Why Flipping Property May Not Be A Clever Strategy In 2023. Hello everyone, I hope you are well. In today’s post, I will be sharing a guest post from property expert Ritchie Clapson CEngMIStructE, co-founder of propertyCEO. Ritchie will share the pros and cons of flipping property in 2023 and whether there is a more lucrative alternative to consider. Many (maybe even most) people have thought about flipping a property at some point, and it still seems an attractive proposition, but is now the right time? And are there easier and/or more lucrative property options?
Why Flipping Property May Not Be A Clever Strategy In 2023
Doer-uppers, refurbs or flips – it doesn’t matter what you call it, the game is the same:
- Find a run-down residential property
- Buy it below market value, then add value by knocking it into shape and redecorating it from top to bottom.
- Put it back on the market to sell for a healthy profit.
Many people are attracted by the idea of executing a good flip. After all, the cost of acquiring your property is likely to be pretty modest. And, as it’s only a single residence, you’re not spending an arm and a leg doing the refurbishment. Plus, it’s not going to take you forever and a day to complete the project; you should be in and out relatively quickly. According to a 2021 report by Hamptons, the average flip sold during the pandemic produced a profit of £48,000. Considering that the average salary in the UK is around £30,000, this sounds like a good way of supplementing your income, if not earning a living.
Now, I’m a chartered structural engineer and property developer by trade, and I can certainly see the attraction of flipping properties as a strategy. But property flipping probably shouldn’t be your go-to strategy this year for several reasons, mainly due to the timing.
We need to look closely at Hampton’s £48,000 profit figure. Considering the period over which these numbers were calculated—while there was a global pandemic— we saw house prices rising at a rate of close to 10% per annum. The stamp duty holiday had stoked the market and helped motivate many people to take the plunge and move house. And this was great news for flippers. If they purchased a property for £250k and sat on it for 12 months, that property would go up by £25,000 without them lifting a finger. It takes them more than halfway to Hampton’s reported £48,000 profit average.
Most of these flippers didn’t simply sit on their hands and wait, they hired builders, plumbers, and decorators, and some got stuck in themselves. Let’s assume that, of the average £48k profit, £23k came from adding value, with the remaining £25k coming from an underlying increase in the property’s value over the period they did the work. So far, so good; profit is profit. However, you get it. But this year, the housing market looks like it will be a different place. Most experts predict that house prices will fall in 2023, and while the estimates vary considerably, the general feeling is that we could see an adjustment of 5-12%, with house prices not increasing again until later in 2024.
So, let’s assume instead that this £48k flip was done this year instead of during the pandemic. If house prices reduce by 10%, then our flipper’s numbers look very different. If they buy a £250k doer-upper whose value decreases by 10% over the time they own it, their starting point is a £25k deficit. And if they add £ 23k’s worth of value (as they did in the previous example), they’d be looking at a net loss of £2k instead of a profit of £48k. It’s quite a change, and while there are many variables, including the property’s value, and the flip’s timing, the underlying message is clear: flipping works best as a fair-weather strategy. You want to be doing it when the housing market is in good shape and values are on the rise, and the chances of 2023 seeing a strongly rising market are, by all accounts, slim.
What, If Not Flipping
One of the interesting dynamics of the current market situation is that what’s bad for flipping a single residential property could be very good for converting a single commercial building into multiple flats. I term this ‘small-scale development’, and while it’s only one rung up the development ladder from a flip, it can be worlds apart regarding profitability.
Let me explain first why the timing could be perfect, and then I’ll tell you why these sorts of projects are perfectly doable even if you’ve never tackled anything like it.
Three costs are critical to anyone that develops property:
Cost 1. Acquiring A Property
Santa didn’t bring me a crystal ball, but it would be logical to assume that commercial property prices will come down this year: we have a significant oversupply of unused commercial property that’s ripe to be converted; recession will force many businesses to close or sell their property assets; commercial property owners are aware that the value of their assets will be going down while, at the same time, the costs of maintaining them (mortgage rates, energy, security, business rates, etc.) are all going up.
Cost 2. Development Work
With most commentators predicting a fall in house prices of 5-12% this year, volume housebuilders are likely to pull back on production as they will have no interest in releasing properties into a falling market; they will look to minimise any negative impact. Because these players make up a significant slice of the labour and materials market, we could end up with lots of tradespeople out of work and materials not being sold. This, in turn, makes both resources a lot cheaper to buy – supply and demand.
Cost 3. The Price You Sell At
If you buy a commercial property in mid-2023 and start work in late 2023 or early 2024, you should be ready to sell in late 2024 or early 2025. And this is when even the most pessimistic forecasters predict that house prices will rise again. Even the Office for Budget Responsibility (OBR) reckons house prices will increase in late 2024 and throughout 2025, so you’ll be entering a sellers’ market.
But what if your timing is off, and the cards don’t fall as kindly as you’d hoped? One of the significant advantages of small-scale projects is that you always have the option to hold on to the flats you’ve built and rent them out. As we’ve recently seen, a lack of affordability puts downward pressure on house prices, but it puts upward pressure on rental costs as people look to rent rather than buy. Consequently, you can rent out the units you’ve built until the market moves on and you’re in a better place to sell.
Almost Chalk And Cheese
The timing for doing a small-scale development could be excellent, but exactly how big is the difference between doing a flip and a commercial conversion? Well, the first difference is in the numbers; a small-scale development should net you between £100k and £500k profit, whereas a flip, as we’ve seen, is likely to target a lot less. The other key difference is in the workload. Small-scale developers don’t usually manage their projects. Because there’s a bigger budget, they can afford to hire a professional project manager to oversee all the construction work on their behalf.
It effectively moves them from the coalface to the boardroom (much less hands-on) and allows them to develop property in their spare time. It also means that, as a developer, you don’t need DIY or project management skills. You need to be able to oversee operations at a high level while a team of professionals does the heavy lifting for you.
Another significant difference between flipping and small-scale development is the amount of money you need to invest. Many flippers will stump up a 25% deposit and the cost of the refurbishment work from their savings. For small-scale developments, most of the funding is borrowed from specialist commercial lenders who generally require the developer to put in a much smaller proportion of the needed financing themselves. While the overall sums involved are usually more significant than with a flip, the developer puts in less of their own money and gets far greater leverage than other types of property investment. In short, more profit for less cash invested and less work – it’s a powerful combination.
I hope you enjoyed that.
About The Author
Ritchie Clapson CEng MIStructE is an established developer, author, industry commentator, and co-founder of the leading property development training company propertyCEO. To discover how you can get into property development, visit www.propertyceo.co.uk