How feasible is it to flip real estate, especially when you are operating in a market like India? Can this prove to be a viable option for earning some returns while also gaining experience? Read on for more!
We all have that friend, colleague, acquaintance or someone else who has apparently earned a tidy sum from flipping real estate at least once in his or her life. Many a time, we have heard real-life stories of how someone purchased a property in an emerging location at the right time for an unbelievable deal of say Rs. 20-30 lakh and then fitted out the property with better amenities and patiently waited for some appreciation in capital values before selling it off in 2-3 years for a tidy sum of even Rs. 40-45 lakh and earning a neat profit. How feasible is this kind of venture for you?
It may look easy initially; All you need to do is purchase a home, just make a few cosmetic changes, install a few new features, enhance the quality of materials and when the time is right, simply list it back for sale on the market and earn a sizable profit on your investment. If you look at the U.S. market, there are even popular television shows that highlight impeccably groomed investors who seemingly make home flipping profitable and a fun activity in fact! Reports state that as of 2019 itself, flipped homes contributed a decent 6.2% towards the total home sales volumes in the U.S. which represented an 8-year record. While volumes apparently came down in 2020, they recovered strongly in 2021.
Yet, are things ever that easy? It may seem apparently fun on the outside but there are numerous things that you should examine before venturing into this space.
Table of contents
Traits or attributes to be successful in this business
- Thorough knowledge of the housing/real estate market in your city or region along with staying updated on market trends, emerging localities, infrastructure and connectivity improvements, new commercial growth trends, price trends, circle rates, capital value appreciation and more factors.
- Flipping homes also requires vast business skills along with a lot of planning.
- Investors should be able to accurately pinpoint the exact amount of time or money that they will need.
- They should have their finger on the pulse of the market and be excellent salesmen/saleswomen in order to land new investors or buyers for their flipped properties.
- They should be able to time their decisions in a proper manner while possessing the ability to choose properties in locations with huge potential and future growth prospects.
- Of course, luck is a key factor which cannot be under-estimated by all means.
The mechanism of home flipping
House flipping is a specific real estate investment strategy where investors buy properties not for end-use but with the objective of selling them for an eventual profit margin. Those flipping properties will focus on the purchase and resale of either a single property or a group of several properties. Many investors try to keep their income flowing through frequently flipping properties and reinvesting proceeds in bigger projects for bigger profits!
Investors look to purchase a property that is priced on the lower side, ideally in a new and upcoming location with good future prospects. They try and finish the deal in quick time since each day that you spend will cost more in terms of the loan and other payments, along with insurance costs if any and property taxes, not to mention the down payment that you have just made. Buyers look to upgrade and finish properties quickly before selling them for a profit to investors and other buyers. However, timing the market is of importance here, since most of the profits are usually derived from capital/price appreciation of these properties rather than property upgrades.
Many investors look for properties in hot and upcoming locations at comparatively lower prices but which will increase once any major infrastructural project is completed, or commercial development happens in the future. The best guidance for any aspiring flipper is to lower financial exposure and risks at the outset. You should always look to scale up your potential for earning future returns. Do not pay an excessive amount of money for a home. Avoid making a huge down payment since a major chunk of your money will be stuck while you try to sell the property in the future. Pay only what is required; make sure you bargain for getting a lower price from the developer along with other deals and discounts if possible. You should also invest in a property only after assessing the amount that you will have to spend in fixing it up with repairs and upgrades, installing better materials, and so on.
The business will need your full attention, money and time along with lots of patience and skill alongside. This is not a get-rich-quickly scheme for investors, especially in a housing market like India.
Some aspects worth noting
1. Money
Real estate is always a costly affair; your first expenditure will be the cost of acquiring the property. You will have to possess the initial money for a down payment which could be up to 20-25% of the value of the property. You will also have to pay for registration and stamp duty costs along with mutation. You will also have to factor in charges payable for property maintenance on a monthly/annual basis along with membership fees for societies, clubs and other charges for amenities. Property taxes are also payable by the buyer. The longer you take to sell your property, the more you will be paying interest on your home loan EMI that you took for buying the property in the first place. Even though you will get tax deductions on principal and interest repayments under Sections 80C and 24 respectively, it may not be enough.
