A Guide to Flipping Houses in Ontario
Interested in house flipping but not sure how it works? From market research to tax requirements, we’ve got you covered!
By Emily Southey | 9 minute read
One of the most popular forms of real estate investing in Canada is house flipping. House flipping is the process of buying a less desirable house at a low price and renovating it to eventually sell the home at a profit. Keep reading to learn all about flipping houses in Ontario.
What Is Flipping Houses?
Flipping houses, sometimes referred to as wholesale real estate investing, is a type of real estate investing in which an investor buys a property with the sole intention of selling it for a profit. They do not plan to rent out the home to tenants or live in the home themselves. Rather, the purpose of buying a property using this method is to fix it up and sell it as quickly and for as high a price as possible.
Real estate investors who flip properties often concentrate on the purchase and resale of one property at a time or on one group of properties. To maintain a steady income stream, house flippers aim to engage in frequent flips.
So how does house flipping work? At its most basic, the goal is to buy a house at a low price and sell it at a high price (as is the case with most types of investments). However, rather than adopting the “buy and hold” strategy that goes for other types of investment properties, house flipping is predicated on updating and selling the house as fast as possible upon buying it. Therefore, the focus of house flipping tends to be on speed versus maximum profit. This is because the longer you hold onto the property, the more money it costs you, as the flipper is the one responsible for paying everything from mortgage and utilities to insurance and property taxes. Many house flippers prefer to purchase fixer-uppers (homes that are less desirable or in need of many repairs and are therefore priced low). In an ideal world, the investor might purchase a fixer-upper in an up-and-coming neighbourhood, renovate it, and then sell it at a higher price that reflects its new appearance and features.
To better understand house flipping, we break down the two categories of house flipping below: retailing and wholesaling.
- Retailing: Retailing is likely what you think of when you hear the term “house flipping.” It is where an investor buys a house in need of fixes, and updates and sells it for a profit. This form of house flipping can be very profitable if you know what you’re doing. The profit you make is the difference between the purchase price and the selling price, less the renovation costs and taxes.
- Wholesaling: Wholesaling house flipping involves an investor buying a property at a certain price and then turning around and immediately selling it to another investor at a higher price. This form of house flipping, while far less time-consuming, is much riskier. Since you are not adding any real value to the property, there is always a chance that you will not be able to sell it for more money or at all.
Is flipping houses legal?
Rounding out the discussion of what house flipping is and how it works is the following question, “Is flipping houses legal?” This is a common question and we can confidently say that yes, flipping houses is legal in Canada. There are no laws anywhere in the country prohibiting the practice. That said, you must be careful when filing your taxes. A house flipper can run into trouble by incorrectly filing their taxes, whether by accident or not. Some house flippers may try to claim the principal residence exemption when selling a flipped home in an attempt to pay less tax, which is tax fraud and is therefore illegal. If you aren’t sure how house flipping impacts your income tax, contact a reputable accountant in your area.
How to Flip Houses in Ontario
Learn how to flip houses in Ontario by following the simple steps below.
Determine your budget
Before you start looking for a property, the first step is to determine your budget. A budget for house flipping is a little different than for a typical home purchase, as you will need to consider not only the purchase price but the cost of major renovations. In addition, a few other fees are unique to home flipping. For example, you will want to pay for an extra-thorough home inspection and need to take into account selling costs since you will likely be selling the property in the near future. Of course, it is always wise to overestimate costs than underestimate them, especially since the cost of labour and repairs is often higher than we think.
“Do extensive research on local market trends and predictions. Understanding the direction the market is going (is it heating up or cooling) can help you make informed decisions about when and where to buy a home.”
Understand the tax requirements
Another important step to take before flipping a house is to research and understand the tax requirements in your province. This should be factored into your budget. You likely won’t qualify for the principal residence exemption, which means the profit you make on the sale of your flipped house will be subject to capital gains. You may also have to pay HST/GST on the property when you buy it. Understanding your tax requirements and obligations is vital if you wish to avoid trouble with the Canada Revenue Agency (CRA).
Obtain the necessary financing
Unless you have enough money lying around to purchase an investment property, chances are you will need to secure financing in order to fund your project. This usually means taking out a mortgage loan. Getting pre-approved for a mortgage before you start house hunting can help you stay within your means.
