You’ve found the perfect house in a red-hot neighborhood. It needs some cosmetic work, but foundationally it seems sound. You hesitate. You see headlines screaming that house flipping is dead in 2021. Low housing inventory, social distancing, and of course, unemployment have made buying and selling homes more challenging.
But there is good news. Mortgage interest rates are at historic lows, making homeownership more affordable. Also, experts predict an increase in distressed properties on the market near the end of 2021 as the mortgage forbearance comes to an end. This will bring more properties on the market for savvy investors to flip.
So save up your cash, and keep your eyes peeled for good deals. House flipping is alive and well in 2021. Here is how to house flip in 2021.
House Flipping Basics
House flipping has probably been going on in some form since man first starting living in mud huts, but the modern craze started in the 1980s. Foreclosures were very high in the mid-80s. Savvy investors picked up homes for pennies on the dollar, renovated them, turned around, and sold them for high profits when the market rose. “This Old House” with Bob Villa was one of the most popular shows on TV.
Many investors got wealthy as the market rebounded nicely. By the year 2000, the DIY movement was in full swing, and the real estate market was booming. Home Depot and Lowes were on every corner, and entire television networks were dedicated to home remodeling and selling.
The economy soured in 2007, and the real estate market crashed. The whole country was walloped, but hot home flipping states like California, Florida, and Nevada were hit the hardest. Many home flippers went upside down in their homes and lost everything.
The recession lasted well into 2012. By 2014 a recovery was well underway, and home flipping became popular again. Interest rates were low, so investors who picked up solid homes in good areas made a killing. Home flipping shows became some of the most popular programs on cable.
High-Interest Rates and a Cool Market
As unemployment levels decreased, the Fed started increasing interest rates. By December of 2018, the feds had hiked the interest rate four times and suggested raising the rates twice in 2019. At the same time, some real estate markets were beginning to cool. The buying frenzy seemed to be over.
Talking heads started talking about the home flipping demise and how hard it is to make a profit. Like most headlines, it was partially correct. It’s wasn’t as easy to buy and flip.
For starters, much of the low-hanging fruit was gone. Many profitable homes were snapped up and are harder to come by. Secondly, shoddily done renovations have given some home flippers bad reputations, leaving buyers and realtors wary of them.
Zillow and other significant professional companies are also getting into the home-flipping business. With lots of money and power behind them, individual investors faced fierce competition.
So is Home Flipping Dead?
Not by a long shot. Because the economy has cooled due to the 2020 pandemic, interest rates have fallen. This has led to lower than expected interest rates and a better outlook for home sales this year.
The other good news is that many inexperienced and shoddy contractors and home flippers have moved on. For those who are willing to do their homework and due diligence, there are always deals. Individual investors will have to compete with the big boys like Zillow in some markets, but a single investor can move faster on a property than a large company with tons of overhead.
The average gross profit in 2018 on flips was over $65,000. Gross profit doesn’t include the cost of repairs or capital gains taxes. Still, if done correctly, a knowledgeable investor who can do an excellent job while keeping costs low will do well.
How Can You Avoid Making Costly Mistakes?
- Stay close to home. Investors with intimate knowledge of a market do better than those who go out of town. Familiarity allows you to honestly know when a home is a deal or a money pit.
- Find a real estate agent who understands your goals and who understands the nuances of the market. Experienced agents will know what it takes to buy the property and sell it in a few months. Their advice is invaluable.
- Pay with cash if possible. Interest-heavy mortgage payments will eat up profits if the renovation or sale takes longer than expected. We recommend paying no more than 80% of the appraised value minus the repairs.
- Be patient. Those who rush deals usually make bad deals. If the project isn’t right, walk away. There is always another deal.
- Make a budget and stick to it. Know what equals a smart investment and what doesn’t. High-end countertops and cabinets in a $150,000 home make no sense. A suitable quality laminate with repainted cabinets may be all you need. Paint, carpet, and landscaping get the most bang for the buck.
- Protect your reputation by doing a good job. Hire licensed and insured contractors. Inspect and repair any dangerous wiring or plumbing. Don’t hide problems and pass them on. If you do, local realtors will stop working with you. Be honest.
- Stay with the 70% rule. You shouldn’t pay more than 70% of the home’s value (after rehab) minus repair costs. If a home sells for $400,000 after being fixed and cost $75,000 to improve, you should not pay more than $205,000 for it. This gives you a cushion for unforeseen costs and fees when you sell.
2021 is still a great time to be investing in real estate. With a little dose of patience, the time is always right!