By Ritchie Clapson CEng MIStructE, co-founder of propertyCEO
Flipping a property has made a profit for many people. They find a residential property (often run-down, at least having seen better days), they buy the property below market value, then they add value by making improvements (not necessarily just redecorating), and they then sell for a healthy profit. Even if you don’t have the t-shirt, you’ll have seen the TV programmes.
The cost of acquiring a property is likely to be modest. As it’s a single residence, refurbishment shouldn’t be too costly. Completing the project shouldn’t take too long; you should be in and out relatively quickly.
According to a 2021 report by Hamptons, the average flip sold during the pandemic produced a profit of £48,000. The average salary in the UK is around £30,000, so flipping seems like it could be a good way of earning a living.
Let’s look closer at Hampton’s £48,000 profit figure, remembering the period over which the numbers were calculated. During the worst of the pandemic, we saw house prices rising at a rate of close to 10% per annum. This was great news for flippers. If they purchased a property for £250k and sat on it for 12 months, that property would go up by £25,000 without lifting a finger.
Let’s assume that, of the average £48k profit, £23k came from adding value, and circumstances accounts for more than half of Hampton’s reported £48,000 profit average.
However, this year the housing market looks like it will be a different place. Most experts are predicting that house prices will fall in 2023, and while the estimates vary considerably, the general feeling is that we could see an adjustment of 5-12%, with house prices not increasing again until later in 2024.
So, let’s assume instead that this £48k flip was done this year instead of during the pandemic. If house prices reduce by 10%, then our flipper’s numbers look very different.
If you buy a £250k doer-upper in 2023 and its value decreases by 10% over the time you own it, you’re looking at a £25k deficit. Adding £23k’s worth of value (as in the previous example), leaves you with a net loss of £2k instead of a profit of £48k.
Yes, there are many variables (the property’s value, the timing of the flip, and so on) but the underlying message is clear: flipping works best as a fair-weather strategy. You want to be doing it when the housing market is in good shape and values are on the rise, and the chances of 2023 seeing a strongly rising market are, by all accounts, slim.
One of the interesting dynamics of the current market situation is that what’s bad for flipping a single residential property could be very good for converting a single commercial building into multiple flats. I term this ‘small-scale development’, and while it’s only one rung up the development ladder from a flip, it can be worlds apart when it comes to profitability.
Let me explain first why the timing could be very good, and then I’ll tell you why these sorts of projects are perfectly doable even if you’ve never tackled anything like it before.
Three costs are critical to anyone that develops property:
Cost 1. Acquiring a property
Santa didn’t bring me a crystal ball, but it would be logical to assume that commercial property prices will come down this year: we have a significant oversupply of unused commercial property that’s ripe to be converted; recession will force many businesses to close or sell their property assets; commercial property owners are aware that the value of their assets will be going down while, at the same time, the costs of maintaining them (mortgage rates, energy, security, business rates, etc.) are all going up.
Cost 2. Development work
With most commentators predicting a fall in house prices of 5-12% this year, volume housebuilders are likely to pull back on production as they will have no interest in releasing properties into a falling market; they will look to minimise any negative impact. Because these players make up a significant slice of the labour and materials market, we could end up with lots of tradespeople out of work and materials not being sold. This, in turn, makes both resources a lot cheaper to buy – supply and demand.
Cost 3. The price you sell at
If you buy a commercial property in mid-2023 and start works in late 2023 or early 2024, you should be ready to sell in late 2024 or early 2025. And this is when even the most pessimistic forecasters predict that house prices will rise again. Even the Office for Budget Responsibility (OBR) reckons house prices will increase in late 2024 and throughout 2025, so you’ll be entering a sellers’ market.
If your timing is off, and the cards don’t fall kindly, you always have the option to hold on to the flats you’ve built and rent them out until the market moves on and you’re in a better place to sell.
Exactly how big is the difference between doing a flip and a commercial conversion? A small-scale development should net you between £100k and £500k profit, whereas a flip, as we’ve seen, can be a lot less. Another key difference is workload as small-scale developers don’t usually manage their own projects; with a bigger budget, they can afford to hire a professional project manager to oversee all the construction work on their behalf, moving the developer from the coalface to the boardroom (much less hands-on) and allows them to develop property in their spare time. A developer doesn’t need DIY skills – they oversee operations at a high level while a team of professionals does the heavy lifting.
Another significant difference between flipping and small-scale development is the amount of money you need to invest. Many flippers will stump up a 25% deposit and the cost of the refurbishment work from their own savings. For small-scale developments, most of the funding is borrowed from specialist commercial lenders who generally require the developer to put in a much smaller proportion of the required funding themselves. While the overall sums involved are usually greater than with a flip, the developer puts in less of their own money and gets far greater leverage than other types of property investment. In short, more profit for less cash invested and less work – it’s a powerful combination.