Flip property in South Africa
Buy to sell – or better known as the ‘buy to flip‘ strategy is one of the few property strategies to generate capital gains in a very short time. This is in contrast with buy to let where the property will generate a recurring income.
As the name suggests, the concept is quite simple: you buy a property and sell it at a profit. Though easy to understand, it’s exceedingly difficult to master this strategy.
Why choose this strategy?
As a short term strategy, you need to make sure that you will make a profit:
Profit = Sale price – Purchase price – Costs
The art in this equation is to know if the purchase price is below market value and how to keep your costs in check.
For calculating the profitability of a flipping deal, it is worth using the ROI calculation
Return on investment (ROI)
The ROI calculation is determined as follows:
Profit / Cash invested = ROI
As example, If I invested R 360 000 in a property and sold it for R 420 000, I would’ve made a profit of R 60 000. The calculation would look like this:
R 60 000 / R360,000 = 0.16
As a percentage, this would translate to a 16 % return. In general, a 20% ROI is a good number to work with – note that this is only a guideline!
Buy to flip options
Buy to flip have has different permutations. From a simple flip to a more complex strategy like fix and flip or rent.
Buy and flip
The most simplest form of this strategy is buying and selling it immediately – no fuss, no issues and no red tape.
In many of the costly property courses you will find people promoting this with a simple trick: make sure the transfer and bond attorney is the same person/company – and appointed by you. You will sign the OTP, and will sell it to another person for a greater price. In this scenario, the inital OTP will not be signed by you.
Buy, fix and flip
In some scenarios a property will be at a discount because the owner or tenant ruined the property.
Whatever the circumstances of the seller, he does not want to fix the property up but sell it immediately. It is worth pointing out to the seller/agent everything that is wrong so you will be able to get a better purchase price.
For fixer-upper properties, it’s recommended to get quotes to determine the exact cost (with timelines) of when the property will be ready to sell. These factors will determine the profitability of the deal and can turn a sweet deal into a nightmare from hell.
Buy and sell rental property
It sometimes happens that the purchaser fixes up a property specifically to sell it as an investment.
This makes it attractive to investors, as the property has been renovated and the tenant is already in place.
Doing this will also make your cashflow look great while you wait to sell the property.
Knowledge is key
It becomes clear that you will need to have exceptional knowledge about the area’s property costs as well a team of property specialists to help you on this endeavour. Make sure you have a great team to back you up and confirm with you if this is going to be a good team or not.
Make sure that you have done all calculations concerning the cost and profitability on the deal. Rental property might be forgiving, but short term buy and sell is not!
Tax on buy to sell properties
The South African Revenue Service love people that invest for the long run. Investing in property is not different: if you buy to let, you will be liable for capital gains tax when you sell (more info here!).
In the case that you flip properties, the following options will apply:
- If you flip properties in your own name, you will be liable to pay income tax at your normal tax bracket at the end of the financial year
- If you flip properties in a company, you will be liable to pay company tax on all profits at the end of the financial year. This is currently 28%. If you want to get the money out of the company and into your pocket as income, you will be liable for income tax.
Flipping properties can be exceptionally profitable if executed as a well-calculated risk.
It’s worth investing in a good network of developers, attorneys and handymen to assist in your endeavours to make it worthwhile.
Don’t be too hasty to flip deals if you don’t know what you’re doing.