Flip your house without losing
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.
"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.
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.
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.
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.
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
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.
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.
he says, "the money is there for someone who is real savvy about renovating."
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
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."
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
Beef up kitchens and bathrooms
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
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.
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.
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.
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
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.