Buying a private house in poor condition, improving its characteristics through repair using modern energy efficient and sustainable materials and then a profit-making sale is called flipping. This investment strategy is common in the US and Europe. In recent years it has been gaining popularity in our country. An expert on consulting in the field of real estate Shamil Rakhmatulin tells us how the renovation of private houses is arranged, what risks and opportunities it provides.
The global property market is going to grow in the future, the forecasts say. Its value is expected to reach $14.6 billion by the end of 2030. From 2021, market size has grown by 53.7% at CAGR growth of 4.9%. This trend shows great potential, since it is assumed that demand for real estate will grow despite all negative economic and political factors that occur in present.
At the same time, the global financial crisis of 2008 provoked a sharp decline in real estate market caused by mortgage default. As a result, demand for new residential buildings decreased, but quickly recovered and is growing steadily. On the one hand, the rising price of residential buildings allows realtors to maximize their revenues as steady growth makes investments in housing profitable and relatively safe. On the other hand, the number of people, who can afford new housing, is declining steadily every year, which leads to a growing imbalance in the property market. This inequality forces them to look for alternative ways to accommodate, such as the secondary real estate or dormitories.
As a result, there is such a problem as a bubble in the real estate market, because real estate agents believe in great prospects for price growth of residential construction, while demand for new buildings that are expensive, decreases. Facing these trends, there is interest in the acquisition of real estate at reduced prices and repairs for subsequent sale. Today house flipping remains a popular strategy in real estate, especially among experienced investors. Technology development and information availability also made this business more accessible to a wider audience. Some entrepreneurs saw an opportunity to invest in real estate, and then lease it instead of selling it directly. Thus, flipping homes has evolved into a more diverse investment strategy.
Prospects for the development of this area in the Russian Federation
Despite economic difficulties, flipping of private residential buildings and summer cottages will remain attractive for business in the near future, as housing and recreation remain a priority for most citizens regardless of economic and political factors. And there are a few moments that have a positive effect on the development of the market.
- The need for comfortable and modern housing still exists in Russia. With rising income levels and changing customer preferences, demand for quality homes and summer cottages can continue to grow.
- Migration within the country is happening constantly, people are always striving for improvement of their well-being and looking for the best place to live or relax, this process is continuous, and can be used to earn money.
- Improvement of infrastructure, development of transport accessibility and communications in suburban areas could attract more potential buyers. Searching locations with a future large-scale investment project can also play into your hands when selling.
- Many people strive to live in country houses or rest in dachas to relax and move away from the city hustle and bustle. This factor can create stable demand for quality flipping facilities.
- There are public programs and initiatives aimed at development of suburban construction, support for the real estate market and the mortgage sector lending. All this creates additional opportunities for entrepreneurs.
In general, taking into account the stable interest in suburban real estate and potential profit, flipping of private houses and summer cottages in Russia may represent a promising line of business for investors, but requires careful analysis and planning.
How much can you earn now on reconstruction of suburban real estate?
The answer to the question can be complicated, since profits depend on many factors including region, real estate market status and investor skill to control the flipping process. Let’s analyze it by example. Suppose you have a budget of 6 million rubles for the reconstruction of a private residential building or cottages. Possible earnings will depend on several factors, including price of site purchase, repair costs and current market conditions. Usually flippers aim to make a profit of 15% to 30% of value after sales of an object. So, if you buy a house for 4 million rubles. and you expect, that its cost after repair will be 8 million rubles, we can expect potential profit in the range from 1.2 to 2.4 million rubles. depending on market conditions and repair costs.
Path from object selection to sales
Flipping houses includes several stages, each of them has its own importance from a business point of view and can affect the final profit.
Let’s take a closer look at each step.
Selecting an object. It is important here to conduct a thorough market analysis and choose a suitable property. In this case, you should pay attention to the following factors:
- Location. Appreciate the location of the house, proximity to amenities, transport infrastructure, schools and other facilities that can enhance attractiveness of the property to potential buyers if your future buyer is a family and the house is for permanent residence. If your target audience are cottage lovers, then the infrastructure criteria are already not so important; silence, beautiful location and transport are important opportunities here as this target audience looks for a way to relax from the bustle of the city and likes a brazier as a gift.
- The state of the object. Assess the condition of the home and determine if it requires major or cosmetic repairs. The more depressing the state of the house, the more potential to increase cost after repairs. Don’t neglect expert opinion, if you are new to flipping, take for the first examinations someone who understands private housing construction, since at the initial stage there is a great risk of not noticing hidden defects.
- Cost and growth potential. Take into account the cost of purchasing an object and evaluate its potential to increase value after repair and sale. Market analysis of trends and forecasting future real estate demand may help determine the growth potential of its value. Review the available ads in the considered location by similar parameters, but keep in mind that there always remains backlash when pricing, since perfectly typical and similar houses in a private sector do not exist. There will always be a difference in anything, hence the potential for increase in sales value. If you find a house and plan, for example, an extension in the form of a bath or garage, this can affect significantly value gain.
