If you’ve ever tuned in to HGTV, we don’t have to explain what it means to “flip” a house. The idea of the “fixer-upper” is as old as home ownership, but savvy house flippers can take an undesirable property, renovate, and resell at a profit in 12 months or less.
Before the housing collapse, flipping was at its height, with 259,192 active home flippers participating in 2005. Levels of activity are rising, although there’s still a ways to go. The 5.5 percent share of U.S. homes flipped in 2015 was still well below the peak of 8.2 percent of U.S. homes flipped in 2005.
There are several reasons why rehabbing a residential property can be a great investment.
#1. Lower purchase price
Depending on the market, investors can find rehab properties at a considerable discount, which naturally increase the potential return on investment. Markets with high demand and a large percentage of distressed properties are ideal for this type of investment. Some of these include several cities in central Florida, Detroit, Tucson, Pittsburgh, Memphis and Chicago. This combination of low purchase price and high demand has driven the return in Baltimore up to 94%, for example, according to RealtyTrac.
While some investors are willing to pay full price for properties to flip, this approach entails considerably more risk than discounted purchases. It can also inflate home prices in markets where demand is high, since flippers looking to maximize profits will raise asking prices and consumers feel the pressure to spend more in order to secure a home from limited inventory.
#2. Strong returns
Returns of more than 90%, like Baltimore’s, aren’t to be found in every market, but overall successful flips can be very profitable.
Last year, the average gross profit on a flip, however, soared to $72,450 nationally, up from $61,684 in the first quarter of 2014. The average gross return in over 35%. This increase can be attributed to the tight supply in the housing market, which is pushing prices higher faster.
RealtyTrac mentions these markets as having particularly strong flip returns: Tampa, Florida (57.2 percent), Pittsburgh (55.2 percent), Memphis, Tennessee (54.8 percent), Chicago (52.9 percent), Seattle (49.0 percent), New York (47.1 percent), Washington, D.C. (44.2 percent) and Boston (44.0 percent).
#3. Multiple options
One benefit of house flipping is the idea that, should prices dip, investors have the option of holding the property until the market improves. This can be an excellent option in markets with strong rent growth, so that statistic should be considered when investors are investigating potential properties to flip. Fortune magazine predicts rent growth of 8% on average, nationwide, in 2016.
For many investors, rehabbing residential properties can be a profitable venture. Particularly suited would be people who can purchase distressed properties for cash, have a well-established professional network, and the ability to wait out a down market.
While flipping properties is not without its risks, conditions are favorable in many U.S. markets, making residential rehab a great investment.
If you're interesting in flipping a property and are in need of financing, let Patch of Land be your partner for you next project! For more information, look through the steps on how to get started or download a FREE copy of our Borrower Handbook.