I am often asked if flipping is still a viable strategy.
The answer is “yes and no”.
I don’t normally sit on the fence like this but it really does depend on a number of factors.
One thing is for sure – it is not as profitable as it used to be.
If you are not aware of the flipping strategy it is a fairly simple concept.
You purchase a property at a price below market value and then perform a renovation and sell it for a profit.
In theory it sounds great doesn’t it? But in the real world there are a number of things that can go wrong with this strategy.
So what about flipping as a strategy in 2020?
Well this year has been very different to other years and not for good reasons. In this post I will share my views with you on how viable flipping is in 2020 and what you need to look out for.
The Strategy of Flipping
Sometimes you will see this called “fix to sell” or “property trading” or even “fix and flip”. It is all the same thing. You purchase a property for a low price because it needs renovating and then you renovate it to make it possible to sell at a high price and make a profit.
Flipping properties has been going on for years in the UK. The formula for flipping is as follows:
Final sale price – (initial purchase cost + renovation costs) = Flipping Profit
Let’s look at an example:
Initial purchase price: £300,000
Cost of renovation: £75,000
Other costs: £25,000
Final selling price: £480,000
Flipping Profit: £80,000
So what is the return on investment here? This is simply the final profit divided by the total costs multiplied by 100:
(£80,000 / £400,000) * 100 = 20%
Should you consider this to be a good investment? Yes, a lot of experienced property investors will use 20% as a guide when evaluating flipping projects. You might think that this is a bit high, but there are so many things that can go wrong with flipping that it is a good yardstick to use.
If you were to chose a lower ROI figure of say 15% then you are increasing your risk with a flipping project. Often, renovation costs end up being higher than first estimated and this can result on you losing money on the flip. You need to do everything possible to ensure that you minimise your costs to make a profit.
Flipping in 2020
There are two significant issues that you need to take into account if you are considering flipping as a strategy in 2020. One has been around for a while and the other was a total shock to the whole world.
The Impact of Brexit
Brexit has been going on since 2016 and has caused a lot of uncertainty in the UK property investment industry. Last December the outlook with Brexit was looking a lot brighter with the general election result. But it is going to take some time for all of the negotiations with the EU to pan out so there is still a degree of uncertainty.
You need to bear in mind here that property flipping is a short term strategy. Many experts define it as the purchase and sale of a property in a calendar year. The profit margins for flipping have been declining over the years. When the UK voted to leave the EU in 2016 they declined even further.
So think about the short term when it comes to Brexit. It is unlikely that there will be any significant Brexit announcements made in the coming weeks and months that will negatively impact house prices. But there is something more important to consider though.
The Coronavirus Pandemic
Nobody saw this coming. It represents a far greater short term threat to the UK housing market than Brexit. Unemployment has risen and house prices have either stagnated or started to fall. There is a stimulus package from the government but it may not be enough to prevent a recession.
The UK housing market has effectively closed for business and will not reopen again until the government eases the pandemic restrictions. Savills, the well known estate agents, said that the pandemic was likely to impact the housing market in the UK in 3 specific ways:
1. In the short term, only the most committed buyers will see their property purchases through. Most will wait until the world markets stabilise.
2. People will be prevented to buy and sell properties in the UK due to the restrictive “lockdown”.
3. The pandemic is likely to have a negative impact on the UK economy which will force people to think again about property transactions.
You could possibly have to take these coronavirus factors into account as well:
- With the lockdown in place it will be impossible for surveyors to assess property values and when they are able to do this they may value properties on the low side due to concerns over the stability of the housing market
- You will find it extremely difficult to find a conveyancing solicitor during the pandemic as they will not be able to properly verify individuals for money laundering
- Several vendors will pull out of transactions because they are concerned to move on them or due to them believing that after the pandemic property prices will be reduced
- Even if you do purchase a property finding a contractor to renovate it will be almost impossible during the lockdown
The situation with the coronavirus pandemic is changing all of the time. At the time of writing this post the UK government are looking to change the lockdown rules to allow more freedom of movement. Therefore it is not easy to make any reliable predictions about the UK housing market at this time.
Although there was a base rate cut to 0.1% it doesn’t mean that it is going to be cheaper to borrow money. There is a great deal of caution in the financial world as they are unsure (as everyone else is) what impact the pandemic will have on the UK housing market. LTV (loan to value) thresholds have increased and it is virtually impossible to get a 95% mortgage.
There was an article from the BBC that revealed certain lenders are now exiting out of property purchase transactions. They suggested that only buyers that have a minimum of 25% equity in their existing properties would be eligible for a mortgage.
Zoopla published an article explaining that the government are taking a tough stance over people moving into a new home. The government is advising people to either delay the transaction or pull out altogether because of the COVID-19 pandemic.
At the time of writing this post, the UK housing market is closed for business.
The coronavirus pandemic in the UK could go on for a long time or it may be over fairly soon. Timing really depends on medical breakthroughs and the how well people follow lockdown rules. How much of an impact all of this will have on the economy of the United Kingdom is unknown.
Flipping in 2020 Advantages and Disadvantages
These days most of the property investment “experts” advise that you “buy and hold” rather than flip properties. Flipping has a risk element to it as do all property investment strategies. Here is how I see the advantages and disadvantages of 2020 house flipping:
Advantages of Flipping
- Some areas of the United Kingdom could produce a return on investment of more than 20%
- Bargains may be possible to find once the pandemic eases
Disadvantages of Flipping
- It is likely that you will have to invest in a property in a location you are not familiar with to achieve the highest ROI
- The COVID-19 pandemic is still ongoing and nobody knows when the UK housing market will be open for business again
- It will be very difficult to obtain a mortgage for a property investment despite the fact that the base rates have fallen
- When you are able to purchase a property and renovate it is probably going to take more time to sell
- If you have a mortgage on the property then with some financial institutions you have to own it for a minimum of 6 months
There is no doubt that the COVID-19 pandemic provides the biggest threat to successfully flipping properties in 2020. You cannot ignore Brexit either, so I would suggest that a flipping strategy in 2020 may not be a viable option. If the pandemic is over soon there could be a limited impact on the housing market.
But if the pandemic is around for another few months then this is almost certainly going to affect the economy with unemployment numbers rising. It will be harder to get a mortgage and these things will definitely impact the housing market and flipping.
Flipping will not work well if the demand for properties is low. The best results are achieved when there is high demand.
Having said all of that, if you are able to make a purchase at the right price then you could make money whatever the market conditions. It takes a lot of skill and experience to make a good return when the market is declining but it is possible.
So my recommendation is that you wait but always be on the lookout for opportunities. The pandemic is likely to lead to people losing their jobs and being unable to pay their mortgage so opportunities may exist to help people if they are suffering financially.
While other investors are panicking you need to be calm. Keep looking for opportunities and focus on getting the numbers right.