Fix and flip

What is fix and flip and what do you need to consider if you’re thinking about making money from property this way? Here’s what you need to know.

Fix and flip – also known as property flipping – involves buying a property that needs work and then renovating it to sell at a profit.

Research by estate agent Hamptons International found that the proportion of homes flipped (defined as being bought and sold again within 12 months) in England and Wales during 2020 was at its highest level since 2008. Flip and fix became more popular when the housing market boomed in the second half of the year. Fix and flip tends to become less popular when house prices are rising slowly.

How does fix and flip work?

The idea is that you buy a property cheaply, usually because it’s in poor condition, and then add value by refurbishing it. The bigger the discount you can get on the property you buy, the greater your chances of making money.

Buying a property at auction can be a good strategy as you can often find homes that are uninhabitable, which may be less popular with buyers, or you can find repossessed property that the lender wants to sell quickly. You may also be able to get a bargain in other situations where a quick sale is needed – for example, the owners are getting divorced or struggling to pay the mortgage. Ask local estate agents if they have any on their books.

As you may have finance costs and bills to pay while you own the property, completing the work and selling the property as quickly as possible will help you maximise your profits. You’ll also need to factor in the costs of buying and selling the property, such as stamp duty, legal fees, survey costs and estate agent fees as well as the cost of the renovations when working out how much money you could make.

Is fix and flip safe?

As with all investments, there are risks involved, and as you’ll have to spend a lot of money on the project, you could find yourself seriously out of pocket if it doesn’t go well. You could come up against unexpected problems and costs, spend more on the renovations that you budgeted for or struggle to sell the property for a high enough price at the end.

But good research and planning will increase your chances of success. Think carefully about the area you’re buying in and the market you’re aiming for to make sure there is demand for the type of property you plan to create there.

You should also match the quality of finish with your target market – for example, will buyers in the area expect a high-spec kitchen or would it be an unnecessary expense? And although adding rooms by extending the property will boost its value, make sure this won’t price it out of the market.

Detailed budgeting at the outset is essential. As well as taking into account the cost of the property itself and how much you might be able to sell it for once the renovations are complete, you should calculate what your buying and selling costs might be and find out how much the work is likely to cost by getting quotes. You might be able to save money by doing some of the work yourself but bear in mind that cutting corners could mean less profit.

You will also have to pay capital gains tax or income tax on your profits depending on whether you’re doing it as part of a business.

How do I get funding?

If you need to borrow money to fix and flip, a mortgage is unlikely to be an option unless you can remortgage your existing home. You won’t be able to get a residential mortgage on the property if you won’t be living there and a buy-to-let mortgage isn’t possible unless you’re planning to let the property. A mortgage lender also won’t lend on a property that’s uninhabitable when you buy it.

A bridging loan can be a good option. This is a type of short-term finance that can be taken out for as little as 1 month up to 2 or 3 years, but it is usually taken out for 12-18 months. As it’s a relatively expensive way to borrow, the shorter the term the better.

The loan is secured with the property you’re buying or with one you already own, and you can borrow up to around 80% of the property’s value (known as the loan-to-value or LTV) or more if you have other assets you can use to secure the loan.

The interest rate will depend on the LTV and whether you need to carry out light or heavy refurbishment on the property. Heavy refurbishment is defined as including structural work and usually costs more to borrow for. You can also choose to “roll up” the interest until the end of the term rather than making monthly repayments and pay it off along with the loan at the end.

Although the lender will look at your personal finances and credit history when deciding whether to lend to you, your exit strategy (how you plan to repay the loan) is more important. In the case of fix and flip, it’s likely that you’ll be planning to pay off the loan by selling the property, so the lender will want to be sure that you will be able to sell it for a high enough amount in time to pay off the loan.

Bridging loans are quick to arrange, and you could get the money in as little as 10 days.

Pros and cons of fix and flip

Fix and flip can be a good way to make money from property if you choose the property and location carefully and have a target market in mind when you’re planning the refurbishment. However, as the costs are high, you could lose a significant amount of money if you don’t make the profit you expect.

Bottom line

Fix and flip shouldn’t be entered into lightly, but it can be profitable if you plan the project carefully.

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