How to Flip a House
House flipping was really made popular with several popular house-flipping television shows being broadcast daily across the country. Watch a 30-minute episode and it’s easy to see why it’s so appealing. The overall process look pretty easy to flip a home and resell for a substantial profit, but don’t be fooled! If life were only like that. In fact, there is much more involved with flipping a house than what you see on TV, from funding your flip to dealing with the tax implications. If you intend to take the plunge and start your own flip project, research and educate yourself on the dos and don’ts of flipping a house.
What is House Flipping?
House flipping is a popular term used in the real estate industry to describe buying, fixing, and reselling a property for a profit. Most of the time, the ‘flipping’ involves renovating and repairing the house to bring it up to date. This allows the investor to turn around and sell the home for a much larger price, pocketing the profits. House flippers are typically real estate investors who seek out distressed or undervalued properties, purchase them at a discounted price, renovate or improve them to increase their value, and then sell them quickly for a higher price.
Flipping houses can be a lucrative investment strategy when done correctly, but it also requires much knowledge, skill, and capital to execute effectively. Successful house flippers must be able to accurately assess the costs of repairs and renovations, determine the appropriate market value for the property after the improvements, and have a good understanding of the local real estate market. Just as quickly as it’s gone right, a house flip can also take a turn for the worse and can cost you money. This is why researching and making wise choices is always the best option!
Things to Remember When Flipping a House
How Will You Fund Your House Flip?
The first question you need to ask yourself is: How are you going to fund this flip? It is a vital question since you do not want to drain your rainy-day fund or exhaust your credit limit. Therefore, it is important to come up with a plan to fund your house-flipping efforts. The three primary options are to apply for a conventional bank loan, tap into your home equity, or go into a partnership with a firm that offers real estate crowdfunding.
In addition, it would be prudent to establish a plan and create a budget blueprint. By planning in advance, you can determine the scope of renovations, giving you a better idea of how much you will need to spend. Moreover, a budget can allow you to figure out how much you are spending, what is left, and if you have anything leftover for unforeseen circumstances.
The 70% Rule
Housing market experts urge flippers to never forget the 70 per cent rule. This is a standard strategy that suggests you pay no more than 70 per cent of the after-repair value (ARV) subtracting repair costs. In other words, you must ensure that your flip does not cost you more than you can potentially make from the initiative.
Of course, in an environment of above-trend inflation, high borrowing costs, and higher labour costs, it can be quite a challenge to rein in your spending. With the right amount of planning, professional support, and a ton of calculations, you can make certain that your flip will be a financial success.
Location is Everything!
Location is critical for both purchase and resale prices, as purchasing a home in a great neighbourhood will result in buyers also wanting to be in that neighbourhood. Also, remember who your target buyer is going to be. Knowing the liveability factors of the area you choose will play a significant role in how you renovate and market your flipped home. Over the years, research has highlighted that Canadians put easy access to shopping, dining, and green spaces at the top of their liveability criteria, along with proximity to transit, work, and good schools. Work with a real estate agent who knows the market and area and can find you a fixer-upper in a great neighbourhood at a great price!
Consider Your Target Buyer
Once you’ve narrowed down your preferred neighbourhood, consider the type of buyer you want to purchase the home from once the flip is complete. By doing this, you can renovate the house to cater to their preferences and budget. If your target buyer is a new family, consider the features that will benefit them as their family and kids grow, whether that be lots of storage or good backyard space. If you’re renovating to sell to a professional couple, consider their lifestyle and what elements you can put into the home that will cater to them. Considering your target buyer can help not only give you direction in the design and renovation phase of the flip. It can also help you with the resale value, as your flip will hopefully check all the boxes for potential buyers!
Find a Reputable Contractor
After locating a great neighbourhood and purchasing a home, it’s time to find a contractor to carry out the renovations required for your house flip. Take the time to interview different contractors to find someone you will get along with and who understands your vision for your house flip. One of the best ways to find a reputable contractor is by asking trusted friends and family for referrals. Someone in your circle has likely worked with a contractor they trust and can refer their name to you. Don’t forget to get quotes from your contractor. This way, you agree on the renovation cost and the project timeline. Another great way to find a reputable contractor is to visit the Canadian Home Builder’s Association website. They have many great tools and resources to help you find the right contractor for your renovation.
