For the uninitiated, flipping involves buying a property, refurbishing it, and selling it for a profit. If you've seen a 2021 report by Hamptons, which reported that the average flip sold during the pandemic produced a profit of £48,000, you may be interested in trying it – just don't do it this year.
Times change
Hampton's £48,000 profit figure was calculated based on a period when we were gripped by a global pandemic, and the market was stoked by a stamp duty holiday. House prices rose at a rate of close to 10% per annum. That made flipping fun. Purchasing a property for £250k and sitting on it for 12 months saw that property go up by £25,000. That's half of Hampton's reported £48,000 profit average. Let's say the remaining £23k came from adding value.
This year the housing market looks like being a different beast, with most experts are predicting that house prices will fall in 2023. Estimates vary considerably, but the general feeling is that we could see an adjustment of 5-12%, with house prices not increasing again until later in 2024.
Imagine the £48k profit 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 their £250k doer-upper decreases in value by 10%, that's a £25k deficit. Adding £23k's worth of value (as they did in the previous example) results in a net loss of £2k.
Ouch!
Flipping alternative
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 when it comes to profitability.
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 works 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.
Different strokes
A small-scale development should net you between £100k and £500k profit, whereas a flip, as we've seen, could mean no profit in 2023. Workload is another key difference; with a bigger budget, small-scale developers can afford to hire a professional project manager to oversee all the construction work. A small-scale developer doesn't even need to pick the paint never mind apply it.
Investment is another significant difference. Flippers can be dipping into savings for a 25% deposit and the cost of the refurbishment, but 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 required funding themselves.
To sum up the difference between flipping and small-scale property development – the latter provides more profit for less cash invested and less work.
By Ritchie Clapson CEng MIStructE, co-founder of property CEO
ABOUT THE AUTHOR
Ritchie Clapson CEng MIStructE is an established developer, author, industry commentator, and co-founder of leading property development training company propertyCEO. To discover how you can get into property development, visit www.propertyceo.co.uk
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