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Ask a property investor – How do I flip a property?

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Q

Hi there, I would like to know if this is a good idea. I currently have a bond which is half paid, and I would like to buy a property at auction using money from my bond by releasing money from my bond. Thereafter, once I buy from my first property auction and refurbish it and sell it I would like to keep buying and selling. Does this sound like a good idea or is it a long shot? – Kaylene

A

Hi Kaylene, there certainly is risk associated with any investment, and this remains true for property investments and, in particular, speculating in capital flips (buying and selling for profit). There are several considerations that need to be made when looking at the funding mechanism that you would utilise in order to fund a capital flip.

The cost of the finance being utilised for the deal must be understood. Often, new property speculators forget to account not only for the cost of the finance being utilised but also to consider the cash flow (monthly payments) required to service the repayments of the finance during the refurbishment and sale timeframe. You need to consider the cost of the finance as well as the terms of repayment compared to other available finance sources.

How to flip

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Know this BEFORE you buy from a flipper. Click the pic

In the illustration below I use an example of a straightforward capital flip. The use of finance from an existing access bond at the agreed interest rate of the existing facility is utilised in the example to cover the purchase price of the unit. Other costs are covered by existing funds available.

Purchase Price R500,000 from Access Bond at 9.5% (Prime less 1%)
Transfer Costs R12,315
Transfer Duty R0 (Purchase below R750,000)
Total Acquisition Costs (2)                                           R512,315
Renovation Costs R20,000
Finance Payments @ 10.5% Interest Rate for 4 months R18,642
Rates and Levies (Assumed at R250 plus R850 per month) R4,400
Renovation & Carrying Costs (3)                               R43,042
Selling Price R650,000
Agent Commission @ 5.5% Plus VAT (R40,755)
Net Sale Proceeds (1)                                                    R609,145
Profit Calculation
Net Sale Proceeds (1) R609,145
LESS Total Acquisition Costs (2) R512,315
LESS Renovation & Carrying Costs (3) R43,042
PLUS Bond Capital Paid down over period R1,705
PROFIT                                                                                                 R55,493

In the example above, assuming only the purchase price is financed by utilising an access bond and the property is sold within 4 months of taking transfer, the profit would be R55,493, with a return on investment over 4 months being R55,493/R55,357 (Transfer Cost + Renovation & Carrying Costs) = 100.2%, and when annualised gives a ROI of 300.6%.

When the sale takes longer

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This is what every extra week on the market costs you. Click the pic

If we take the illustration, and extend the turnaround time to 8 months, only the carrying costs would increase. The calculation would be as follows:

Purchase Price R500,000 from Access Bond at 9.5% (Prime less 1%)
Transfer Costs R12,315
Transfer Duty R0 (purchase below R750,000)
Total Acquisition Costs (2)                               R512,315
Renovation Costs R20,000
Finance Payments @ 10.5% Interest Rate for 8 months R37,285
Rates and Levies (Assumed at R 250 plus R 850 per month) R8,800
Renovation & Carrying Costs (3)                               R66,085
Selling Price R650,000
Agent Commission @ 5.5% Plus VAT (R40,755)
Net Sale Proceeds (1)                                                    R609,145
Profit Calculation
Net Sale Proceeds (1) R609,145
LESS Total Acquisition Costs (2) R512,315
LESS Renovation & Carrying Costs (3) R66,085
PLUS Bond Capital Paid down over period R1,705
PROFIT                                                                                                 R32,450

This would therefore provide a return on investment of R32,450/R78,400 (Transfer Cost + Renovation & Carrying Costs) = 41.4% over 8 months, which when annualised gives a ROI of 62.1%.

It is therefore vitally important to be conscious of the ongoing holding costs of any capital flip, as these could reduce your returns substantially. The source of financing, be it from a traditional bond, access facility, angel investor or other source, it is rather important to consider the cost of the finance and the ability to service the ongoing finance repayments.

Carrying out due diligence is essential; ensuring that calculations kept conservative on potential returns and having a clear alternative plan in place to fund the finance and any monthly shortfall on the property, should the property not sell as expected. This reduces the risk in the speculative deal by making the decision from an informed and risk-aware position, which is essential when utilising sources of finance that create additional personal liabilities.


Got a question about property investing? Email david@hometimes.co.za


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Who is Grant Smee?

Grant Smee, MD and franchisor at Only Realty

Grant Smee, MD and franchisor at Only Realty

Grant Smee, MD and franchisor at Only Realty, has been operating as a property investor since 2005. He has a solid financial foundation gained through tertiary studies in finance and accounting, and experience gained in large international financial institutions. Extensive property investment and rental knowledge has been gained through personal property investments and property business ventures since 2005 in both South Africa and the UK. Smee’s specialties include property investment and rentals in the residential housing market.


Disclaimer: The information above is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort offered or endorsed by HomeTimes and Only Realty. Any expression of opinion is personal to the author and the author makes no guarantee of any sort regarding accuracy or completeness of any information or analysis supplied.

david.steynberg@gmail.com

David A Steynberg, managing editor and director of HomeTimes, has more than 10 years of experience as both a journalist and editor, having headed up Business Day’s HomeFront supplement, SAPOA’s range of four printed titles, digimags Asset in Africa and the South African Planning Institute’s official title, Planning Africa, as well as B2B titles, Building Africa and Water, Sewage & Effluent magazines. He began his career at Farmer’s Weekly magazine before moving on to People Magazine where he was awarded two Excellence Awards for Best Real Life feature as well as Writer of the Year runner-up. He is also a past fellow of the International Women’s Media Foundation.

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