Buying a home has become a luxury within reach of few, at least in the current real estate market characterized by an adverse macroeconomic situation. Therefore, methods such as house flipping are becoming a trend in Spain (and many other countries) as a way to achieve a potentially higher return on investment in a home.
What is house flipping?
House flipping is a method that involves purchasing an old home at a good price to renovate and give it a second life. The goal of this method is to enhance the value of an already outdated building in need of major renovations and return it to the market at a high profit.
Thus, all parties benefit: both the buyer, who will more than recover the money invested, and the market itself (and the future owner) as there is a new habitable property available without the need to demolish and discard an old building to design a new one.
What is house flipping like in Spain?
The key to investing in real estate flipping is buying at a good price: these are usually homes that need major renovations but can still stand, without being in a state of disrepair.
Given the poor state of repair of the property and the need for major renovations, it will be feasible to negotiate the purchase price further and obtain a discount.
Furthermore, undertaking a major renovation, with the associated financial and time costs, will allow the investor to obtain a higher return: many people may be willing to pay a high price for a newly renovated iconic property, but not everyone will have the time or inclination to go through a lengthy and costly renovation process and thus acquire the same property.
Benefits of house flipping
There are many advantages to house flipping, both for owners and for the company itself. Here are some of them:
- You’ll get great returns: Obviously, the goal of house flipping is to invest in homes with potential that will allow you to earn a high return by returning them to the market in good condition. If you do it right, you can make a lot of money, as renovating and selling a property can generate returns of between 20% and 40%, depending on the market and location.
- Quick liquidity: The high demand for renovated homes in cities like Madrid, Barcelona, and Valencia ensures a rapid sales process. In 2024, the average time to sell a renovated property in Madrid was 60 days, according to Idealista data.
- Flexibility: You can tailor renovations to your budget and target market.
- It’s compatible with other economic and work activities: This means you don’t need to dedicate yourself full-time to house flipping; you can combine this activity with any job or business.
- You’ll benefit your community and return valuable properties to the market: Not everyone is willing to renovate dilapidated properties, as it entails all kinds of risks. Therefore, entering this industry will also benefit society, as you’ll be helping to renovate iconic homes and return them to the market in optimal condition.
- It’s a sustainable activity: renovating an existing property typically generates less waste than creating one from scratch. Instead of letting a property slowly die, you’ll be giving it a new lease on life, recycling what’s there, and making changes only where necessary. If you also opt for a renovation that ensures high energy efficiency, even better.
- You’ll learn in the process: It’s likely that during your first experience, unforeseen events will arise that will make you rethink your decision. However, with time and experience, you’ll learn a lot about architecture, construction, and design, enabling you to anticipate potential problems and propose the best solutions to achieve a cost-effective and aesthetically optimal result.
Steps for investing in house flipping
If you’re thinking about investing in house flipping, keep these tips in mind:
- Study the market beforehand: you need to know which areas are experiencing growth, how the investment can increase the value of an area, whether there is a real market large enough to quickly sell the property, what access to mortgage loans is like at that time, etc.
- Look for a property at a good price: profitability is key, so you should consider the property’s potential and choose those investments that allow you to buy as cheaply as possible.
- Do the math: make sure the renovation is possible and which elements you can keep, as well as those that must be destroyed and/or need renovation. This way, you can calculate the approximate price of the work and its duration.
- Don’t forget the time factor: the longer the renovations take, the longer it will take to put the property on the market. The risk of conditions changing during that period will also increase.
- Be patient: it’s better to invest wisely than to rush. Therefore, if you’re not sure, it’s better to wait.
- Don’t invest all your money: This type of investment can cause many unexpected events, resulting in significant financial and time costs. It’s not a good idea to take too much of a risk of not being able to continue due to a lack of liquidity.
- Work with trusted professionals. Collaborate with:
- Architects and designers: to optimize space and ensure a functional layout.
- Approved contractors: guarantee quality and meet deadlines. 50% of delays in house flipping are due to poor planning.
- Real estate agents: help you sell your property quickly.
Important factors to consider
House flipping is becoming more common in Spain, so it’s important to consider the specifics that may affect you if you invest in renovating properties within the country’s borders. Generally, these are legal factors:
- Hidden defects: These are defects that cannot be seen with the naked eye and render the property unfit for its intended use. These defects, if known before the sale, would have led us not to formalize the purchase or to do so for a lower price. In Spain, you are protected if certain defects appear, but it’s important to know the limits.
- Buying as-is: This is very common when purchasing bank-owned properties. If you do this, keep in mind that you’ll be giving up any extra square meters beyond what the purchase documents state (you’ll be buying what’s available, not what the deeds state). However, this is limited to the property’s dimensions and doesn’t affect your claim for hidden defects.
- Licenses, permits, and heritage: You’ll need to ensure your project complies with regulations. In particular, pay attention to the property’s heritage value. You may need to complete additional procedures if the property is listed and you need to preserve, restore, or replicate certain elements.
Is House Flipping possible with a mortgage?
One way to obtain financing for house flipping is to get a mortgage, keeping in mind that your goal will be to sell as quickly as possible and pay off the loan, thus avoiding interest payments as much as possible.
Keep in mind that mortgages for renovations are usually granted with greater reluctance. In addition, you’ll need more savings than usual, as lenders typically pay between 50 and 60% of the home’s appraised value in these cases. The repayment period will also be shorter than normal (around 20 years), and you’ll need a detailed estimate for the renovation to obtain it.
If a mortgage with renovation isn’t an option, another option is a personal loan, although this type of product will be more expensive, compromising the profitability of the transaction.
It’s best to have sufficient savings to cover at least a significant portion of the project. You can always start with a budget-friendly purchase and a relatively simple renovation to gradually build up a cushion that allows you to expand the scope of your renovations without going into debt.
