House flipping has been a growing trend among home investors over the last decade, spurred mainly by low mortgage rates and the popularity of television shows such as Fixer Upper and Flip or Flop.
But is taking on a fixer-upper as easy as they make it seem on TV? And is house flipping still a good business to get into?
Sadly, the home flipping market has seen better days.
According to the latest data by ATTOM, 92,422 single-family houses and condos were flipped in the third quarter of 2022, translating to 7.5% of all house sales. Although still high, this represents a sharp decline compared to Q1 2022 when 9.6% of all homes sold were flips—the highest level on record in the last 22 years.
Gross profit also declined over the third quarter, witnessing a drop of 18.4%—the lowest on record in the last three years.
Still, this does not mean that there is no money to be made. Savvy investors can still earn a profit off fix-and-flips, provided they buy in the right area, don’t overspend on the purchase, and outsource as little of the renovation work as possible.
Let’s take a closer look at the factors you need to consider and how much money you can expect to make by flipping homes in 2023.
How Much Can You Make by Flipping Houses?
According to ATTOM, flippers made around $62,000 in gross profits in Q3 2022. At the same time, the resale price of homes declined by 5.5% to $310,000, while the average purchase price was $248,000.
This translates to a return on investment of 25%, which is not bad, but a far cry from the 31.8% recorded the previous year.
Why aren’t house flippers making more money?
There are several reasons why the once-booming flipping market is stalling right now.
House prices are up
House prices have been on the rise across the country, real estate statistics show. More specifically, the latest report from the Federal Housing Finance Agency (FHFA) House Price Index indicates that house prices went up by 8.2% between November 2021 and November 2022, while data from FRED shows that the average sale prices in the fourth quarter of 2022 stood at $535,800. This is an increase from the $497,300 recorded in the same quarter of 2021.
Since the initial investment for house flippers is higher, the returns are lower than what they used to be.
Mortgage costs
While interest rates do not have that much of an impact on flippers, as 63.7% of homes flipped were purchased in cash, the mortgage market does affect demand from buyers, especially first-time buyers who typically get higher than average rates.
Mortgage rates have eased up a bit over the last few months—the 30-year fixed rate was 6.09% as of February 2023, a full point down from a record-high of 7.08% in November 2022, says research from Freddie Mac. Nevertheless, interest rates are still almost twice as high compared to the historically low-interest rates introduces during the pandemic era.
Experts predict that high-interest rates coupled with rising house prices will keep potential home buyers out of the market.
Cost of renovations
The final factor is the cost of renovations, including labor and building materials, and the time it takes to complete the work.
As of December 2022, the average cost of a gut renovation ranges between $100,000 and $200,000, with a complete remodel coming in at $60 to $150 per square foot, says Rocket Mortgage.
In terms of completion time, ATTOM reports that the average time it took an investor to resell a home at the end of 2022 was 163 days. This is much longer than the average time from purchase to resell in the third quarter of 2021 when flips were sold in about 149 days.
How to Make Money from Flipping Houses?
Here are a few tips you can follow for successful flips.
1. Don’t overpay for the property
To get a clear idea of how much you need to pay for the home, you first need to have a rough notion of how much repairs will cost. You can then use this information along with the value of the home to estimate the purchase price.
In essence, you should not pay more for the home than 70% of the resale value, i.e. the after-repair value (ARV) of the property.
This is how the 70% rule works:
Value after repair x 70% – the cost of repair = maximum buying price
So, if the home’s ARV is $300,000 and you need $30,000 for repairs, then you should not pay more than $180,000 for the property.
An experienced flipper will not have any issues using the 70% rule as they are already familiar with the overall cost of a remodel. Newbies to the business might want to team up with a more seasoned house flipper until they get a bit more experience.
2. Find the right market
ATTOM reveals that the following markets have the highest average ROI in the third quarter of 2022.
- Buffalo, NY—121.7%
- Pittsburgh, PA—116.9%
- Scranton, PA—88.7%
- Reading, PA—86.7%
- Salisbury, MD—81.2%
In terms of metro areas Philadelphia had the higher gross ROI (77.5%), followed by Baltimore, MD, and Detroit, MI with an ROI of 75 and 68.3%, respectively.
That said, going for the areas with the highest returns is not always the best idea. Instead, you should look for markets that have growing populations and diverse economies, as well as ones where there is strong demand and housing stock, but which are not oversaturated with fix and flip investors.
You also need to plan ahead and calculate how the real estate maker is expected to change in the coming months and years by factoring in the local pricing and growth potential of the area.
3. Learn more about the neighborhood
Some things you should be mindful of when looking at the local area include:
- Crime rates
- School systems
- Taxes
- Future development plans
- Employment rates and the state of local business
Properties in safe areas with good schools and active, growing businesses are likely to sell faster and for more money.
4. Run a comparative market analysis
A comparative market analysis will tell you how much similar homes are worth in the area, giving you an idea of how much you can expect to make from the flip as well as the amount of money you should invest in the property.
For instance, if homes in the area do not have high-end appliances and upgrades, there is no need to overspend money and include these in your property. On the other hand, you don’t want to skimp on features that other similar properties have as this will make your house decrease in value.
5. Apply for permits in time
Get familiar with the local by-laws and the permits you will need to renovate the house. Failure to do so will cost you time and money as you will need to schedule and pass inspections before putting the house on the market.
6. Find the right form of financing
Ideally, you need to pay for the home in cash if you want to maximize profits and limit risks. However, if you don’t have the cash to pay for the property, you can explore other methods used for purchasing a house with no money upfront, such as applying for a mortgage or HELOC.
Keep in mind though that even if the interest on loans is tax deductible, it is not a 100% deduction, so you need to factor in the interest in the overall cost of the investment as well.
7. Outsource less
If you know your way around power tools or can put up drywall, you could end up saving a lot of money on labor costs. Even if you don’t have any construction skills, you could still save a couple of hundred dollars by getting your hands dirty and doing demo work, laying tile, or painting the interior.
Bottom Line
Profit on fix-and-flip investments may not be as high, but house flipping is still a good business for those who invest wisely and are able to minimize costs by supervising or doing most of the work themselves.
If you feel that you are not cut out for renovating and selling homes or think profits are too low, don’t give up on property investing. Real estate is one of the safest places to put your money, even during inflation, so consider other options such as investing in REITs or commercial property.
