ITS OFFICIAL- Flipping Property For Profit Is Back!
According to Countrywide, the estate agency, the number of speculators flipping property has reached it’s highest level in a decade.
I wanted to investigate this a bit further so I got hold of the land registry price paid data for the UK since 1995. I then isolated all the transactions for my County (Leicestershire) and discovered some interesting trends.
Before I go into the analysis, you may be thinking…
Because it’s really important to know the total picture since the average investor will always make the average amount of profit. When the average is high, it is easier to turn a profit, and when it is not, it is harder. When the average is low, we need to be more wary (the same thinking apples to gambling which obviously always results in a negative average outcome for players yet lots of people still play and lose their money because they don’t understand the odds – don’t fall for the same mistake in property).
During the 2008 crisis, some mortgage lenders got burnt lending on investment properties. A number of changes came about which are still in place today, for example lenders generally will not lend on properties bought and sold within 6 months. Developers must declare all incentives given to buyers, finders fees paid and the existence of any parties in between buyer and seller such as investment companies.
A 3% stamp duty surcharge is also in place for those who own >1 property, which many flippers and landlords will fall into. Mortgage lending is more strict now too.
So with all of that in place, you would think flipping would have largely gone away, right?
Take a look at this chart which shows a resurgence in property trading, close to the levels last seen in 2007:
Much of the property trading is occurring because properties are relatively expensive compared to yields and prices are still going up in some areas, so it makes more sense to extract the value than to hold. Low interest rates also are a factor – why sit on savings in the bank when they can be put to work in a relatively low risk leveraged property trade?
Lending is plentiful and short term commercial lenders are able to charge high fees due to high demand (the shares of Shawbrook have more than doubled in the last 12 months). These and other factors mean trading will continue as long as the market remains buoyant.
As mentioned before, some of the restrictions on lending today are due to new build flippers in the previous boom. Here we can see that new builds represented almost 30% of all properties flipped at the previous peak:
Nowadays, new builds represent only a small portion of flipped properties, perhaps due to the much restricted lending environment so that is not so much of a worry this time around.
Let’s now turn to profit per flip. It’s a crude calculation based on the difference between price paid, and price sold and does not include the cost of refurbishment. Those costs would even out over lots of transactions, so we get a decent, but not perfect picture as presented below:
This is really interesting because we can see that the best profit margins are made just before property prices take off (late 90’s to 2002 and 2012-2013). Margins also tend to drop when property prices increase, perhaps due to the entry of unsophisticated investors, making sensible purchases harder. Everyone has to accept thinner margins if they want to continue doing deals.
We are now in negative (average) margin territory, so if you are thinking of flipping, be sure to get a really good deal. I do not think property flippers will cause a crash or anything like it, but I do think it is a mistake doing a deal today where there is an expectation that prices will keep going up.
As always, drop me a line about this post with any thoughts or drop by and see us at our office in Leicester. It’s always nice to share ideas and talk about investing.