Flipping vs. Renting
Q. We have purchased a home in the Edmonton area for 265,000.00. We are putting approx. 40,000 of renovations into it. We hope to put in on the market in June for a sale price of 335,000. It has no basement (a 3 foot crawl space) a big two care garage). It is approx 1100 square feet.
I was wondering about the merits of selling vs. renting. We
might be able to sell without a realtor. We have formed a numbered
company and therefore the sale proceeds if we sell would go into the
company and therefore avoid the significant capital gains tax.
We could probably get around 1300.00 a month rent.
Your thoughts would be appreciated.
Subscriber from Edmonton, Alberta
A. Here are some things to keep in mind when flipping properties:
- Renovation costs can easily get out of control. Create a budget and stick to it
- Renovations should focus on the wants and needs of your target buyer. An elderly couple will be looking for different things than a first time home buyer
- Include the costs of holding onto a property while waiting for it to sell. For example, you still have to pay for electricity, heating/cooling, water, and insurance.
- Insurance premiums on vacant properties are extremely high (easily many thousands of dollars annually). Be sure you carry adequate coverage and that your insurance company knows it is vacant. Otherwise, if something happens, they may deny your claim.
- Include selling costs such as realtor fees, staging costs (if you want the place to look great), and of course legal costs, adjustments and disbursements
Here are some things to remember when renting properties:
- Renovations should match the expectations of your target renter
- Check local newspapers and call landlords to determine market rents. Go visit their properties to see if they are renting something comparable to yours
- In hot markets (like Edmonton), it can be hard to rent a property with positive cash flow without putting a large down payment
- The more expenses you pay each month, the less money you make. Try to get the tenant to pay for everything possible.
Here are some comments with respect to your particular property:
- You bought it at 91% of (after renovations) market value -- (Purchase price + Renovations costs) / Sale price = ($265,000 + $40,000) / $335,000 = 91%
- After renovations, you will have approximately 9% equity in the property
- Realtor fees can easily be 4%-6%
- Legal fees can easily be 2%-2.5%
- Estimated profit = 0.5% - 3% ($1675 - $10,050), assuming renovations are within budget and zero holding costs (highly unlikely)
Based on the above quick analysis, my recommendation would be to rent it out and wait for the market to appreciate. Edmonton is a really hot market right now and may soon catch up to Calgary's recent appreciation rates.
The only problem with this option is that you will likely not have a positive cash flow. You may have to pay the negative cash flow while you are
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Paul Blacquiere and Joanne Beehler are full time real estate investors and have been investing in Ottawa, Ontario, Canada since 2002. They are owners of Spirepoint Properties, a Canadian real estate investing company dedicated to making real estate investing easy.
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