Is Flipping Houses Still a Good way to Make Money?
In general terms, house prices in the UK have continued to grow at a disproportionate rate during the last few years. This has largely been inspired by an imbalance between supply and demand, which has created a market stacked heavily in favour of vendors.
This trend may be about to buck, however, with London experiencing a significant slowdown as prices in the capital fall to their lowest levels since the depths of the financial crisis. As a result, the average property value in the UK fell by 0.5% (or £73 per day) during August, bringing average growth within the market to around 2% for 2018.
While this may make some forms of real estate investment less palatable, however, techniques such as house flipping remain enduringly popular. But is this really a good way of making money?
Appraising House Flipping and the So-called “70%” Rule
In simple terms, house flipping is the process of purchasing a devalued property and adding value to establish it as a revenue-generating asset. This is then resold quickly and for a profit, and this technique is generally considered to offer excellent returns when it’s executed well.
At the heart of successful house flipping is the so-called 70% rule, which dictates that an investor should aim to pay around 70% of a property’s ARV (after repair value) minus the cost of the remodelling works required.
The ARV relates to the value of the property once any necessary works have been undertaken, and the 70% rule enables investors to operate within a 30% profit margin when forcing through a sale.
For example, if you want to flip a property with an ARV of £150,000 but need to spend £25,000 on repairs, the 70% dictates that you should aim to pay no more than £80,000 for the home. A degree of compromise is required here, of course, while you may be able to spend a little more in instances where you can have repairs completed at a discounted rate.
Does House Flipping Still Represent a Solid Investment?
We’ve already touched on the fact that house flipping retains universal popularity, and one of the reasons for this is that it can be successfully attempted regardless of the surrounding housing market.
This is because properties are typically purchased at a discounted rate through an auction house, meaning that investors have considerable flexibility when looking to resell the asset for a profit.
More specifically, houses purchased for flipping boast a higher potential margin and are not completely bound by market conditions, creating an opportunity for investors to profit even in depreciating conditions.
In the current market, house flipping is certainly a viable method of investment, as while the overall rate of growth has declined in recent times it remains well above Nationwide’s annual forecast of 1%. So long as investors can identify bargains and complete the necessary repairs in good order, they can achieve a healthy profit as 2018 progresses.
The only potential issue here is a declining global economy, with some economists fearing that another financial crash could follow in the near-term. For now, however, house flipping remains a genuinely effective method of investment in a strained and slightly volatile market.