Why flipping houses for profit is not an ideal investment strategy

While the idea of making a profit by renovating and reselling houses may seem appealing, it's essential to understand the potential pitfalls, how to avoid them and the alternatives for strong returns.

Flipping houses for a profit after doing some quick renovations might sound like a good idea in theory, but there are many potential pitfalls of taking this approach. Building a new property in a strategic location is a safer option for investors looking for strong returns.

First, let's look at the pitfalls of flipping houses.

1. Renovating always costs more than you think

It’s no secret that building costs have risen significantly over the past few years across Australia. While that has affected the cost of building new properties from scratch as well, you have greater certainty over the costs when you’re building a new home.

On the other hand, when you’re renovating an older property, costs can quickly add up when unforeseen issues arise. There’s an old saying that renovations can quickly become a money pit.

2. Not factoring in your buying and selling costs

Flipping properties is a short-term property investment strategy. It’s important to factor in both your buying and selling costs, not just your renovation and finance costs when you’re doing your potential return on investment (ROI)calculations.

When you’re buying your property, the most significant upfront additional cost will be stamp duty, and you may also have to pay lender’s mortgage insurance (LMI) if your deposit on the property is less than 20%.

When selling, you will typically have to pay 2 or 3% of the selling price to a real estate agent.

On the other hand, if you take more of a long-term property investment approach, these costs will be spread out over several years.

3. Overcapitalising

Overcapitalising is another common pitfall of investors using a flipping houses strategy. This is where you spend more on renovations compared to the value added to the property. It can be easy to do that when renovation cost shave risen as sharply as they have done recently.

4. Lack of renovation skills

If you take the DIY approach to renovating to save money, you need to have the skills and qualifications to do the work. Otherwise, you may not get council approval to flip (sell) your property when the work is complete.

Another problem with taking the DIY approach is that it’s time-consuming.

5. Timing is everything!

Maximising your ROI when flipping houses relies on everything going according to plan, including getting your timing for buying and selling right. Unfortunately, that’s easier said than done.

First, you need to find a property that has flipping potential. Then you need to buy it at the right price, do all your renovations while avoiding pitfalls 1 to 5, and finally, sell it at the right time when market conditions are right.


A superior investment strategy — building a new property

Building a new property can be a superior investment strategy to flipping houses for a range of reasons:

  • You can select from a range of modern home designs to make your property more appealing to potential tenants.
  • You can also potentially build a multi-rental home like a dual-income or duplex to maximise your investment return.
  • New properties tend to be more attractive to tenants than older properties (even renovated ones). You are therefore more likely to be able to charge a higher rent on a new property for greater return on your investment, especially if it’s in a good location.
  • New properties provide you with more opportunities to claim tax deductions for depreciation.
  •  If you buy land and build a new home you pay less stamp duty because you’re only paying duty on the cost of the land.

How we can help

DPN is a partner of quality builders, land suppliers and architects across Australia. We can help you to build a new property in a strategic location to maximise both your investment return and your capital growth prospects.  

Our team at DPN can help you with all aspects of property finance, investment and ongoing management. 

Contact us today to find out more.

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