Buying houses or apartments to rent and have additional income is one of the most traditional forms of investment for Brazilians. Now, this practice is being improved, with the acquisition of properties to renovate and sell later, as often happens in U.S.
The activity is called house flipping, in the industry’s jargon, and refers to finding good opportunities to acquire properties, especially residential ones, at attractive prices to renovate and resell them. The practice generates profits between 20% and 30% in an average time of 12 months.
The strategy of reforming and resell real estate It is seen as one of the best ways to make a profit from these assets in Brazil today, alongside investing in real estate funds. But it takes technique and agility to avoid losing money. The annual appreciation of property prices in cities such as São Paulothe largest real estate market in the country, grows, at times, below inflation.
Therefore, the time between purchase, renovation and resale, according to experts, should be up to 12 months, avoiding problems such as a reduction in the profit margin due to the monthly payment of bills such as condominium fees and IPTU.
In the first quarter of 2024, according to data from Fifth floor, the average price per square meter (m²) in the capital of São Paulo rose 3.73% in 12 months, compared to accumulated inflation of 3.93%. Even for those seeking profitability with rentals, the annual profitability is 6%.
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Real estate funds – which manage commercial and residential properties, depending on the manager’s strategy – can offer a higher average profitability. According to the Ifix index, which brings together the main assets of this class, the appreciation of real estate funds was 17.96% in the last 12 months ending on May 3 – but it is necessary to take into account that these funds are variable income assets, quite subject to market volatility.
With the practice of buying properties for renovation and resale in the short term, investors can obtain returns between 20% and 30%. In the case of properties purchased at auctions, the return can be even higher, depending on the discount at the time of purchase and the time it takes to vacate the property.
The practice has been common among individuals and companies. Four out of ten people who purchased a residential property in 2023 said it was like an investment. According to data from FipeZap X-Ray in December, among those who purchased a property for this purpose last year, 46% said they expected to make a profit on resale and 54% are counting on the profit coming from rent. The majority of investors are male (71%), over 50 years of age (52%) and with a monthly income above R$15,000 (48%).
Among companies, Loft operated in this market for a few years, but chose to change the course of business to become a connectivity and data platform for the real estate market, which made it leave its accounts in the black (or reach the breakeven, break-even point). This game, then, proved to be better for individuals or smaller companies, with controlled growth, and not at the breakneck pace of technology startups.
This is the case of Brise, which carries out projects in São Paulo. The company carries out three projects a year, completely renovating the purchased apartments. The changes include tearing down all the walls and rethinking the layout of the properties for the current reality, creating spaces for remote work, kitchens integrated with the living room and reducing the size of the laundry area.
”We buy at an opportunity price, below the market, generally apartments in very precarious situations, which have never been renovated. Our renovation enhances old features and delivers a contemporary project”, says Arnaldo Borensztajn, business partner.
Brise, which operates in the center and in upscale neighborhoods of the capital of São Paulo, seeks to gradually increase the number of projects per year and even buy and renovate an entire residential building, from the first to the top floor. “Our first projects were in Vila Buarque. But we understand that there was an audience for this in Higienópolis and Jardins, and we are also interested in the Pinheiros region. We only work with buildings built until the 1960s,” says Borensztajn.
Following investor interest in old properties to renovate and resell, the startup Toki was created a few years ago to enable the management of multiple renovations at the same time.
Danilo Duarte, founder of Toki, says that the digital platform was created based on the company’s experience, which has already carried out around 300 renovations. For him, what causes the most problems in construction projects is the lack of planning, which generates rework and can reduce the investor’s profitability. With the platform, he says, it is possible to save 30% time to complete the work.
“We recommend that investors think about a simple and quick renovation so that the sale is also quick. It is necessary to think about inventions that generate value in a short space of time. In general, painting is also important and quick to complete. In old apartments, people don’t like having electrical and plumbing problems. The finish must also be of good quality, but with neutral colors”, says Duarte.
