Flipping houses has really become popular thanks to the hit house flipping TV shows that air daily across the country. Watch any 30-minute episode and you'll quickly see why it's so appealing. The whole process of flipping a house and making a tidy profit seems so easy, but don't be fooled. If only life was like that. In fact, there's a lot more involved in flipping a house than you see on TV, from financing the resale to dealing with taxes. If you're thinking of taking the plunge and starting your own flipping project, research and learn the dos and don'ts of house flipping.
What is House Flipping?
House flipping is a term commonly used in the real estate industry that refers to buying, renovating, and reselling properties for a profit. In most cases, “flipping” involves renovating and fixing up the home to bring it up to date, which allows the investor to sell it at a higher price and make a profit. House flippers are real estate investors who typically seek out distressed or undervalued properties, buy them at a discount, renovate or improve them to increase their value, and then sell them quickly for a higher price.
Flipping houses can be a profitable investment strategy if done right, but it also requires a lot of knowledge, skill, and capital to execute effectively. A successful house flipper must be able to accurately assess the cost of repairs and renovations, determine the proper market value of the property after renovations, and have a strong understanding of the local real estate market. Flipping houses can go wrong and cost you money just as quickly as it can go right, so doing your research and choosing wisely is always the best option.
Things to remember when reselling a house
How do you finance a home flip?
The first question you should ask yourself is, “How am I going to finance this flip?” This is an important question because you don't want to dip into your emergency fund or max out your line of credit. Therefore, it's important to have a financing plan for your home flip. Your three main options are to apply for a traditional bank loan, leverage the equity in your home, or partner with a real estate crowdfunding company.
Additionally, it is wise to have a plan and create a budget blueprint. Planning ahead will help you determine the scope of your renovation and give you a better idea of how much it will cost. Plus, a budget will help you know how much you will spend, how much you have left, and how much you have left over for unexpected circumstances.
The 70% rule
Housing market experts advise flippers to never forget the 70 percent rule. This is a standard strategy that recommends paying no more than 70 percent of the after-repair value (ARV) minus repair costs. In other words, you should make sure that the costs of flipping the property do not exceed the profit you could potentially make from the endeavor.
Of course, in an environment of above trend inflation, high borrowing costs, and rising labor costs, it can be quite difficult to keep expenses in check. With the right planning, expert help, and a ton of math, flipping property can definitely be a financial success.
Location is everything!
Location matters for both purchase price and resale price. If you buy a home in a great neighborhood, buyers will want to live there too. And keep in mind who your target buyers will be. Knowing the livability factors of your chosen neighborhood will play a key role when renovating and selling your remodeled home. Years of surveys have shown that Canadians rank access to shopping, dining and green spaces as top livability criteria, with proximity to transportation, work and good schools also important. Work with a real estate agent who knows the market and the neighborhood and can find you an affordable remodeled property in a great neighborhood.
Consider your target buyer
Once you have narrowed down your desired neighborhood, think about the type of buyer you want to attract to purchase your home once your renovation is complete. This will allow you to renovate your home to suit their tastes and budget. If your target buyers are new families, consider features that will come in handy when they grow up, such as lots of storage space and ample space in the backyard. If you are renovating to sell to a professional couple, consider their lifestyle and what elements you can incorporate into the home to meet their needs. Considering your target buyers will not only give you direction during the design and renovation phase of your renovation, but it will also help with resale value, as you can expect your renovation to tick all of your potential buyers' boxes.
Find a reputable contractor
Once you've found a great neighborhood and purchased a home, it's time to find a contractor to carry out the home improvement needs. Take the time to interview different contractors to find one who you get along with and who understands your vision for your home improvement. One of the best ways to find a reputable contractor is to ask for referrals from trusted friends and family. Chances are someone in your life has worked with a trusted contractor and can recommend their name to you. Don't forget to get quotes from the contractors so you can agree on the cost of the renovation and the timeline for the project. Another great way to find a reputable contractor is to visit the Canadian Association of Home Builders website. This website has a lot of great tools and resources to help you find the best contractor for your renovation.
Consider the timing of the housing market
Timing plays a key role in flipping a home. With a mortgage payment, you will want to sell the property as soon as you finish renovating. Consider when you will buy, how long it will take to renovate, and the date you plan to sell. When you start working with contractors, set a timeline for the project and stick to it. Ideally, you will have a fast turnaround from the purchase date to the sale date. That way, you won't exceed your timeline and end up in a situation where you have to pay a mortgage while the house is vacant in the middle of renovations, or it will be left sitting on the market trying to sell at the lowest price of the year. Be aware of timing and plan everything as much as possible to avoid situations that will affect your budget and overall profits.
Determine the right asking price
Once your renovations are complete, determining the asking price for your project is the final step. Consult with your real estate agent to choose the right asking price for your property. You need to attract buyers, cover your costs, and make a profit on resale. Price it too high for the neighborhood and buyers will move away, leaving you struggling to make mortgage payments while your home is vacant. Price it too low and you might attract many buyers, but not enough to recoup your costs and make a profit on resale. Your real estate agent can suggest an appropriate listing price based on location, livability factors, upgrades, and other similar properties in the area.
Is flipping a house worth the investment?
Whether or not flipping a house is worth the investment depends heavily on a variety of factors, including the current state of the real estate market, the location of the property, the cost of renovations, and the overall demand for the property in the market. If done properly, flipping a house can generate significant profits in a short period of time. However, it can also be a risky investment as there is always the possibility that the property may not sell well or that unexpected costs may arise during renovations that reduce profits. Conducting thorough research, having a solid understanding of the real estate market, and carefully evaluating the potential risks and rewards are essential to making a successful house flip investment. Ultimately, the decision to flip a house should be based on an individual’s situation and personal goals. Investors must be willing to invest the time, effort, and resources to ensure success. Otherwise, what was the whole ordeal for in the first place?
Is flipping a house right for me?
Ultimately, the decision to flip a house should be made after a thorough evaluation of your situation, goals, and level of experience in the real estate industry. Flipping a house is a high-risk, high-return investment strategy that requires significant time, effort, and capital. If you are considering flipping a house, it is important to be honest with yourself about your expertise and experience in the real estate industry. Partner with a more experienced investor or seek advice from a real estate professional if you are considering the decision to invest in flipping a house.
What about taxes on home resales?
In January 2023, the Canadian government's home resale regulations came into effect. Due to the revision of the tax law, individuals who “purchase real estate with the intent of reselling it in a short period of time for profit” will be considered to have business income rather than capital gains. If classified as business income, 100% of the profit will be subject to taxation.
Various jurisdictions have introduced their own home resale taxes. British Columbia will maintain a 20% tax on homeowners who sell their homes within a year of buying them, effective from January 2025. The aim was to shrink the list of parties competing for a limited number of housing options.
For years, policymakers have blamed speculators, home flippers and investors for rising home prices in Canada. Despite the tax, resale activity in the Canadian real estate market is brisk. As of the end of the fourth quarter of 2024, resales accounted for 2.58% of all home transactions, up from 2.5% in the first three months of 2023.
Overall, remodeling has accounted for about 2% of all residential transactions since the start of 2014. Figures vary by market, but they represent a smaller portion of the overall real estate industry than many people and politicians realise.
Thinking about flipping your home?
Flipping a house is hard work and can seem daunting to those who have never been through the process. If you take the time to research, educate yourself, work with a good real estate agent and contractors, and stick to a budget and timeline, your hard work will pay off and you will reap the rewards when your flipped property sells.