If you’ve ever watched HGTV, you’ve probably gotten pulled into shows like “Flip or Flop” or “Flip It to Win It,” resulting in a case of fixer-upper fever. But are these house flips really as easy — and profitable — as they seem on TV? In keeping with this issue’s DIY theme, we’re taking a closer look at the practice of home flipping to see just how advantageous flipping can be for those who want to leverage real estate as an alternative investment path.
Flipping Makes a Comeback
The trend of house flipping — which is defined as buying a home, renovating it, and selling it within a year — has seen its share of ups and downs over the last decade, but recently it’s been on the uptick. In fact, the number of U.S. homes flipped reached an 11-year high in 2017. As the nation struggles with a shortage of housing inventory, an increasing number of investors are seizing the opportunity to flip homes for a profit, simultaneously helping to increase the supply of desirable properties that’s desperately needed in today’s housing market.
Home Flipping by the Numbers
In early March, ATTOM Data Solutions released its Year-End 2017 U.S. Home Flipping Report, revealing solid gains for those in the business of flipping houses.
Last year, the average gross profit for home flipping reached $68,143 — up 5% from 2016 and an all-time record high. While the return on investment (ROI) dipped slightly to 49.8%, it was still the second highest ROI of any year since as far back as data was available (2000). What’s more, the ROI was even higher in certain large metro areas, including:
Pittsburgh (145.5%)
Philadelphia (115.7%)
Cleveland (113.3%)
Baltimore (97.7%)
New Orleans (92.9%)
Of course, if you’re able and willing to do many of your own renovations, you could see an even greater profit since you’ll replace some paid labor with sweat equity.
Flipping Isn’t Just for Cash Buyers
While the data supports the idea that flipping can be a profitable income source, potential flippers may remain deterred by the notion that flipping is only available to cash buyers with large sums of money. Yet that’s simply not the case. In 2017, 34.8% of flipped homes were purchased with financing — the highest level since 2008 — and the dollar volume of financed flips reached a 10-year high, at $16.1 billion. This tells us that flipping is becoming an increasingly accessible venture for those who are considering entering the market for the first time.
Words of Caution
If you’re looking for a way to make some extra cash, flipping homes can be a lucrative option, especially for investors with DIY know-how. But as with any investment, flipping is a risk, and it should be approached with caution.
Don’t focus solely on the final sale price after the flip, as that does not take into account the expenses that will be incurred along the way. Unforeseen issues — such as mold, roofing problems, or contractor delays — can chip away at your profit margin. And there’s no guarantee you’ll sell right away once the rehab is finished, in which case you’ll still have to pay the mortgage, taxes, and insurance (known as holding costs) until you sell.
Approach any flip with a thorough plan for renovations, a detailed budget, and an experienced and knowledgeable team to help you see the project through.
Bottom Line: If you’re interested in doing a home flip, right now is an exciting time to do so. And with financing becoming available to more borrowers, the opportunity might be more feasible than you’d think.
If renovating a home sounds like something that’s right up your alley, but flipping seems too risky or time-consuming, consider buying a fixer-upper as your primary residence. Many areas of the country are experiencing high home sales prices, but a home that needs some TLC can allow you to afford a home in the neighborhood you like while indulging your renovating bug. Renovation loans, bridge loans, and other options may be available to you.
We are not a financial advisory firm. Consult your financial advisor before making any investment decisions.