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House Flipping

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House Flipping

Earlier I wrote this piece about the 4% rule. I received feedback on it, namely the following: ‘If you are alone and want to be able to live on an average salary of about 25,000 euros per year, you have to adjust for inflation of 2% and an estimated return of 4% and 0.1 % for the broker already make 6.1%. That means that you have to get around a capital of 410.000 euros. And even if you manage to set aside 2000 per month, it will take you 205 months or 17 years. Although there is a snowball effect in it which makes it faster in practice, it does indicate that the horizon is too long to comprehend. “Really super extensive and calculated feedback! Thank you!

And I totally agree with this! Saving to retire is not cool, fast, easy or fun at all. It takes a long time and with a normal salary (which I assume in this blog) it takes a very long time. You have to be very frugal for it and you will regularly wonder what you are doing it for.

You can abandon the idea all together, but you can also ask yourself whether it can be done faster or differently. One way to become financially free faster could be to earn more and invest that extra income as well. Another way is to see if your living expenses can be reduced. Most people think about this, the ideas are open doors. Another way, by no means an easy way, is flipping houses.

Graham Stephan talks about it, Robert Kiyosaki (author of Rich dad, poor dad) wrote about it and Peter a.k.a. Mr. Money Mustache loves it. Real estate. Why? Real estate can yield a lot very quickly. In this blog I specifically zoom in on house flipping.

What is house flipping?

House flipping is buying a house, fixing it and then selling it for a profit. This can be a very lucrative activity if you are a handy carpenter.

In the fall of 2020 there was a house for sale that I was interested in. It was a fixer-upper. A number of things had already been done, such as a new kitchen and the living room / kitchen had a new floor, new ceiling and freshly plastered walls. The rest of the house was, well, let’s say, habitable. Water, gas and electricity worked and the house was not yet about to collapse, but everything else had to be done. It was really a fixer-upper for a handyman. It must be added that it is also a large house. Suitable for double occupancy. The garden was even worse. What once must have been a beautiful garden was an abundance of weeds and the entire garden was difficult to pass because the vegetation was everywhere. All and all it looked bad and you had to see through to see the potential.

At the time, I was unable to purchase a fixer-upper. It was probably financially successful with the sale of my current house, it was a real bargain. The house was for sale for 175,000 euros. The highest bidder was about 60.000 above the asking price which is normal in this region at the moment. Someone was the new owner of a potentially beautiful place. Now, about 6 to 8 months later the same house is for sale again. The renovated living room / kitchen is untouched, the rest of the house and the garden has been given a major facelift. New bathrooms, kitchen of the other part, walls, ceilings, floors, doors. Everything has had a beautiful facelift. Everything on the outside has also been beautifully painted and the entire garden has been made bare, with grass and gravel. Not super pretty, but it looks fresh around a newly renovated home.

Now the shocking part: the house is for sale for 595,000 euros. That’s 360,000 more than it was sold for half a year ago. It will probably sell for about 50.000 higher than asking price. Imagine if a renovation of that house cost anywhere from 100,000 to 300,000. Then the house is sold for 635,000. For more than six months of work, you will have made a nice profit on your project between 100,000 and 300,000 euros. If you want to make a lot of money quickly, this is a smart way.

Totally unrelated cat pic <3

I want that too!

Like I said, this is not an easy way. There are many things you have to work hard for. First, you need a mortgage and therefore a mortgage lender. You need the amount for the costs of the buyer yourself and a fixed income so that you can get the mortgage. Alternatively you need the money on hand in cash. Also you have had to work for it pretty hard and long if I’m correct. Then you also need a starting capital for the buyer’s costs. Either you pay for it in cash or you go into debt for it. Both are a risk. Then you need time to renovate (how do you arrange that if you have a job to apply for the mortgage?). Good connections help enormously (people who are handy and who can help, your own construction company so that you have staff who work with you, etc.) To set up something like this it may take you years before even buying your own property, just like a house to live in. However, if you do this trick once a year or once every two years, for example, you can – if you earn between 100,000 and 300,000 each year – live off of the profit. In addition, the skills that you have acquired as a handyman are useful for the rest of your life. The more you are able to do yourself, the better (read why).

Now it is easier to buy a home that requires less work but is cheap, only needs modernization and can then be sold for more. The chances of buying a house that is already fine for a bargain are smaller. The profit that can be made on this is usually also less. How about buying such a fixer-upper, renovating it and then renting it out? You can include the rental income as income for your new mortgage. Before you know it, you will be a slum landlord! (just kidding, don’t milk your tenants).

Once again, I want to emphasize that this is not an easy way to make money. However, it is something to consider or to work towards if you are working towards financial freedom. The road to financial freedom is a boring, slow road with probably sometimes (serious) setbacks. There is some serious risk-taking involved in this. But becoming financially free is a lot faster by working hard on a challenging project like houseflipping, it is worth considering.

Have you ever heard of house flipping? And would you do it yourself?

Until next time,

Elske

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