Financing a Flip in Edmonton

This week we had the opportunity to go through the cost of a flipping a home. Not the physical costs, of let’s say, re-doing a bathroom, kitchen, floor and trim as this will vary from one person to the next, but paper costs like financing, accounting, insurance, legal, and real estate fees.
Aside from being able to create value from taking a older maybe beat up property and recreating it into something new and more desirable to consumers for a profit, the biggest obstacle to participating in the flip market is how to cover the cost of purchasing a property while paying for improvements and holding the property until eventual sale.

Most mortgage companies will not finance this type of endeavor. Simply, big banks make their money on mortgages through the interest they charge us over long periods to safe borrowers. Banks protect the interest they earn from us by making the cost of breaking the mortgage high.

After speaking with half a dozen or so mortgage specialists in Edmonton, it did not take long to figure out there were one or two lenders in town that specialized in this type of lending. These companies were willing to finance open mortgages with no payout penalties with as little as 10K down. The rub being the less the borrower put down, the higher the interest. On a $250,000 mortgage for example, with 20% down, we were looking at paying approximately $2,100 a month in mortgage payments. We could sell, without penalty, whenever we wanted, so long as we paid a broker fee of a few thousand and paid our monthly simple interest payment calculated somewhere between 10 and 15% depending on our down-payment.

While having these conversations the obvious did come up. The cost of borrowing on a risky venture is high, this attracts cash of private investors. If and when we get started, I will let you know how this pans out, I did receive a soft offer of 8% simple interest.

With borrowing comes insuring, and if I’m helping folks get rolling on making their flip dreams come true, I want to eliminate surprises. All of the mortgage professionals I spoke with had an opinion on flip financing, but all but one knew anything about insuring one. You can’t finance anything without a specific insurance requirement from a lender. You can guess who I recommended. Thankfully, basic fire insurance was all that was required from this particular lender.

Next off, I sat online with an accountant to go through the tax implications of a flip to a first-time flipper. Unincorporated, any profit would be taxed as income. Interestingly, in many cases, people ‘should’ be charging GST with the price of their flips. I nor the accountant, had ever seen GST charged on a flip, but, there is a case known about in Real Estate, Legal, and Accounting circles where a investor in Vancouver got stung with huge back-payments and penalties once audited. What is nice, is if we do ‘substantially renovate’ a property for re-sale and charge GTS, we can build a clause into the purchase contract where ‘the GST rebate goes back to the builder’ or in our case the flipper. We could simply build GST into our MLS price to avoid headache in the future and capture back much of what we have to pass on to the customer and later pay to the Feds.

Legal and real estate fee’s are more or less pretty boring. Closing costs aren’t going to change much, +/- $1,200 + tax disbursements on the legal side, and 7/3 split for Agent commissions. Mind you this is my business model. I would negotiate a discount if I were doing multiple transactions with he same professional every year.

I hope you found this helpful, if you have any questions or engagements, I’d love to hear your thoughts, questions and experiences.

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