Anatomy of An Annex Flip
This week I thought I would highlight a listing that recently came on the market in the East Annex that has amazing potential for ‘flipping/fixing’ – or as we often call it in the business – “adding value”. Many folks, perhaps due to the television phenomenon surrounding value-adding project shows, have taken an interest in this development strategy, but are unsure of how a real deal looks. For those who fall into that category, check this out:
Subject: 122 Bedford Rd.
Listed: $2,395,000
Bedrooms: 3 + 1
Washrooms: 5
Parking Spaces: 4
As you can see from the inside of the home, the ‘bones’ of the building are great, with large, open rooms, but the finishes and materials are decidedly ‘old school’ and could use updating to capture the interest of the broader buyer market.
So what’s the plan? It’s fairly straightforward. The idea here is to buy the property at a great price, invest in upgrading it and then sell it at a profit. Let’s review the particulars of a fictitious flip on 122 Bedford…
The property is listed at close to $2.4 million, which may or may not be a reasonable price for this stretch of Bedford. With that being said, I would advise my fictitious value-adding client that we would likely need to acquire this opportunity at about $2.1 million in order to make our ‘numbers’ work.
This is because we are going to budget $400,000-500,000 for our renovation, and we want to leave room for our profit when we sell at market value later. Now you know what investors mean when they say ‘your money is made when you buy’ – buying at the right price ensures your ultimate success.
After putting 20% down on our purchase ($420,000) and carrying the property for 8 months on a mortgage (estimated at $50,000), plus putting the investment capital in for the upgrades ($450,000), we list and sell the property at $3.0 million. Sweet! But what happened?
The difference between our purchase price and sale price was $900,000. This number, minus our upgrade costs ($450,000) and mortgage carrying costs ($50,000) leaves us with our gross profit – $400,000. When we consider that we invested a total of $930,000 in the project over 8 months, our annualized percentage return on this deal was close to 65%. Not bad!
The eagle-eyed reader almost certainly will note that this has been a very simplified accounting of the process, and notably did not include taxes, or transaction costs, which will invariably eat into your returns. Each deal needs to be assessed on its own merits, and this is only meant to give an idea of how the mechanism works for ‘flipping’ in Toronto.
Tell your friends! They’ll thank you. Call me if you’re interested in learning more about buying or selling Toronto real estate.
Until next time,
Shaun Nilsson
1-888-712-7888
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