Buy-to-flip? Know the pitfalls of property flipping
With all the signs pointing to the likelihood of a downturn in the economy in the not-too-distant future, for those with savings to spare or access to a mortgage, this might seem like an attractive moment to invest in the property market. But when it comes to buy-to-flip investing in a shrinking economy, it can genuinely be a case of buyer beware.
What is buy-to-flip?
Buy-to-flip property investment is purchasing property at a low price to re-sell it at a profit. The usual strategy is to snap up a run-down abode in a thriving area, renovate it quickly and then put it back in the estate agent’s window with a marked-up price tag.
If you knew what you were doing, there was undoubtedly some money made through this approach, particularly during the early 2000s. But the inherent risks became starkly apparent when the market took a sudden nosedive for property flippers during the financial crash of 2007-2008, leaving many in severe economic peril.
The rise and fall of property flipping
One and a half decades later, Ireland is still facing the fallout from seeing its property bubble spectacularly burst. Property investors were so confident in making money from the housing boom that speculative building projects were popping up all around the country, and house prices were rising at an unprecedented rate. When the collapse came, abandoned, half-built developments littered the nation, and prices sank further and further – in Dublin, they endured an incredible 56% freefall from their one-time peak. By the end of 2012, more than a quarter of Irish mortgages were in arrears.
While the property market in Ireland has slowly recovered, it’s still far from the giddy heights of yesteryear. For cash-rich investors, that might have seemed like the perfect opportunity to make a killer return. Still, the recent, unexpected, and profound changes that have affected everyone’s lives prove that buy-to-flip is always a risk, and if you don’t have the financial clout to fail, the repercussions can be severe.
A gloomy, unpredictable economic forecast
As of today, even the most experienced analyst can’t predict the housing market's short- to medium-term future. There are many unknowns: what will happen to employment rates and average incomes? When will fuel prices return to normal to stabilise the economy?
Put your money to good use.
So, should anyone with savings to invest stay away from property investment right now? Not at all. There are still good, consistent returns to be made in the sector, but it’s more certain to make your returns from buy to let rather than buy to flip.
Even in an expanding economy, buy-to-let has always had many advantages, particularly for new investors. When considering flipping for a quick profit, it’s easy to lose sight of how much time and money it takes to improve a property to boost its value. The longer it takes, the more money ‘leaks’ out through capital costs and ongoing expenses such as utility bills, insurance, mortgage, and so on. Before you know it, a lot of the profit can have evaporated.
But one result of the previous decades of boom and bust is that Ireland now has an intense housing shortage. People up and down the country need residential properties to live in, which demands private rental accommodation. Consequently, despite declining prices, the rental market remains incredibly buoyant.
Buy-to-let, therefore, presents a strong option for regular, long-term returns at lower risk. For investors looking for somewhere substantially more rewarding than a bank for their savings, buying property to rent is a far better way to weather this next storm – however long it takes to pass.