers and carpenters who are reliable and available. Before you hire anyone, ask to see their work – even the most expensive tile looks nasty if it’s badly laid, so it’s worth getting things right. The quality of workmanship is imperative.

The Stevens’ top tips for renovating

  • Most important: Never skimp on finishes. Use the best quality, as buyers are savvy and can see through cheap fittings and fixtures. Using the best will help to sell the house quickly.
  • Keep your palette of colours neutral so that you appeal to as many buyers as possible.
  • Buy big tiles (600mm x 600mm) for the best price possible (shop around – you can get them for R100 to R150 per square metre if you’re lucky!). If your tiler is great, they will look like they cost R400 per square metre!

Related: Buying To Renovate? Consider This First

Lisa Witspeski
Lisa Witepski is a Johannesburg-based freelance journalist and editor whose work has appeared in most of South Africa’s major magazines, including Cosmo, Women’s Health, Shape, Destiny, the Oprah Magazine, Women & Home, Financial Mail and Longevity. - See more at: http://www.mybalancingact.co.za/looking-back-looking-forward#sthash.4P3SErVo.dpuf
  • Sharlene L Rowett

    Can this be done as a business? My son and I are considering pooling our resources, starting a business, buying houses, renovating them and selling them. We have a construction co that will renovate for us. Since we are buying and selling CGT shouldn’t apply, just normal company tax.

    • Juan-Pierre Otto

      Hi Sharlene.
      Have you guys started your company?
      I am looking to do the same but there is not a lot of info in SA for this type of business.
      Do you maybe have any resources that you found that I can also have a look at?
      I have a construction background so plan to manage the construction myself.
      Well good luck with your business.