Successful property flipping tactics
Flips
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
3. Affordability
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.
4. Flipping
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:
Stamp Duty
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.
Licensing Issues
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.
Capital Gains
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 Legals | : | $2,500 | |
| Less Stamp Duty | : | $14,860 | |
| Less Agent’s fee | : | $3,000 | |
| Capital gain | : | $49,640 | |
| 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.
Comments
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Where to next? Flipping in USA so we don’t have to pay that big stamp duty!
Hi How do you get around the banks doing there title searches for the person who eventually end up with the property. When they do there title searches it will come up as the original owner not the middle man. I understand you can do simultaneous settlements but some banks are not happy with that. I have flipped properties in the past this way with no problem but I have one at the moment and the person I am flipping the property to cant get finance due to the property is not in our name.
how do the logistics of the flip in settlement work.
Settlement is due in the same date. But how are the transfers and cheques work. How does one pay for the original property and then get the money from the new buyer?
Great Content but leaves you wanting more
Hi Rob.
I have done it and the answer to your question is: Assuming you are the middle man…
Your conveyancer / lawyer instructs the purchaser to make out checks to:
1. Council rates, the water board, etc etc
2. you for profit
3. the owner for their price
4. the real estate agent
5. Your conveyancer / lawyer
6. any other conveyancer / lawyer who is to be paid in the transaction
The title never touches you.
it goes from the original owner to probably the purchaser’s bank (unless they are paying cash, if so the purchaser them self)
Incredibly helpful,thank you Steve.
Does anyone know of any Australian sites similar to ListSource where pre foreclosure properties, default tax properties, vacant properties etc are listed?