Flipping risks are now more elevated
Property flipping has often been an effective strategy for experienced properly investors who have successfully timed the purchase, renovation, and sale of their property assets.
However, property flipping in softer market conditions can be very challenging, according to Pete Wargent, co-founder of Australia’s first national marketplace for buyer’s agent services, BuyersBuyers.
Mr Wargent said, “on top of the cost of renovating, there will always be transaction costs involved in the quick purchase, renovation, and resale of a property, including stamp duties, legal fees, and capital gains taxes.”
“Now there are two more factors which make life tougher for property flippers. Firstly, as interest rates rise, there is less certainty about the market outlook, and a renovator could find themselves selling into softer market conditions. The generic market capital gains may not be there to carry a project through to profitability.”
“The second factor is that construction costs are presently very high, so there’s also a tangible risk for over-capitalisation if property market participants don’t budget carefully.”
“Figures from the ABS showed that the prices of timber and steel have rocketed about 50 per cent higher, while a range of other materials and services have seen the average cost of construction of a new home up by 20 per cent 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 cost less dependable, while in many areas of the country, there is a shortage of available tradies, which needs to be factored in as a contingency to any proposed renovation budget” Mr Wargent said.
Cooling market adds risk
BuyersBuyers CEO Doron Peleg said that a stylised example underscores the challenges facing flippers in the current market conditions.
Mr Peleg said, “in 2021, purchasing a property price for $600,000, adding $120,000 of value with a $60,000 renovation, and factoring in a property market increase by 20 per cent, could lead to a profitable sales price of $840,000.
“Even after accounting conservatively for 7-8 per cent transaction costs, there’s a still generous profit to made in such a deal in a brief period of time”.
“However, you can also easily see how a reduction in market values of, say, 10 per cent could leave an investor undertaking a flipping project in a precarious or loss-making position, particularly if there were unforeseen cost overruns due to materials or trades shortages” Mr Peleg said.
Sticky prices and the ‘missing middle’
BuyersBuyers co-founder Pete Wargent said that construction and materials costs can be sticky, so renovators and developers should assume that elevated construction and trades costs could persist for some time, even if global supply chain issues are resolved this year.
Mr Wargent said, “geopolitical events are unpredictable, and supply chains may right themselves in time, but demand for materials and construction services remains relatively high for the time being, so there’s every reason to expect costs to remain high for some time.”
“Property market conditions are quite varied around the country. Sydney and Melbourne are the most expensive markets, where households may have larger mortgages, and rising fixed mortgage rates have already dampened sentiment.”
“Some other markets such as Adelaide and a range of regional markets still have some solid momentum.”
“Renovator and flippers need to factor in the outlook for the local market they are operating in, to effectively manage project risks” Mr Wargent said.
“If you aren’t confident about your ability to flip property, think longer term. There’s a looming undersupply of family-appropriate dwellings in the middle-ring suburbs of many of the capital cities, and there are plenty of prospects for growth in rents and property prices in these landlocked areas over the coming decade”.