Research the market where you want to buy
Researching the local housing market in the area where you want to flip a house is of the utmost importance. First, you should research average home prices in that area, so you can determine whether you’re getting a good deal on a property. Next, you need to consider the demographics of the area to get an idea of what types of homes are in demand (for example, condos and single-family homes). Finally, do extensive research on local market trends and predictions. Understanding the direction the market is going (is it heating up or cooling) can help you make informed decisions about when and where to buy a home.
Find a realtor to help you
Even if you are a seasoned real estate investor, enlisting the help of a realtor is usually wise. A realtor with knowledge of real estate investing and house flipping in particular, not to mention knowledge of the local housing market, can help you decide on the best property for you.
We put the real back in real estate.
Join Wahi today and find out how easy it is to get real estate in Canada.
Buy the property and start fixing it up
Once you’ve found your dream property, work with a realtor to make an offer. When the house is yours, it’s time to start fixing it up. This means making all the necessary repairs, as well as renovating it to improve its appearance. Contact multiple contractors for quotes, hire one, and get to work.
Stage, sell, and repeat
The final step after repairing and renovating the property is to stage it (even a flipped property should be staged!). Your realtor can help with this. From there, list the property, sell it, and start the process all over again.
Tips on How to Buy and Flip Houses in Ontario
Ensure your first house-flipping experience goes as smoothly as possible by reading the expert tips below.
- Aim to buy the house with cash: In an ideal world, properties for house flipping would be bought with cash. It is a much simpler process when mortgages and loans can be avoided.
- Maintain a high credit score: If buying a property with cash isn’t an option, then be sure to maintain a high credit score. If you have great credit, you will be more likely to get approved for a loan. Conversely, with a low credit score, obtaining financing can be even more difficult than it already is for investment properties.
- Carefully consider the risks: It is wise for real estate investors to carefully consider the risks of house flipping by mentally preparing for the worst-case scenario (that is, the house not selling or sitting on the market for a long time). If such a situation arose, you would be stuck paying an additional mortgage, utilities, insurance, and property taxes. Understanding the risk versus reward of house flipping is key.
- Don’t overspend on renovations: To be a successful house flipper, you must understand which renovations are worthwhile and which are not. Generally speaking, cosmetic upgrades like a fresh coat of paint or adding crown moulding are inexpensive and have high payouts. Meanwhile, structural or foundational repairs are often costly and time-consuming. As a rule of thumb, if a bathroom or kitchen needs a complete renovation or the entire roof needs repairing, it’s best to pass on the property. These kinds of updates can easily lead to going over budget, violating the 70% rule that says house flippers should never spend more than 70% of the anticipated value of the home between the purchase price and updates.
Frequently Asked Questions
Is it legal to flip houses in Ontario?
That said, there are a few real estate crowdfunding sites that are consistently ranked well, and they include Fundrise, CrowdStreet, RealtyMogul, YieldStreet, and EquityMultiple. Fundrise is generally considered to be one of the top overall crowdfunding sites for non-accredited investors.
What is the 70% rule in house flipping?
The 70% rule in house flipping is that real estate investors should never spend more than 70% of the anticipated value of the house fixing up the property. In essence, you never want to spend more than 70% of the updated home’s worth in labour, closing costs, property taxes, staging, realtor commissions, and more. Otherwise, your profit likely won’t be enough to make the process of house flipping worthwhile.
Do I need a licence to flip houses in Ontario?
No, you do not need a licence to flip houses in Ontario. However, it is recommended that you work with a realtor who has one. If you do not want to work with a realtor, then obtaining a licence of your own can be worthwhile as it gives you access to the MLS, which might allow you to see listings before others.
What's behind a tax on flipping houses?
The Government of Canada released its 2022 federal budget in early 2022 that included a new residential property flipping rule. Entitled “Making Property Flippers Pay Their Fair Share,” this rule specifically targets house flippers as it makes any profit from the sale of a residential property taxable as business income, so long as the seller owns the property for less than a year. Thus, the proposed rule directly impacts properties bought, flipped, and sold in under 12 months and is set to take effect on January 1, 2023. Certain exemptions would apply. However, the overall purpose of the new tax on flipping houses is to prevent housing prices from rising as high as they have been, and some people believe that flipping houses leads to higher housing prices. Ultimately, the goal of the new property flipping tax is to ensure the profits made from flipped homes are taxed fairly and in full, in an effort to make Canada’s housing market more affordable.