What It Takes To Make Money Flipping Houses In A Crazy Real Estate Market | Economy
More people are changing homes, but they are making less profit.
Investors looking to get a slice of soaring house prices by buying a house, fixing it up and then quickly putting it back on the market aren’t getting quite the returns they once had.
Finding a home to buy in the first place is more difficult, with record home inventory and foreclosures. And the growing competition for all available homes means that even shoddy homes in terrible condition are selling for a fortune. Additionally, shortages of materials and labor made it more expensive to repair a location.
There were 94,766 single-family homes and condominiums in the United States that were returned in the third quarter of last year, the highest number of homes returned in a quarter since 2006, according to real estate data provider Attom.
But profits remained lower than they were a year ago.
Gross profit on a typical home flip trade was $68,847 in the third quarter, according to Attom, compared to $70,000 a year earlier. This is a return on investment of 32.3%, against 43.8% a year earlier, its lowest point since 2011.
The decline in profit margins was largely due to the fact that many investors bought when home prices had soared and then sold when prices were rising more slowly, according to the report.
Yet a 32% profit before expenses does not discourage investors. Here’s how they make it work.
Know the market
Danielle Green has been flipping homes in Baltimore since 2018. She buys homes in the city at auction and has seen a big difference in property availability and cost.
“I used to be able to buy a house for $5,000 or $10,000 at auction before the pandemic,” Green said. “Now they go for $20,000 or $40,000.”
Fewer properties were available as the auction process slowed during the pandemic, Green said. Additionally, auctions that once took place in person have been moved online, allowing more buyers to bid. And, Green said, there’s a ripple effect as investors from neighboring towns seek cheaper homes to flip.
“Some investors have been driven out of their areas, so they come to Baltimore from Washington, DC or Philadelphia and they drive our prices up,” Green said.
With so few single-family townhouses available, Green began buying small three- and four-unit multi-family homes. As she sells some of her properties, she keeps others for rent in order to save some money.
“Before the pandemic, I was doing three or four transactions a year,” she said. “Now I’m doing one or two big deals a year. It’s doable. You have to know your profit margin and work to keep it.”
She hasn’t been immune to labor shortages and increases in procurement costs, but Green said she feels she has an edge over investors in other regions. , because she’s lived in Baltimore and knows which neighborhoods will carry which prices.
“Investors come in and think it’s easy to buy because the houses look cheap – they’ll think they’re buying a shell [of a house] for $40,000, it’s a bargain,” she said. “But I know it’s not the best neighborhood. You have to know the market and understand what you are buying. »
Stick to a firm budget
Leah Wensink, who has been doing flips since 2014 and now works in Harrogate, Tennessee, said she paid the most she’s ever had for a flip this year.
Wensink bought a house for $170,000 last June and said the only way to make a profit was to pay cash. Not having to make monthly payments gives her the leeway to do some of the work herself or find more affordable alternatives to circumvent price increases for labor and supplies. She expected it would take nine months to complete, but Covid-related delays brought it closer to a year.
Wensink said his approach to profitability is quite simple. She draws a hard line on how much money she’s willing to spend.
“If I stay below that amount, I know I can make money,” she said. “I don’t spend a lot of time planning my margins to the umpteenth degree. It’s just not what I want to do with my life. But I do a lot of research to see what’s going on in the market. And I like to give me a huge cushion so that if I don’t end up selling it for that higher amount, I can always lower it.”
But Wensink is worried about getting his money back on this current home, his biggest turnaround yet.
“This house was uninhabitable when I bought it,” she said. “There was water damage. And so I had to come and take care of those things from the start and rip it all out. I’m worried because I don’t think people are going to see half the job of that. was done in this house, which is a shame to buy a house that needs so much work.”
Find strong partners
During one of his first flips in 2017, Lukas Vanagaitas lost all his life savings. He therefore called on a lending partner, Kiavi, to help him finance his flips. It helped him grow his real estate business, Horus Homes, from four or five transactions a year to 100.
“In my first year of investing, everything that could have gone wrong went wrong and I ended up losing $100,000,” Vanagaitas said. “I made a lot of mistakes and had to start over. It took me a while to get back on my feet and I had to live in my flips while I reshaped them.”
He moved from Houston to St. Petersburg, Florida, and now works with Kiavi, a lender that offers bridging and rental loans to real estate investors as well as a platform to track projects.
“They’re there for me with an answer to everything from ‘What do you think?’ to ‘How will this help us?’ “, he said. “We’ve never missed a close, typically closing in ten days or less.”
But this frenetic market made every decision a little more difficult. “It’s a very hot market where there are multiple offers on every house on any given day.”
He said continued demand for housing, particularly in Florida, is attracting more investors. But he doesn’t see a crash looming because so many people have equity. The dynamic market sometimes means that plans for a property change very quickly.
“We have a duplex that we wanted to keep rented out,” he said. “But we can get $150,000 more than its repaired value if we sell it. With the money we bring in, we can buy two rentals.”
CNN’s Zachary Wasser and Sean Clark contributed to this report.
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