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Flip your house without losing your shirt

Bolstered by the many home renovation shows that dot the TV landscape, the recent housing boom has spawned a lot of interest in making money, by renovating a fixer-upper and selling it at a higher price.

It seems like a no-brainer, but is flipping a house a sure-fire path to riches? "It's not that easy to do," says Joe Devison, a mortgage expert with Centum Mortgage House Ltd. in Halifax.

"You have to be careful," he says, noting that trading in real estate is not for everyone. Flipping a house requires a lot of leg work and a lot of capital. Read on to see if it's the right path for you.

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Financing a challenge
Mortgage rules for buying second and third properties are different from those for buying your first home, and the amount you can borrow for an investment property is also limited in comparison.

According to tax laws, the interest on money borrowed for business purposes is tax deductible. So, theoretically, someone investing in real estate should put as little of his own money as possible into an investment property and use borrowed funds.

However, that means getting a high-ratio mortgage, which must be insured. Devison says the Canada Mortgage and Housing Corporation (CMHC) requires that borrowers looking to invest in real estate have a net worth of at least $100,000. And the most the CMHC will lend is 85 percent of the property's worth.

So, for a $300,000 property, you still need $45,000 in capital. If you want to avoid the expensive high-ratio mortgage, you'd need $75,000. And that's before you start spending on renovations.

Whether you can afford to flip comes down to cash flow -- do you have enough to service the debt while you renovate? You have to be able to carry the mortgage until you're in a position to sell the home, which will likely take at least a few months, at the same time as all your usual debts.

Commissions and taxes
Taxes and real estate commissions will also eat into your profits. If you sell a home that is not your principal residence, all profits are subject to capital gains tax, so expect to pay tax on half of whatever you make.

If you flip your own home and you live in it for more than a year, it might qualify as your principal home and thus be exempt from capital gains taxes. However, you should consult a professional because if you are flipping, the Canada Revenue Agency (CRA) might consider that your occupation and tax you differently on the money you make, when selling the property.

Devison says he has clients who buy houses and flip them, but they're usually builders. "For the person off the street, it's very difficult." He says you're better off buying the property and occupying it while you renovate; and then selling it after a year or more. "Do it two to three times to get to know the ropes."

That will also allow you to build up a network of trades people, whom you will likely have to call on to help with the renovations.

The three key renovations to make
Charles Bilash, a real estate agent with Century 21 In Town Real Estate, in Vancouver, says it can be challenging to find a reasonably priced fixer-upper in today's hot market.

However, he says, "the money is there for someone who is real savvy about renovating."

He says there are three basic renovations that will noticeably increase the price of a home. "Kitchens, bathrooms and flooring are the biggest return for your money."

While everyone loves hardwood in hallways and living rooms, it's not necessarily the best choice, says Bilash. "It's such a competitive market for flooring right now. There are all types of great laminate products out there that wear a lot better than real hardwood floors."

For kitchens, ceramic tiles are popular, but be careful not to use colours or patterns that "make the place look choppy." For bedrooms, fresh carpeting is a must.

Beef up kitchens and bathrooms
People want contemporary fixtures, says Bilash. "Large, walk-in showers seem to be a nice feature now." Massage showerheads are also attractive, as are glass enclosures around the bathtub. As well, Jacuzzi tubs are the order of the day, and chrome taps are a must.

Fresh tiles are key to improving a kitchen's aesthetic appeal, says Bilash. While new cabinets are nice, he says you can cut costs by replacing the cabinet doors and installing new facing materials and doorknobs. You should also replace the countertop, and new appliances are highly recommended.

Bilash says you should also spend money on curb appeal. That means a new coat of paint and possibly new windows and doors. Landscaping can also give a house a fresh look.

Renovations that don't pay
He says there may be certain infrastructure renovations you can't avoid, but don't result in a big pay back upon resale.

Leaky basements, for example, usually require that you replace the drain tiles, which can cost $30,000 or more. "If you spend that money, it's hard to see it come back," says Bilash, because it's hidden and not a cosmetic change. As such, you might only get half the value of the investment on resale.

So, make sure you hire a home inspector to take a good look through any house you intend to flip, before you buy, to make sure the only changes it needs are cosmetic ones.

However, Bilash says any addition to a fixer-upper should pay off in some fashion. "Almost everything at this point in time gets something back the way the market is right now," he says.

Be realistic
Keep in mind that while the gains in housing prices in the past decade have been healthy, they are an anomaly, since prices normally rise in the two-to-three percent range annually, not nine percent, as is expected this year. So, don't be fooled into thinking that the real estate market is where you should focus all your investment dollars.

Although a recent study by the Canadian Imperial Bank of Commerce (CIBC) study shows that Canadians think real estate is a better investment than the stock market, the fact is if you put $100,000 into a basket of stocks reflecting the TSX index, it will probably earn a far greater return than real estate will provide, in the top urban markets, for a lot less effort.

Jim Middlemiss is a freelance writer and lawyer based in Toronto. He's a frequent contributor to the National Post, Investment Executive and Wall Street & Technology.

 
-- Posted: Aug. 29, 2005
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