It’s been a great seventeen years in the Toronto real estate market, and all the players have made money.  But is flipping actually viable anymore?

Market conditions aside, flipping properties for profit has become very difficult…

In early 2009, I had a coffee with prospective client who wanted to ‘pitch’ me on his idea.

He surmised that there was an opportunity in the Toronto marketplace for him to purchase houses, renovate them, and then sell them at a profit.

That’s it.

That was his idea.

I felt like Hans Gruber in the first Die Hard, facetiously saying, in a thick German accent, “You are so very clever.  You mean to tell me that you put this all together yourself?”

This prospective client didn’t have answers to any of my questions, however, when I asked, “What’s your cost per square foot?  Where are your economies of scale – how are you going to save money?  Who are your trades?  How reliable are your contacts?  What is your timeline like?  What is your exit strategy?  How solvent are you?”

He had nothing.  All he had was the idea of buying a property, “fixing it up,” and selling it for a profit.

He knew nothing about Toronto neighbourhoods, he didn’t have any contacts in the development industry, and his only asset was the money from mommy and daddy that was burning a hole in his pocket.

I could have sold this guy a dilapidated house and told him, “Have at it – go make your fortune,” but that’s not my business model.  He didn’t understand that “hard work is hard,” and that developing or flipping houses isn’t easy.

If it was so easy, everybody would be doing it.

And you know what?  For a while, everybody was!

When I started in this business in the early 2000’s, Leaside, Davisville Village, Lawrence Park, and any neighbourhood in which you could find a bungalow was booming with development.  Many of these developers were first-timers whose awful craftsmanship showed, or experienced developers from Richmond Hill who wanted to try their hand at some larger-scale properties.

I think the idea for the classic, ugly, characterless, stucco home was first conceived by an out-of-area developer who figured he could save tens-of-thousands of dollars cancelling his expensive order of red brick and just plastering the outside of the house instead.  Thankfully, buyers have spoken loud and clear: they’ll pay more for a beautiful, red-brick, tudor-style home than they will for an awful grey salt-box.

The mid-2000’s were full very lucrative for developers in North Toronto, as many of them were able to carry 3-4 projects at the same time.  Imagine buying a house for $500,000, putting in $400,000, and selling it for $1.2 Million.  Imagine making a $300,000 profit inside of six months.  No wonder everybody and their mother went into developing!  With the market in these areas going up 9-10% per year, your profit was almost guaranteed!

But flipping properties is getting harder and harder, and we’re not seeing it nearly as often.

Many North Toronto builders have stopped speculating a long time ago.  They no longer purchase bungalows, build mansions in their place, and sell these homes for a profit.  There’s too much risk involved, and many buyers are simply hiring these same developers to build on their behalf.  This way, the risk falls on the buyer and not the builder, and the buyer says, “I’m gonna be in this house for 15-20 years anyways, so I’m going to be fine no matter what happens with the market in the short term.”

I can’t pin-point exactly when flipping started to die, but we can all agree that the new municipal Land Transfer Tax and the Harmonized Sale Tax didn’t help.

Those two taxes took away 4-5% of every builder’s profit, on every property, and with margins already thinning, that might have been the straw that broke the camel’s back.

Also consider that the market hasn’t gained as rapidly as it did in the mid-2000’s, and those of us still making money, albeit at a smaller rate, are almost crying poor.

I’ve seen traditional investing thrown out the window, just as it was in the stock market around the time of the tech bust.  Nobody is looking at steady, income producing properties anymore – they want the big dollars!

Only the smart, reliable pension funds are interested in a 6% yearly return, every year, forever.  Ask the average real estate investor in Toronto, and they’ll laugh!  They want six-figure profits!  They want to buy for $400,000, hold for a year, and sell for $500,000!

Nobody cares about the monthly yield from an investment property.  Screw Benjamin Graham.  Screw Warren Buffet.  Who cares about cap rates anyways?  When can I unload my fourth and fifth condos for an $85K profit?

The problem is that for a while, it was so easy to make money in real estate.  A complete moron could put down 5% on a pre-construction condo in 2004, wait for the property to be registered in 2007, and walk away with $120,000 profit.

But the condo developers caught on, and they started charging tomorrow’s prices, today!  Sadly, the masses failed to notice, and they continued to go to launch parties and eat crab cakes with glee while they were duped into paying $550/sqft for a condo that woudn’t be ready for five years, when they could have purchased the same condo next door for less, rented it out, and collected a steady 6% return.

I’ve long argued that flipping pre-construction properties is dead, but I’m not going to waste another breath on it – as I enter month sixteen of occupancy at West Side Lofts.

So what are the alternatives?

How can you still make money flipping condos?

Well unfortunately, you might have to (gasp!) actually work for it.  You might have to be calm, patient, and wait for a property to come along that is under-valued and that can benefit from a renovation and some designer flair.

There was a property near Ryerson University that sold earlier this year for $405,000 – a paltry sum for a 1300 square foot unit, but the building had all kinds of internal issues and the condo corporation’s finances were in shambles.  It wasn’t worth looking at, in my mind, because the building itself came with massive risk.  It would take a miracle for somebody to pay “top dollar” for the condo, and $405,000 certainly wasn’t top dollar!

The same unit came back onto the market for $550,000, after a gut-renovation, and subsequently sold.

This is how you make money flipping properties in Toronto.

But consider that the profit isn’t nearly what it seems.

That buyer paid $8,400 in Land Transfer Tax on the original purchase, and $27,500 in real estate fees on the sale.

The condo had a new kitchen ($20,000 including appliances), two new bathrooms ($7,000 each), hardwood floor throughout ($12,000), new lighting ($3,000), new paint ($3,000), a renovated outdoor space ($2,000), custom closet organizers ($3,000), and perhaps a few more small-ticket items that would cut into the profit margin.

That’s $91,000 in expenses, before you consider the soft costs in financing the flip itself (assuming the seller isn’t flush with cash), and as much as $5,000 to stage the property.

All told, this seller might have made $50,000 on this flip, which is a fantastic return.  But it took six months to accomplish, and the work might have amounted to a full-time job.

The finished condo was magazine-worthy, and it was pretty obvious that this was no first-timer.  The marketing, staging, pricing, timing were all perfect, and the flipper was able to turn a profit.

This is not a typical result.

Joe Average can not expect to buy a property, renovate it, sell it, and make a $50,000 profit, let alone the $200K most amateurs dream about.

If you’re working 40 hours per week at your day-job, how do you expect to renovate and flip houses and condos successfully?  It’s not as easy as people think, and it requires this thing called “hard work” that much of our society is distancing themselves from, as evidenced by St. James Park and its current occupants…

The only people making money flipping are those that do it as an occupation, and even still, they’re going to take the odd loss once in a while.

If you’re working on your first flip, expect to make little to no money, and take the experience gained as your payment for all your hard work.  The next project will be easier, and from there you’ll continue to learn valuable lessons.

But if you think that there’s money to be made by purchasing a house, paying somebody to install an IKEA kitchen, arranging flowers on the rented dining room table, and paying a Realtor 3.0% to throw it on MLS and not actually work towards a sale, then I think you’re in for serious disappointment…