Estate Agents (Part 9)
Over the past few weeks we’ve been thinking about property strategies and lately, we’ve been looking at flips. Today, we are going to look at the last sub-strategy in this category which is flips to owner occupiers.
If we’re going to flip to owner occupiers, then it’s likely we’ll be looking for a different type of property than we would for a flip to an investor. Why? Because investors by and large are probably going to want to buy something which is cheap and cheerful for renting out. In other words, not properties in the very worst areas, but not those in the very best areas – after all, properties in the very best areas are going to come with a price tag that is likely to be so high that there won’t be a return or yield.
So, let’s clarify what we are looking for. If we were to think about it on a scale of 0 to 10, then an investor is probably going to look for properties at around the 4 or 5 mark. In contrast, an owner occupier is likely to want a better quality or a higher priced property. So, on this same scale, if you’re flipping to owner occupiers then you’ll probably be looking for property at around the 6 or 7 mark. With an owner occupier in mind, you wouldn’t be looking at a property higher up on the scale because those that rank at 9 or 10 (or even 8) are of higher value, and there would only be a limited number of buyers with the capacity to afford this.
With this in mind, if you want to do ‘flipping’ as a business and if you want to be sure that you can sell the property on, then you need to know that the property will be readily saleable. You don’t want to buy a property and spend your money, only to have to hold onto it for any length of time. Speed of sale is important in order to get your funds back out and release your profit.
To be able to do this, you need to understand your target market and have clear in your mind who you are going to flip the property on to. This will help you decide what sort of properties you’re actually looking for in the first place.
If it’s going to be ‘first time’ buyers, then you’ll probably be looking for properties at around the 6 mark on the scale. If you’re going for ‘second time’ or ‘third time’ buyers, then you might be considering properties that hit the 7 mark. By doing this and by having a clear understanding of your market, you can then refine your search on Rightmove and when you visit the estate agents’ offices.
However, one thing which perhaps as beginner investors we don’t often appreciate is that things change – particularly with the economic cycle and the market cycle.
If we assume that the property market runs to a cycle and that things do change, it means that particular types of property which are suitable for owner occupiers at the moment might not be suitable when the market dips. Equally, if the property market accelerates, then it could turn out that an investor could buy a more expensive property because there will be a little more certainty that it will sell more quickly. It all comes down to the availability of finance for the buyers and how easy it is going to be for them to obtain finance for your property when you put it back on the market. This might lead you to a look for a particular type of flip property.
Again, this might be a function of what’s happening in the economy and what’s happening in the property market at the time of looking. You may think to yourself that actually, first time buyers are going to find it quite tough to raise finance at the moment, so you may choose to concentrate on properties which would work for second and third time buyers instead. So, you need to be thinking about all of this as it can help guide you to the areas and the price ranges where you will need to be looking for your properties.
When we’re looking for properties to flip, we need to know that we’re going to make a profit. To recap for a moment, what we should be thinking about is buying at a significant discount or buying a property that’s in a condition whereby we can add enough value. Or, somewhere between the two.
As a rough rule of thumb, we probably want to be thinking about selling the end product on (in other words, the renovated property), at a price which is probably going to give a 20% profit on the cost of the purchase price. This is the approximate percentage that many developers work towards.
Now, is that right for you? This very much depends on a few questions that you need to ask yourself. It depends on how much money you need and how much you can afford to give away. You need to question how quickly you want to sell the property and then consider if this means you have to stick out for a particular asking price. Then, you can ask yourself if it can be more flexible.
But, if you are prepared to reduce your profit, then you need to think about how much profit you are going to make when you do the works and can you add more value. Can you spend the same money but add MORE value? These are all the questions which you’ll need to fully understand. Fortunately, this gets easier as you do more projects.
If you interested in doing flips, then I suggest you just get out there and start doing it. Go and visit the estate agents, get yourself onto Rightmove, do some guerrilla marketing to get you direct to vendor… and opportunities WILL come your way. You just have to get started.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, author and property investor
By the way, I’ve rewritten and updated my best-selling e-book, The Successful Property Investor’s Strategy Workshop, which is an account of how I put together my multi-property portfolio, starting from scratch and with no money of my own, and how you can do the same. For more details please go to: www.ThePropertyTeacher.co.uk/the-successful-property-investors-strategy-workshop