Most Flippers Make A Profit – But There Are Dangers

Posted on 9/02/2018  
Most Flippers Make A Profit – But There Are Dangers

Around 90% of Australian who “flipped” properties last year sold for more than their previous purchase price, according to a new report.

“Flipping” refers to buying and re-selling a property within two years in the hope of making a quick capital gain.

You can achieve quick profits by buying undervalued property, benefiting from rising markets or from adding value (such as through renovation, subdivision or securing a development permit).

The process sounds quite simple but the data, released in CoreLogic’s 2017 Property Flipping Report, does not reflect the costs of real estate transactions – including stamp duty, conveyancing, agent’s commissions, marketing fees and bank interest. If these costs were all taken into account, the proportion of properties re-sold for a profit is likely to be somewhat less than 90%.

Flipping has been most prevalent in Sydney, Melbourne and regional Queensland.

Despite the high cost of housing in Sydney and Melbourne, 94% of properties that were bought and sold within two years made a gross profit. Brisbane also fared well at 90%. (A “gross profit” means the difference between the sale price and the previous purchase price, without taking into account the costs of buying and selling.)

The popularity of flipping in Sydney and Melbourne has arisen because of the strong capital growth in the past 3-4 years. Conversely, the rapid turnover of homes in regional Queensland is more likely to have been caused by struggling local economies and rising unemployment.

Vendors in Perth, Hobart, Darwin, regional Queensland, regional South Australia, regional Western Australia, regional Tasmania and regional Northern Territory were the most likely to flip their properties for a loss.

Northern Territory home-owners have fared the worst. In Darwin, only 30% of houses bought and sold within two years made a gross profit.

In Perth, where the market has struggled for much of the past four years, only 52% of properties re-sold within two years made a gross profit. There were similar statistics in Townsville, Mackay and Queensland’s Fitzroy region.

In most of these regions, local economies have been sluggish for a number of years with consequent impacts on their property markets – which has made it difficult to flip for a profit.

Although the proportion of loss-making flips has declined from the highs in 2009 and again in 2012, there has been a clear increase in properties selling for less than the purchase price in the last few years, says the report.

This highlights the reality that there is financial risk in a flipping strategy, especially when taking into account the total costs of buying and selling.

Another possible catalyst for people to re-sell within 1-2 years of buying is the APRA-inspired crackdown on interest-only loans to investors.

Research from Digital Finance Analytics estimates the monthly repayments on the average Queensland interest-only mortgage of $230,000 would increase by $600 to $1,425 if borrowers were forced to start repaying the principle on their loans as well as the interest.

Another concern around flipping comes from the Australian Tax Office, which is cracking down on property flippers. Tester Porter Accountants shares this warning:

The tax law does not allow you to ‘flip’ a property tax-free even if you are living in it. Most people think that they can move in to a property, renovate it and then sell it without paying tax. The main residence exemption – the exemption that protects your family home from tax – does not apply if your primary purpose is to ‘flip’ the property for a profit. The fact that you are living in the property does not mean it’s exempt from tax.

Tester Porter says the ATO can identify a property owner’s intentions around the property’s use by monitoring financial patterns, such as matching employment to income and examining loan documents.

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