Everything You Wanted to Know About Flipping Houses in Canada
Real Estate Investing
There are several ways to build wealth in real estate besides straightforward ones such as renting, house-hacking, Real Estate Investment Trusts, etc. A quick investment strategy to increase your earnings is House Flipping.
Essentially, House flipping is when a real estate investor purchases a home, repairs or upgrades it and then sells the renovated property at a higher price. Buying properties to sell them, ideally in the shortest possible time to turn a profit, is known as flipping houses.
One of the most popular genres in reality shows is Real Estate – Renovating and Flipping properties, in particular. However, though possible, it is not as easy as depicted on television. You need to consider and research many things before you can start flipping houses for a profit.
Today, we shall look at the hard work behind the picture-perfect renovations and answer your question – Is Flipping Houses in Canada profitable?
The Basics of Flipping Real Estate
Flipping (sometimes called bulk property investment or wholesale real estate investing), is a process wherein an investor buys a property to sell it for profit. Basically, house flipping involves purchasing homes at low prices, making appropriate repairs, and then, quickly reselling the house for a profit.
Real estate flipping differs from other investing methods in one primary detail – Professional flippers sell a property right after renovations are completed. Unlike other popular investments, home flipping rarely, if never, requires purchasing the property and holding on to it for extended periods.
Choosing the Right Property
The most important factor for a house flipper is choosing the right property.
Hitting the sweet spot of an undervalued property that requires minimal work in an appropriate neighbourhood is the key to making a huge profit. Of course, this is easier said than done – you will need to research the real estate market thoroughly so that you invest when prices are rising and sell high. Real estate agents have the edge over other investors here – they understand housing market trends and can assess how much the property values will be, in a year or so.
Undervalued, foreclosed or distressed-sale houses are good options for house flippers. However, be prepared for competition from other buyers.
As with all real estate investments, the right location is another important factor. The right neighborhood will enhance the market value of the flipped house, and you will get more money if both the home and the location show potential for growth. Check with the local authorities for parks, roads and other infrastructure plans.
For real estate investors, flipping houses is a more considerable financial risk than other forms of investing. They need easy access to substantial money and may have to take on loans at higher interest rates to finance the project.
It is paramount for house flippers to maintain a good credit score – a score of about 700 will make it easier to get lower mortgage rates. If the buyer can pay cash for at least 20% of the purchase price as a down payment, the chances of getting a pre-approved loan are substantially higher.
The initial cost when flipping a house includes payments for Home inspection, Property taxes, Insurance payments, and Utility tariffs. Other acquisition costs include closing costs, marketing costs or fees for a real estate agent (if you use their services).
Investors must decide whether to get financing or pay the total amount upfront when house flipping. They can choose to use the help of another investor to purchase the property or do it alone.
In all cases, it is essential to refrain from paying a price that would leave them unable to afford the improvements they wish to make.
Budgets and Timelines
A realistic budget and timeline for the house flip will ensure that the project has adequate resources for reasonable profit margins.
Buying and flipping a house requires a significant time investment and funds. You can use your skill sets or sweat equity to cut costs if you have relevant industry experience (physical labour, designing, accounting, etc.). If not, you must take the advice of a professional such as a home inspector or a contractor, to get a clear idea of what the total renovation costs will be.
Take bids from several contractors in different trades, as the first contractor may not necessarily be the best person for the job.
Planning and budgeting start before the actual work begins, and it is better to be aware of the project’s scope. Ensure that you have considered all the mandatory permits and inspections and draw up a working schedule.
Selling Flip Homes
A real estate agent can help you with an initial listing price and marketing the property to get potential buyers and offers quickly. An experienced brokerage or local real estate agent can also advise on making the flip homes more desirable, thus improving the home values.
However, if you work with a professional, you will have to factor his fees into your budget, affecting the gross profit.
You can, of course, sell your flip houses yourself if you are a real estate agent or have experience in the real estate market. There will still be other selling costs on the investment property, such as title fees and property taxes.
If you renovate a property for a house flip with no intention of renting, 100% of the profit is considered income and is taxable. You may even have to charge HST on the sale of the house if there are substantial renovations or additions.
The Canada Revenue Agency may impose additional penalties if you incorrectly report the profit from house flips as capital gains.
A Word of Caution – the Federal Budget Proposal
The Federal Budget issued on April 7, 2022, proposes that all profits from the sale of residential properties held for less than 12 months would be considered business income. Flipping a house falls within this category.
This rule would apply to all properties sold on or after January 1, 2023. Exceptions would be provided for certain enumerated circumstances such as death, disability, and divorce.
Pros and Cons of House Flipping
Now that you have a better idea of house flipping let us discuss the pros and cons.
For investors with the requisite skill sets and real estate experience, there are great chances of making a considerable profit. You can leverage your insights about real estate to minimize risks and not lose money. The rule of thumb to determine the ideal purchase price of an investment property is to pay only 70% of the after-repair value of the property minus the cost of repairs.
On the other hand, many investors have lost money on home sales. Without an in-depth knowledge of local real estate or relevant skills, you may need to depend on expensive professional support when flipping houses. Gaps in the planning of schedules and budgets may lead to unanticipated expenses, and you will lose money.
Flipping a House – Yay or Nay?
As a serious investor, you must avoid common mistakes such as underestimating the time, money, and resources required to flip a house and selling it. The project can easily become a money pit if there are no budgets or schedules in place.
The primary focus should be strictly on the numbers that will get you the maximum amount of gross profit in the shortest time and get a good deal or cash offer. You can refer to the country’s home flipping report or other market stats to check the profits and trends over the past year.
If you have the experience to pick undervalued properties and the right team to bring them up to date with renovations and repairs, house flipping can be a great investment opportunity.