House flipping enters risky business world

In an unhinged Australian market, real estate flips are anything but certain for savvy investors.

But no longer.

Making money in a softer market has become a challenge.

“In addition to the cost of renovation, there are always transaction costs associated with the rapid purchase, renovation, and resale of a property, including stamp duties, legal fees, and capital gains taxes,” said Pete Wargent, co-founder of BuyersBuyers, a nationwide network of brokerage services. .

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“Now there are two more factors that make life harder for real estate flippers.”

With interest rates shifting and the outlook less certain, Mr. Wargent says innovators could sell themselves in a market where capital gains are no guarantee of profit.

Add to that a sharp rise in construction costs and there is also a tangible risk of overcapitalization.

Data from the Australian Bureau of Statistics shows that wood and steel prices have increased by 50 percent, while the average cost of building a new home has risen 20 percent from last year.

“Obviously projects need to be assessed on a case-by-case basis, but overlapping supply shocks have made access to construction materials at a reasonable price less reliable,” said Mr Wargent.

“There is also a shortage of available crafts in many parts of the country, which should be taken into account as a contingency for any proposed renovation budget.”

BuyersBuyers CEO Doron Peleg estimates that a $600,000 property increased in value by $120,000 through a $60,000 renovation that would have yielded $840,000 in 2021 if a 20 percent market increase had been accounted for.

“Even after conservatively accounting for 7-8 percent transaction costs, there is still a generous profit to be made in such a deal in a short span of time,” he said.

“However, you can also easily see how a 10 percent drop in market value, say, can put an investor running a flipping project in a precarious or loss-making position.”

Especially if there are unforeseen cost overruns.

Mr Wargent said innovators and developers should expect the high costs to persist even if global supply chain issues are resolved this year.

“Flippers need to consider the prospects for the local market in which they operate to effectively manage project risk,” he said.

“If you’re not confident in your ability to turn over property, think longer term.”

The good news, he says, is that there will be a looming undersupply of suitable housing for families in the suburbs of the middle ring over the next decade.

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