Slim margins for flippers thanks to strong rise in construction costs and booming market
Renovators looking to flip property in the current market will be making slim profits, agents say, as galloping property prices coupled with rising construction costs make it harder to turn around a quick gain.
Australian property prices have recorded their fastest annual growth since 1989, rising 18.4 per cent in the year ending August, figures show, at the same time as a residential construction boom has raged on.
This has created difficult conditions for any interested flippers looking to make a quick dollar, with homes selling for well above their price guides and long wait times on contracting builders and tradesmen, as well as a marked increase in associated costs even if a home is successfully purchased in the current market.
Instead, agents say, buyers are more likely to make a significant gain if they simply hold a property rather than renovating it and selling in a short amount of time.
James Dorron of O’Gormon and Partners Real Estate said that, in Sydney’s lower north shore, there were so few homes that many flippers were reconsidering whether renovating was worth it, but properties were selling for a premium anyway.
“It is almost getting to the point you’re better off buying something that is all done,” Mr Dorron said. “The challenge with the flippers at the moment is prices are racing forward so quickly they can’t see the margin in it.”
He said with building costs up anywhere from 20 to 30 per cent, a $1 million property would end up costing $4 million to $4.5 million after the renovation, transaction and holding costs.
A dilapidated semi-detached house at Neutral Bay, which would have needed an extensive renovation, sold for $1.675 million earlier this year through Anthony O’Gorman and Mr Dorron.
“There are heaps of flippers on the market but like Ernest Street [in Neutral Bay] they tapped out at a certain level,” Mr Dorron said.
The successful buyer of that property was Liz Cuming, who said she wouldn’t be flipping the house but would be renovating it.
Those renovations were already well underway, she said, adding that she had budgeted $300,000 for the works and planned to rent it out once they were done. She admitted she could only afford to renovate because she was using a known and trusted builder who she knew was going to be available.
“The builder I’m using is a family gem. I’m lucky in that regard,” said Ms Cuming, an artist based on the Northern Beaches.
“At this point, and of course I can change my mind, I will renovate it and within a year it will be finished, hopefully in a much shorter time than that. My thoughts would be to rent it for a couple of years and see how that goes.
“If I were starting from scratch I don’t even know that I would have even bought it.
“What I am aware of is the lovely capital gains tax and for that reason if I can hold it I would maybe be better off to hold it.
Whether she held or sold once the renovations were complete would depend on the market at the time, she said: “I suppose I am lucky because I am not relying on it to be an instant turnaround.”
In Melbourne, an owner-occupier bought a one-bedroom fixer-upper in ritzy Albert park for $1.51 million earlier in the year.
Marshall White Port Phillip’s Ben Manolitsas said unless homeowners had the construction know-how or planned to live in the property for some time, flipping homes was becoming harder.
“With the cost of building being what it is if you’re looking to flip … it is growing harder and harder to make a profit, if any,” he said. “Those [fixer-upper] homes do in particular attract a lot of competition.
“Unless you’ve got trade experience and connection within the industry it’s going to be very difficult to flip quickly and make a profit with the market we’re in.
Mr Manolitsas said buyers were better off buying something renovated or holding a home for longer.
“The mums and dads and families that are looking to flip? I don’t come across a lot of them.”
In Brisbane, where prices have risen at a break-neck speed this year after many years of subdued growth, buyers are after renovated properties to hold and resell rather than attempt to flip, according to Matthew Jabs of Place Newmarket.
“With the competition for housing, to buy a house at a reasonable level to turn it around and sell it is really hard,” Mr Jabs said.
“It’s all about the purchase. If you can pick it up at the right price it can work but if things are going for record prices after record prices it is harder,” he said, adding that many investors looking to flip had to take a gamble that it would be worth more when they sold.
Mr Jabs sold a “knock-down” post-war cottage in Ashgrove earlier in the year for $1.27 million to a local family buying the property to build their dream house.
He said many investors were now living in or holding properties for a year and expecting resales to increase in the following six to 12 months rather than pouring time and money into flipping.
“With the limited supply, unless you want to go out on a limb and pay top dollar for a property and hope it goes up it’s very hard to make it work,” he said.
Flipping was a “highly risky strategy” in any given market but had become even harder in the current cycle, said Rich Harvey, Property Buyer chief executive and buyers’ agent.
“If you’re a flipper you are, in other words, a property trader. You have to make significant gains,” Mr Harvey said. “You’ve got to pay stamp duty on your way in and agent’s fees and capital gains tax on the way out.
“I think a much more sensible strategy is to buy, renovate, hold and refinance, and then you don’t kill the golden goose, which is capital growth.
“In this market, you don’t have to renovate to make a profit, you can literally hold the property and make significant gains.”
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