Danilo Igliori, professor at the economics department at FEA/USP, says that the real estate market was formalized as an investment a few years ago, with the arrival of real estate funds and the debut of large companies in the sector on the Stock Exchange. Although investment in physical properties is a growing practice in the country, it is not possible to assess how much impact this has on the prices of houses and apartments.
“It is difficult to measure precisely, but we have to look at the real estate market dynamically. In any market there is supply and demand. Demand adjusts faster than supply because it takes a few years to create new projects. If for some reason there is an increase in investors quickly, there may be an impact on the price. But the presence of investors stimulates supply. Over time, it is important to have investors for the offer to adjust,” he says.
Profiting from the renovation of used properties or properties purchased below market value to be resold in the future is common in the United States.
According to data from consultancy ATTOM, the average profit obtained from the practice of buying houses to renovate and resell by American investors was US$68,000 in 2022, a 13% jump compared to the average profit of US$60,000 recorded in 2019 and 40% compared to 2012, when the value was US$48.6 thousand.
One in every ten homes sold in the United States was purchased to make a profit on resale. Since 2009, the operating profit margin of 40% has been falling, but is still around 30%.
In Brazil, the cost of construction has also risen in recent years, but the activity of buying and reselling properties still remains profitable. According to the National Construction Cost Index (INCC), the cost of construction in the country rose 51% from January 2018 to January 2024, after growth of close to 10% per year in 2020, 2021 and 2022, mainly due to the pandemic of covid-19. Even so, with the increase in property prices in the period and the market heated by the fall in interest rates in recent quarters, the return obtained on property resale remains around 30%.
Low prices at auctions
Individual investors tend to find properties at discounted prices at auctions. Depending on the case, the advertised value can be up to 70% lower than the real one. These properties are put up for auction by banks due to the owners’ default and can be purchased by anyone. On average, according to experts, the deal is closed with a 30% discount compared to the real price. With improvements, such as simple renovations, the profit margin can be even greater upon resale.
Auctioneer Moacir de Santi, from Sodré Santoro, says that there has been an increase in demand for residential properties by investors in the last year. Most of the properties advertised today are apartments and houses. Despite not specifying the profitability possible with the purchase and resale of properties at auction, De Santi guarantees that this investment in the real economy is more efficient than variable income.
“The return that the investor who buys property at auction to resell will achieve would not be possible in any financial investment”, he says.
The founder and CEO of Resale, Marcelo Prata, says that, on average, investors who buy properties through the auction platform seek to achieve a profitability of 30% on the capital invested, including the purchase of the property, necessary regularizations and small renovations.
“What is interesting is that we have seen an increasing entry of new investors into this sector, in contrast to the past, when these opportunities were only accessible to experienced investors with extensive contacts among auctioneers. For many, this activity has become a business model, involving the purchase of dozens and even hundreds of properties,” he says.
For the president of Zuk, Henri Zylberstajn, the auction sector attracts investors not only because of the discounted prices for residential properties, but also because of the facilities made possible by technology and the judiciary.
“In recent years, there has been a movement towards the professionalization of auction investors. The Court began to release provisions for electronic judicial disposals, which contributed greatly to the ecosystem. Anyone who wants to buy property in another city can now do everything via the internet”, says Zylberstajn.
Another known practice of buying properties for resale is buying off plan. By assuming the risk associated with construction delays, the buyer obtains lower prices than on properties already built. This activity ended up turning into a business.
Captal, specialized in this type of operation, does exactly that: using data analysis, it identifies new projects in prime or strategic areas of São Paulo and makes offers to buy a stake in the business, usually at a large discount in relation to the final price of the project. The company works like a fund, but only does business with companies. Tax-free, the average profitability with the practice is 20%.
“The product is not intended for retail investors. Those who invest with us are family offices, managers and investment funds. As we look at the primary market, we always investigate opportunities in the secondary market, but it has been a very difficult account to close. There are a number of new developments on offer for the economic market. But the main focus is on the primary market”, says Leonardo Vianna, CEO of Captal.
Tags: Investors buy property renovate resell profit understand works
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