Nine out of 10 properties flipped by investors last year sold for a gross profit, according to analysis by CoreLogic.
Flipping refers to buying and selling a property within one or two years in the hope of making a quick capital gain by either buying undervalued property, benefiting from rapidly rising prices or from adding value in some way such as through renovation, subdivision or securing a development permit.
While 89.1% of homes resold within one year made a profit and 89.9% resold within two years made a profit in 2017, the proportion of loss-making flipped sales is expected to rise in 2018 as house prices, especially in Sydney and Melbourne, start to ease and obtaining investor loans becomes harder.
The CoreLogic figures also don't reveal the level of profit and exclude the expensive costs associated with buying and selling property including interest payments, stamp duty, conveyancing costs and real estate agent commissions, which can easily turn a gross profit into a net loss.
"Although the proportion of flips at a loss has declined from recent highs in 2009 and again in 2012, there has been a clear increase in loss-making flips recently," said CoreLogic in its inaugural Property Flipping Report.
"The rising number of loss-making flips highlights there is some financial risk in flipping, keeping in mind that the proportion of loss making flips on a net basis is likely to be substantially higher once expenses are taken into account," the firm said.
The CoreLogic report also shows sharp differences in flipping success depending on where property has been bought and sold.
Not surprisingly, Sydney and Melbourne, which have enjoyed the strongest capital growth in recent years, delivering profits for well in excess of 90% of those who flipped in 2017.
However, in Perth, where property prices have been sliding downwards, 30% of properties flipped within a year lost money and nearly 50% of those flipped after 12 to 24 months lost money.
The worst place to flip property last year was Darwin, where more than a third of properties flipped within a year lost money and 70% of those flipped between 12 and 24 months sold at a loss.
With Sydney house prices falling 0.2% in the first two weeks of the year and growing at just 2.5% annually, in line with inflation, flipping profitably will become a lot harder, especially for highly-leveraged investors.
Some investors are already running into trouble, with 20,000 investors at Queensland's Property Club no longer able to afford their mortgage repayments after the banks reset their interest-only loans to principal and interest.
This article was originally published by the Australian Financial Review on 18 January 2018. It represents the views of the author only and does not necessarily reflect the views of AMP.
The first strategy is to always pay more than the minimum.