2. Upgrades
What exactly are the upgrades that you are planning? Not everything adds value to a property. For example, installing a little knick knack on the door or painting the walls green will not bump up the value of the property you just invested in. You can only do this by making strategic upgrades of the fixtures and fittings along with using high-quality paint and lighting, installing plus furnishings and of course, changing the flooring, tiles and so on. You can also upgrade the property with security features like CCTVs and intercoms. Make sure that you factor in the cost of these upgrades and add them to your total investments.
3. Time
Flipping a home successfully will be a time-consuming proposition by all means. It may take you months and months to finally find the right first flip! Once you take ownership, you will need time for upgrading it while also waiting for capital values to rise. Thereafter, you will have to spend time in looking for buyers and marketing your property. This will necessitate a huge amount of time and patience on your part. Do you have what it takes in this regard?
4. Skills
Do you have what it takes to successfully market and advertise your property and quickly find a buyer or investor? Can you tap into social media and other digital channels to find buyers while building liaisons with brokerages and other firms for the same purpose? Can you organize house visits and get more people interested in your property? Quickly selling a property is a difficult task, more so in a price-sensitive market like India.
5. Knowledge
Do you have sufficient market knowledge? Do you have an idea of price trends over the last few years and year-on-year price growth or month-on-month price growth? Do you have an estimate of capital value growth and the right time to buy and sell? Do you know the market like the back of your hand including price trends, connectivity and infrastructure improvements, new developments, etc? Answering these questions is crucial before you venture into any flipping activity.
6. Patience
Are you patient enough with the financial strength and mental tolerance to wait it out until you find a buyer? Can you wait till the prices pick up and render your investment worthwhile? These are big questions to be answered and confirmed mentally before trying out your flip!
What else can you ponder over?
- Flipping is possible with both ready to move in properties and under-construction properties (although the latter should be nearing completion for you to maximize your returns and not lose money due to construction delays).
- Resale properties may also be flipped but depreciation does play spoilsport. At the same time, you have to spend sizable money in repairs and upgrades in order to enhance the value of any resale property. Thereafter, if you are confident about the property getting a higher value from an investor, you can go ahead, only if you have market knowledge, research and the network to find buyers.
- It is always best to look out for quick distress sales, i.e. property owner wishes to leave the city for work or other purposes, there is no left to stay in a property in any particular city, or a family is selling out and moving to another location and they need money urgently. You can get great deals in these scenarios along with hefty discounts on comparatively newer or resale properties.
- You should conduct due diligence before any investment, taking the help of an industry expert and lawyer, verifying the title, status and other documents of the property and the credentials of the developer/seller.
- If your property is near a business or IT zone, you may find a buyer working at an organization here. These buyers may look for automation, smart home and security features. You can get them installed for upgrading the property value and making it more appealing to them as a result.
- Make sure that the basics like whitewashing and paint are completed, with there being zero dirt, dust and rust. All drainage systems and plumbing fixtures should be in order along with plugs, lighting fixture and electrical connections. Locks should be working properly with available keys and there should be no broken furniture. Ideally, get furniture items polished before venturing into flipping any property. Remove all junk items and ensure that there is good ventilation overall.
- Vaastu compliance (which most Indian buyers seek) is also a good idea and you can point out all the positive changes you made when prospective buyers visit.
- You can budget a maximum of 1-5% of the property cost in expenses on upgrades and renovations. However, it will be made up if you sell the property at the right time (accounting for capital appreciation), earning a premium of at least 10-25% as a result.
- Many experts believe that flipping is not ethical and is not a good way to handle property assets while many feel that there is nothing wrong although there are always some restrictions in the Indian market. End users currently dominate the market although flipping is best done in a market that is more investor-heavy as per several experts.
It all depends on your final perspective and also the time, knowledge, skills, budget, and overall acumen you have at your disposal. If done right, flipping a property can help you earn a relatively tidy short-term profit. However, as mentioned, there are innumerable factors that contribute to the same. Of course, there are a thousand nightmares that can occur, i.e. delays in construction for a near-ready property, not finding a seller for the property, not earning a higher price or valuation for the property, a lower margin while selling, costs for upgrades shooting through the roof, market trends which lead to price corrections and so on.
However, as mentioned, you need to have patience and the financial capability to weather such obstacles if you are to flip a property. Remember that real estate is always a tangible and reliable future investment. If not anything, you can always rent out your property and start earning rental income which can offset some of your monthly EMI, maintenance, property tax and other costs.