Consider Your Timing of the Housing Market
Timing plays a vital role in your house flip, and because you’ll be making mortgage payments, you will want to sell the property as soon as you’re done renovating. Consider the timing of your purchase, how long the renovation will take, and when you plan on selling. When you start working with your contractor, set a timeline for the project and stick to it. Having a quick turnaround from the purchase date to the sale date is ideal as you then won’t be stuck having to pay the mortgage while the house sits empty, either mid-renovation because of going over your timeline or sitting on the market if you try to sell at a low point in the year. Be conscious of your timing and plan everything out as best as possible to avoid any situations affecting your budget and overall profit.
Determine the Right Asking Price
Once you’ve completed your renovation, determining your project’s asking price is the final step. Check with your real estate agent to choose the right asking price for your property. You want to ensure you’re attracting buyers, covering your expenses and making some money on the flip. Pricing too high for the neighbourhood can turn buyers away, leaving you stuck paying the mortgage while the house sits empty. Pricing too low might attract many buyers, but you may not make enough to recoup the costs and profit from the flip. Your real estate agent can suggest an appropriate listing number based on the location, liveability factors, upgrades, and other comparable properties in the area.
Is Flipping a House Worth the Investment?
Whether flipping a house is worth the investment largely depends on various factors, such as the current state of the real estate market, the location of the property, the cost of renovations, and the overall demand for the property in the market. When done correctly, flipping a house can yield significant profits quickly. However, it can also be a risky investment, as there is always the possibility that the property will sell slowly or that unexpected expenses may arise during the renovation process, cutting into profits. To make a successful house flipping investment, it is essential to conduct thorough research, have a solid understanding of the real estate market, and carefully evaluate the potential risks and rewards. Ultimately, deciding to flip a house should be based on individual circumstances and personal goals. Investors should be prepared to invest time, effort, and resources to ensure success. Otherwise, what was the entire ordeal for anyway?
Is Flipping a House Right for Me?
Ultimately, the decision to flip a house should be based on a thorough evaluation of your circumstances, goals, and experience level in the real estate industry. Flipping a house can be a high-risk, high-reward investment strategy that requires significant time, effort, and financial resources. If you are considering flipping a house, being honest with yourself about your expertise and experience in the real estate industry is essential. When considering the decision to invest in flipping a house, partner with a more experienced investor or seek the advice of a real estate professional.
What About the Taxes on Flipping Houses?
In January 2023, the Canadian government’s house-flipping rules went into effect. The change to the tax code meant that individuals who purchase “real estate with the intention of reselling the property in a short period of time to realize a profit” would be considered business income instead of a capital gain. When it is categorized as business income, 100 per cent of the profit is taxable.
Various regions have been introducing their own home-flipping taxes. Starting in January 2025, British Columbia will maintain a 20 per cent levy on homeowners selling their properties within a year of purchase. The objective was to shrink the list of parties competing for limited housing options.
For years, public policymakers have attributed increasing home prices in Canada to speculators, house flippers, and investors. Despite the levy, flipping activity in the Canadian real estate market has been robust. At the end of the fourth quarter of 2024, flips accounted for 2.58 per cent of all residential transactions, up from 2.5 per cent in the first three months of 2023.
Overall, since the start of 2014, flips have accounted for approximately two per cent of all housing transactions. While the numbers do vary from market to market, they still represent a smaller portion of the broader real estate industry than many people and politicians realize.
Thinking About Flipping Houses?
Flipping a house is a tremendous job that can seem overwhelming to those who have never gone through the process. If you take the time to research and educate yourself, work with a great real estate agent and contractor and stick to your budget and timeline, you can reap the rewards of your hard work when your flipped property sells, and you pocket your profit!