For a benchmark, when finding a suitable object, you can take a scheme common in the United States, for calculating the value of suitable real estate, which is called “rule 70%.” According to it, the maximum purchase price of an object should not exceed 70% of the expected cost after repair, less expenses for repair and other costs. For example, after renovation, the house is estimated at 10 million rubles, and repair and other expenses amount to 3 million rubles. In this case, the purchase of an object for 4 million rubles will be considered profitable, the calculation will look as follows: 10,000,000 x 0.7 – 3,000,000 = 4,000,000.
This approach enables to make a profit of about 30% of the transaction. Considering possible unexpected expenses, you can count on 15-18% of the profit from deals. When conducting several transactions per year, annual profit up to 30-40% can be achieved. It is important to note that these figures and percentages can vary depending on the specific conditions of the property market and region. Therefore, it is important to conduct a detailed market analysis and evaluate the potential risks and returns of each transaction on a case-by-case basis. It takes time to study all the input data, and good objects are sold quickly, perhaps at first you simply will not have time to calculate everything, and you’ll have to take risks. This also needs to be taken into account.
Renovations. At this stage, the goal is to improve the appearance and interior, functionality of the house and, as a result, an increase in its value.
- Contractor selection. You will need to hold a tender and find a gold middle among the incoming proposals, combining promises of construction workers with quality at an acceptable cost of repair work. It’s no secret that construction teams often delay delivery dates or repair altogether with poor quality. Do not pay builders forward, so you will obtain a motivational trump card to solve many problems. It is advisable to make it clear to the contractor, that for you this is a business project, and after its implementation you plan to renew cooperation subject to the terms of the contract on his part, since the speed of sales will depend on the quality of the materials and the performance of the work. High-quality repairs will create a good impression for potential buyers and will help you achieve a higher value when selling. One of the possible options for cooperation with the repair team is fixed a percentage of the profit made, but not everyone will go for it, and such partners may not appear until a while later.
- Budget and planning. Develop a detailed budget for repair work, to avoid financial surprises. Charge up to 20% for unforeseen expenses or use a multiplying factor of 1.2 of the planned amount for repairs. It is also important to draw up a work plan to distribute effectively resources and time. This will allow you to put the right deadlines for the brigade of builders and for yourself, which you will adhere to.
- Target audience. Consider the tastes and preferences of potential buyers when selecting finishes and designs. Try to create a universally attractive interior that will appeal to a wide audience, for example you can see what is now relevant in the finish in top ads about the sale.
- Seasonality. Renovating the house as quickly as the apartment will not work. Here many technological processes depend on the temperature of the outside air and weather. In the cold season, you can do finishing work inside rooms, and leave external improvements until warming.
Sale. At this stage, the main goal is to sell the house with the maximum profit. In achieving this goal you will succeed using:
- Marketing strategy. Focus on the unique features of your property, describe the advantages and features of the house, do high-quality photographs.
- Pricing. Determine price based on market conditions, repair costs and expected profits. Too high a cost can scare off buyers, and too low one can lead to lost profits. I recommend to choose the most acceptable cost in your opinion and further adjust price based on incoming demand. Market always corrects illiquid supply by demand.
- Selling at the right time. Consider seasonal factors and market trends to determine the most favorable moment to sell.
Explore the market and forecasts to understand when property demand will be highest. For example, summer cottages begin to grow in demand in the spring and end in late autumn, and houses for permanent residence are in demand year-round.
When planning and calculating, I recommend taking into account the division of investments into projects of different price segments and purposes, where demand differs significantly, so in a year you can process three or four inexpensive cottages and, for example, one residential building, which will reduce the dependence on seasonality and economic uncertainties. After a couple of years and gaining experience an investor can process these projects in parallel, but it is necessary to take into account the specifics of regional features.
Overall, to get the most out of house flipping, it is necessary to analyze and select objects carefully, conduct high-quality renovations taking into account the tastes of potential buyers, as well as effectively conduct marketing activities and sell the house according to the correct price and at the right time.
Top-3 beginner errors that could lead to financial losses
1.Insufficient real estate market research and analysis. One of the main errors. It includes an incorrect estimate of the cost of the object, underestimation of repair costs and unaccounted risks. Lack of knowledge of market trends and buyers’ demands can lead to erroneous investments and loss of money.
Recommendation: Take a close look at the market and current prices for real estate in the region, analyze supply and demand. Also consider repair costs, legal and commission costs to get more than an accurate picture of potential profits.
2. Incorrect planning and budget management. Beginning flippers may underestimate repair costs or fail to allocate the budget that can lead to financial problems and inability to make a profit from the deal.
Recommendation: Calculate carefully your budget for repairs and be realistic when estimating costs. Leave a small financial cushion on unforeseen expenses or changes to plans. It is also important to be able to monitor and track costs during the repair process to avoid unexpected budget overruns.
3. Little experience and skill in repair work. Poorly executed repairs can lead to poor quality of work, delays and additional costs.
Recommendation: If you do not have sufficient experience in repair work, contact professionals. Hire qualified contractors and workers to perform work efficiently and on time. This may help avoid problems associated with poor-quality repairs and delays in selling an object.
In conclusion, it is important to note that the real estate market is exposed to fluctuations, and high business results may depend on accurate market analysis, investor skills and experience, and proper planning and control of repair and sale costs. You will develop these skills throughout all your experience. Allow enough time for research and planning, learn from your mistakes and attract professional support if necessary. This will help minimize risks and increase chances of success in the real estate flipping business.