Flipping Property Finance: Where Your Sale Dollars Go

This is exactly what this article tries to do. It considers an example of an Australian property flip with a settlement-day granular financial analysis, all the while taking each deduction in turn. It then revisits the example with a later sale and less profit. The references used are Property Now (agent commission), Peakifi (settlement and discharge), Savings.com.au, Canstar, Home Loan Experts, and the Australian Taxation Office (ATO). Several of these references are for-profit businesses, and this has been noted if relevant. All financials are presented as being hypothetical. The information is of a general nature and should not be regarded as financial or tax advice.

Flipping Property Starts With the Inputs You Can Check

Each figure is for one property flip. These are assumptions. The cost lines are for the published examples as shown.

The person is putting in $81,000 for the building and renovation (including $697,000 less $616,000 loan). Comprising stamp duty, establishment fee and seven months of holding costs; cash investment is $122,440. This is the amount to be recouped in the financial settlement-day result.

The Settlement-Day Waterfall for Flipping Property

According to Peakifi, the settlement is completed through PEXA. The mortgage discharge, transfer of title and payment of funds are carried out as part of a single integrated process. Peakifi refers to the order in which funds are deducted as its calculation sequence rather than its payment order so the table below is arithmetic.

What about the sources of these inputs? Property Now mentions that the median agent commission in New South Wales and Victoria is about 2.35% and many agents quote that price plus GST. Peakifi uses $6,000 for marketing, $1,800 for conveyancing, and an $800 rates credit in its example. The discharge fee from non-bank lenders (ranged $300-$600) has been scaled for the middle value. Property Now has a fixed fee private sale service, so this needs to be taken into account when comparing.

The cash at settlement is not what you make as profit, but the amount that your guest has available to pay themselves first.

Flipping Finance Takes Its Share of Flipping Property Profit Three Times

Review the lines that relate to the lender. The establishment fee is part of the cash investment of $9,240. The capitalized interest is $32,340 at step 5. The discharge fee is $450 at step 6. Total capitalized at $42,030.

Once that sum was replaced, the property flip resulted in a profit of $119,452 pre-finance costs. Therefore, flip finance drained 35.2% of the pre-finance profit. A 9% interest rate on 70% LTV loan chomped through over one third of the margin.

Flipping finance took 35.2% of the pre-finance profit on plan.

Peakifi term this payout amount as the Principal, Interest up to settlement, any break costs & Discharge fee. The Conveyancer asks the lender for this amount & Peakifi recommends allowing 10 - 15 Business Days' notice. Peakifi points out late notice is a major cause of delays.

Which Value Does the Lender Use?

Here the two sources appear to be in disagreement, which also impacts on the size of the loan. Savings.com.au states that investment loan applications are based on the value of the property now, rather than the value of the property after renovation. Home Loan Experts says the borrowing power is based on the 'on completion value' that is generally less than the eventual sale price. Both sources are commercial services. It would be best to speak to your lender before choosing a loan size.

Re-Run the Flipping Property Waterfall When the Sale Slips

The first run assumed a seven-month exit at the full price. Now stress it. The late case adds two months. The soft case cuts the sale price by 4%. Both cuts are illustrative.

Two months delay adds $12,240 to the interest and holding costs. Price is reduced by 4%, which leads to a cost of $34,290 after the reduction in commission. In total, these 2 costs compromise 60% of the net profit; the finance department then takes 62.4% of the rest of the flip.

Imagine that the conveyancer rings the renovator in week 6 and the purchaser asks for two weeks to settle. Every extra week is costed out at $1,063 in interest (on the loan) and $345 in holding costs. Not surprisingly, this is a decision that has a tangible cost as is shown in the table below.

Flipping Property After the Waterfall: The Tax Set-Aside

Pre-tax profit is not take home pay. The Australian Taxation Office (ATO) classifies renovators as one of the three classifications: an owner of personal property, somebody who carries out an activity to make money (such as flipping) or a renovator business. Flipping individuals declare their net profit or loss in their income tax return. For renovator companies, real estate is classified as trading stock and CGT is not applied to trading stock.

Different financial websites define flip profits as capital gains, which may be discounted by 50% after 12 months. However, as defined by the ATO, the deviation arises when the activity is repeated. The ATO page I referred to was last updated in July 2020 and doesn't mention if interest costs can be deducted. Seek advice from an accountant and keep records of the intended use.

A sample 30% set-aside applied to the profit of $77,422 would be $23,227, which would leave a remaining amount of around $54,195. The marginal rate will depend on each individual.

What Your Conveyancer Needs From Flipping Property Lenders

Peakifi say that funds will usually be available in the account within 1-2 hours of settlement, although it may take longer if settlement is later in the day. Check with the conveyancer. For fixed loans, check in before choosing a date that the bank will charge break costs. Peakifi say these costs may be as low as a few dollars or tens of thousands of dollars.

Before putting the property on the market, three questions need to be asked of the lender: a payout estimate, the discharge fee and early repayment costs. As can be seen from the Canstar and Home Loan Experts pages, the cost of carrying the property longer than expected is not insignificant. The waterfall analysis makes it clear how much.

How FlipSync IQ Supports Flipping Property and Flipping Finance

An effective waterfall analysis depends on up-to-date inputs. Flip Sync IQ deal analyzer performs an ARV simulation with step-up maximum purchase prices and instantly works backward to arrive at the ceiling. Margin Protection still works: As you increase the maximum purchase price, the higher payment holds down the ceiling before the deal is signed.

Holding cost is calculated by calendar, providing the "late case" above into a concrete amount that appears as the events are audited. Budget vs. actual variance appears in red and green and receipts, invoices and staged payments are tracked against each line item. The ROI dashboard allows for a look at projected vs. realized returns. If the borrower or investor chooses, the Investor Package Report provides similar sales information, CMA data, entries for placeholder before and after photographs, and the projected split of equity and ROI. Role-based permissions allow accountants/financial partners view-only access to the financial modules.

We make flipping finance transparent – all in one place, the plan, the reality and the pay-out.

Flipping Property: Read Your Flipping Finance Backwards

In property flipping the first monies to be paid go to the lender and the last to the renovator. In our example, flippers finance made up 35.2% of pre finance profit at the planned point and 62.4% of pre finance profit when the sale suffered a delay and a price reduction. You can be wise to start your next transaction at the bottom of the waterfall and work to the offer.

It's best to build out the waterfall analysis prior to the bid being placed. Ask questions to the lender regarding the valuation, payout fee, and payout estimate. Consider modeling a scenario with a delayed timeline and a lower price. Flip finance documentation should be kept alongside renovation documentation to provide visibility to accountants. Get a Flip Sync IQ free trial to test flipping finance on a live shortlist.