Property flipping is an investing strategy where you sign a contract to buy a property and then sell your interest to a third party before having to settle or close on the deal.
An example of property flipping…
Andrew finds an absolute bargain of an investment property in Richmond – an inner city suburb of Melbourne approximately five kilometres from the CDB. He knows that it is worth about $400,000 – but the seller only wants $320,000 for a quick sale; she needs some quick cash to settle some urgent debts.
The above is an example of a successful property flipping scenario.
What are the critical success factors?
The critical property flipping success factors are:
1. Finding undervalued properties
2. Finding someone to flip to
If you can’t flip the property before settlement date then you’ll have to buy it. This means that you have to be conscious of the financial impact upon your wealth creation plan should this happen.
Property flipping in Australia is not as straightforward as it seems to be in the United States. There are three issues that I can immediately think of that will impact your profitability. They are:
You may find that there will be double stamp duty payable on a flip.
In the example above Andrew would have to pay stamp duty on a purchase price of $320,000 and Elyce would have to pay it on $390,000.
While there may be ways around this, such as buying an option to purchase the property rather than agreeing to buy the actual property, the legalities are complex and you should consult a lawyer before setting up the flip deal.
Because you are selling a property that you don’t technically own and making a profit as a result, it’s likely that you are going to need to be a licensed real estate agent to complete a flip.
If you’re not a real estate agent then it doesn’t mean that you can’t do property flipping… you’re just going to have to operate under the auspices of someone who is. This means that you’ll need to pay some kind of fee to ensure you are operating within the law.
You should also be mindful that if you buy and sell something that triggers a capital gain in less than 12 months then you will not be eligible for the 50% Capital Gains Tax discount that individuals are otherwise entitled to. See your accountant for more information.
Taking these three issues into account, let’s dissect Andrew’s profit on the basis that he has to pay a real estate agent $3,000 to operate under his agency.
|Contract sell price||:||$390,000|
|Less Contract purchase price||:||$320,000|
|Less Stamp Duty||:||$14,860|
|Less Agent’s fee||:||$3,000|
|Capital gains tax @ 48.5%||=||$24,076|
|(assuming top marginal income tax rate)|
|After tax profit||:||$25,564|
While this is still a great outcome for Andrew, it demonstrates how a $70,000 book profit ($390,000 – $320,000) can be whittled away to just $25,564 after tax and expenses.
Where to next?
- Buyer Beware is an excellent resource that will help you to avoid buying a property lemon. Find out how you can protect yourself with the five templates that make the due diligence process easy!
- Have you considered other positive cashflow strategies? These include Buy & Hold, Lease-Options, Wraps and Renovations…
- Return to Property Investment Strategies introduction.