House flipping: is it worthwhile?
March 04, 2020
6 minutes to read
At first glance, it seems an easy way to earn some money. Buy a run-down house, do it up by putting tens of thousands of euros into it, put it back on the market, and make a fortune. On (US) television, there are enough reality shows about house flipping that make it seem like child's play. But is that really the case?
In recent years, property prices in Belgium have constantly been on the up. And demand for finished, habitable property remains high today, too. Furthermore, not only are there more Belgians, but the number of small families is rising as well. And they all want to have their own roof over their heads. Many wealthy individuals are also looking for more property to diversify their capital. All of these factors make it a selling market.
Jack of all trades
The supply of properties to be renovated is quite high – a large proportion of the homes in Belgium do not currently meet the standards to ensure mandatory renovation. In Flanders alone, more than two million homes must be adapted by 2040.
This means there is enough demand for liveable homes, and there is a big enough supply of homes to be refurbished. If you want to get stuck in, at first glance it may seem a good idea to buy a house, do it up and reap the rewards – particularly if you know what you're doing when it comes to developing a property.
Everyone thinks they are Bob the Builder
The market conditions therefore seem favourable. But are there many Belgians who actually do this? "Unfortunately, there are", says notary Jelle Van Hove. "I see it quite a lot in practice: houses are bought, 'done up' in a few weeks or months and then sold. Sometimes there's only six months between the purchase and sale. That naturally makes you doubt the quality of the renovation." For some people, renovating is code for papering over the cracks. "As a buyer, there's the risk that you end up being duped. Damp problems, poorly-fitted insulation, poor-quality construction materials: there aren't really any exceptions."
And what about buying a 'fixer-upper' in good faith (sold cheaply and where the buyer must live for two years after renovation): would you advise against that? "Absolutely not", says the notary. "It all depends on several factors, of course." Here are some important fiscal and practical points to bear in mind:
1. Registration fees
"If you buy a fixer-upper (either as your main residence or a second home) and then sell it within two years, you'll recoup 60% of the registration fees", says notary Jelle Van Hove. "If you then buy another home (but only in the case of a main residence) within these two years, you'll also be able to recover the balance (40%)."
2. Capital gains tax
"If the fixer-upper is your main residence, you'll pay no capital gains tax on the sale", says notary Jelle Van Hove. "If you sell the fixer-upper on within five years of purchasing it (and the fixer-upper was not your main residence), you will have to pay tax on it. The capital gains are the difference between the purchase price and the sale price. From a tax perspective, the 'purchase price' is a flexible term. You may augment the purchase price with a lump sum of 25% from the tax authorities. And you may also add 5% in lump-sum costs per year. Finally, if you engage a registered contractor, you may also add these costs onto the purchase price." In the example below, you sell a fixer-upper as a one-off hobby within a year
- If house flipping is your main occupation, this income will be taxed through personal income tax.
- If it's a one-off 'hobby', you'll pay capital gains tax of 16.5%.
- And if it isn't your main occupation but you do it on a regular basis, you'll pay capital gains tax of 33%.
The capital gains are the difference between the purchase price and the sale price. From a tax perspective, the 'purchase price' is a flexible term. You may augment the purchase price with a lump sum of 25% from the tax authorities. And you may also add 5% in lump-sum costs per year. Finally, if you engage a registered contractor, you may also add these costs onto the purchase price." In the example below, you sell a fixer-upper as a one-off hobby within a year
costs when buying property
Purchase price of the house
Works carried out by a registered contractor
Tax lump sum of 25%
Sale price of the house
Amount on which capital gains tax is payable
Total capital gains tax due (at 16.5%)
3. Low VAT rates
Even if you're good when it comes to DIY, you're better off leaving the gas connection or stability calculation to a specialist. The tax authorities are very generous on your wallet here, too, as you'll only pay VAT of 6% on works carried out by a recognised contractor. There are, however, a few conditions – one of which is that the house must already be 10 years old. Read more about these conditions in French or in Dutch.
Buying a fixer-upper? You won't get one for nothing, although you're in a better position as a potential buyer. There's often quite a lot of haggling when it comes to such properties. And there may well be less competition if you're interested in buying a house that needs a thorough renovation.
One option is to turn to part of your savings. Furthermore, it's advisable not only to keep some funds aside for renovations, but also a buffer too just in case something goes wrong. You always take a significant concentration risk when you pump a large sum into an investment.
"If you want a loan, you'll have to bear the bank's financing conditions in mind", says Jelle Van Hove. "Remember that a loan involves costs and taxes, too: registration fees, subscription fees, deed costs, and legal fees." If you pay some of the mortgage off early, this also involves costs, such as a reinvestment penalty. You should first make a thorough analysis of the costs, grants and potential returns." > Run a mortgage simulation
Renovations are time-consuming tasks, particularly if you want to deliver a high-quality job. You should therefore say goodbye to the evenings on the sofa and the city breaks at weekends. Apart from time, you also need to be patient. Doing up a house is usually a marathon, not a sprint.
6. Your skills and limitations
If you have to engage plumbers, electricians and painters, you'll be handing over a large part of your potential return. If you're not a natural at DIY, you'll need to make a good plan well in advance and negotiate to get the best rates. And if you don't know much about property, have two left hands, or aren't good at planning or negotiating, perhaps there are
better alternatives for you to invest your hard-earned cash.