House flipping enters risky business realm

Experts say home renovators face a risk of being left out of pocket.
Property flipping carries an elevated risk of being left out of pocket, real estate experts say. -AAP Image

In a tearaway Australian market, property flipping has been all but a sure thing for shrewd investors.

But no longer.

Making a buck in a softer market has become a challenge.

"On top of the cost of renovating, there will always be transaction costs involved in the quick purchase, renovation and resale of a property, including stamp duties, legal fees and capital gains taxes," says Pete Wargent, co-founder of BuyersBuyers, a national network for buyers' agent services.

"Now there are two more factors which make life tougher for property flippers."

With interest rates shifting and a less certain outlook, Mr Wargent says renovators could find themselves selling into a market in which capital gains don't guarantee profit.

Add to that a sharp rise in construction costs and there is also a tangible risk for over-capitalisation.

Australian Bureau of Statistics data shows timber and steel prices have jumped 50 per cent, while the average cost of building a new home is up 20 per cent on last year.

"Obviously, projects need to be assessed on a case-by-case basis, but overlapping supply shocks have made access to construction materials at a reasonable cost less dependable," Mr Wargent said.

"In many areas of the country, there is also a shortage of available tradies, which needs to be factored in as a contingency to any proposed renovation budget."

BuyersBuyers CEO Doron Peleg estimates that a $600,000 property boosted $120,000 in value via a $60,000 renovation might have returned $840,000 in 2021 once a market increase of 20 per cent was factored in.

"Even after accounting conservatively for 7-8 per cent transaction costs, there's still generous profit to made in such a deal in a brief period of time," he said.

"However, you can also easily see how a reduction in market values of, say, 10 per cent could leave an investor undertaking a flipping project in a precarious or loss-making position."

Especially if there are unforeseen cost overruns.

Mr Wargent says renovators and developers should assume elevated costs will persist even if global supply chain issues are resolved this year.

"Flippers need to factor in the outlook for the local market they are operating in to effectively manage project risks" he said.

"If you aren't confident about your ability to flip property, think longer term."

The good news, he says, is that there is a looming undersupply of family-appropriate dwellings in middle-ring capital city suburbs over the coming decade.