Have you ever considered buying a property, renovating it and selling it for a profit? This type of real estate investing is commonly known as "fix and flip." The concept is relatively straightforward ─ purchase a property below its potential market value, make strategic improvements and sell it for more than your total investment.
Choosing the right property
As we often say in real estate, the three most important considerations are location, location, location! Start by identifying Calgary neighbourhoods where buyers are actively looking and properties have good resale potential.
Look at recent comparable sales rather than relying solely on asking prices. Consider neighbourhood amenities, schools, shopping, parks, public transportation and future development.
When evaluating a fixer-upper, look beyond cosmetic issues. A property that needs fresh paint, new flooring or updated kitchen cabinets may offer an excellent opportunity. However, major structural problems, foundation concerns, roof damage or outdated electrical and plumbing systems can quickly turn an attractive investment into an expensive project.
How much money you’ll need
Your purchase price is only the beginning. Before making an offer, calculate the complete cost of the project, including:
- the down payment and mortgage financing costs
- legal fees, inspections and closing costs
- renovation materials and contractor expenses
- building permits and required inspections
- property taxes, utilities and insurance
- mortgage interest and other carrying costs
- real estate commissions, legal fees and selling expenses
If you're borrowing money, remember that interest continues accumulating while renovations are underway and the property remains unsold.
It's also wise to maintain a contingency fund of at least 10% to 15% of your renovation budget. Unexpected repairs and construction delays are common, particularly with older homes.
Renovations that offer the best return
Not every improvement will increase your resale value by the amount you spend. Your goal should be to make the property appealing to the largest possible group of buyers without over-improving it for the neighbourhood.
Kitchens and bathrooms often deserve attention because buyers notice their condition. Other worthwhile improvements include fresh neutral paint, updated lighting, attractive flooring, modern hardware and improved landscaping.
Don't overlook curb appeal. A tidy yard, clean exterior, welcoming entrance and well-maintained driveway can make a strong first impression.
Permits and contractors
Before starting renovations, check the City of Calgary's permit requirements. Depending on the work, building, electrical, plumbing and mechanical permits may be necessary.
For any work you’re not doing yourself, use qualified, insured contractors and obtain written estimates. Make sure responsibilities, timelines, payment schedules and warranties are clearly documented.
Remember that certain homeowner permit options are restricted to people who live in or intend to occupy the property. If you're flipping an investment property, contractors generally need to obtain the applicable trade permits.
Profit expectations
You may have heard of the 70% rule. This investment guideline suggests that your purchase price plus renovation costs should generally not exceed 70% of the property's expected after-repair value, less estimated repair costs.
However, this is only a rough screening tool, not a guarantee of profitability. Calgary's market conditions, financing expenses, selling costs and unexpected repairs all affect your actual return.
Prepare a detailed budget and calculate your expected net profit before purchasing. Be conservative with your resale estimate and don't assume the market will rise while you're renovating.
Don’t forget about taxes
In Canada, property flipping has important tax implications. Under the federal residential property flipping rules, selling a residential property owned for less than 365 consecutive days generally results in the profit being treated as fully taxable business income, subject to certain exceptions.
Even if you hold a property longer than 365 days, the Canada Revenue Agency (CRA) may still consider the profit business income depending on your original intention and circumstances. GST/HST obligations may also arise when selling substantially renovated housing.
Speak with an accountant before starting your project so you understand your tax responsibilities.
In closing
If you're considering a fixer-upper, I'd be happy to help you evaluate its location, resale potential and comparable properties. A little preparation before you buy can make a big difference to your bottom line!
