Purchasing a home, only for the purpose of renovating it and then selling it for a greater price is a popular kind of property investment that, while not new, has grown more popular in recent years thanks to a number of global reality shows.
South Africans are also getting in on the action, with YouTuber Stephen Baron making a profit of about R1 million after flipping a house in Johannesburg.
The concept of flipping a house sounds straightforward, but you do need to know what you are doing. Arming yourself with as much information as possible is the first step to a successfully flip.
Bellow are three things to consider before starting.
1. Set your budget
Find out how much you can afford to invest, you can do this by speaking to your bank or a bond originator to get an idea of the home loan amount you can qualify for.
When you do find a property you are interested in, determine what the After Repair Value (ARV) will be. This is the estimated value of the property after renovations have been done.
Most property flippers use a 70% rule when budgeting, meaning they would pay 70% of the ARV of a property minus the repairs needed. So if the properties ARV is R1m and the renovations would cost R250 000, they would not pay more than R450 000 for the property. Also keep in mind you will need approximately 8% of the bond for attorneys fees to transfer the property into your name.
Before buying a property you should consult with construction experts to get an idea of what the renovation costs will be, look around for reliable and competent builders, architects, electricians, plumbers, etc. and get as many quotes as possible to do price comparisons.
2. Choose the right area
Ask any real estate agent and they will tell you, the most important factor when purchasing a property is location.
When choosing the location, consider things like, proximity to good schools, retail areas and green spaces. Find out who lives in the area, singles, families or older couples, this will give you an idea of who would be interested in purchasing as well as what renovations you need, to make a successful flip.
3. Choose the right house
A property you want to renovate must have a sound structure to keep costs down. Houses with structural faults, such as unstable foundations or weathered roof beams, for example, can be expensive to repair.
Get an expert to inspect the property if you are uncertain about the structural condition.
An ugly house in a good area is what you should be looking for, something that just needs cosmetic repairs. Elements which are the easiest to change or repair are floors, walls, roof, cabinets, counter tops, and the garden. A fresh coat of paint gives the highest return on investment than any other home improvement.
Updated kitchens and bathrooms appeals the most to potential buyers, but be cautious as renovations in these areas can potentially become very expensive.
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