Flipping houses has been a lucrative business & short-term investment strategy for many years. However, the investment strategy’s potential to generate a lot of money has found renewed popularity in recent years.
A house flip is defined as an investment property that is bought and sold within the same 12-month period. Real estate flippers find distressed properties (or fixer-upper homes), remodel, and sell the property for profit.
According to ATTOM Data Solutions, a national curator of property data, 94,766 single-family homes/condos were flipped in 2021’s third quarter. Those transactions identified as a ‘house flipping deal’ accounted for 5.7% of the total single-family transactions for 2021- Q3.
This translates to one flip for every twenty real estate transactions of single-family homes.
To provide some context, the median price of the homes that were flipped in 2021-Q3 hit a record high at $281,847. This amounted to a 4.8%+ from the previous quarter (2021-Q2) and nearly 22.5% over the previous year ($230,000). This year-over-year increase to the price of a flipped home was the largest annual increase in fifteen years.
Comparatively speaking, the median existing-home price (for all types of homes) in December 2021 was $358,000, which was up more than 15 percent from the previous year. Incredibly, this year-over-year price increase marked an upward trend of 118 straight months or nearly ten years!
The popularity of flipping real estate can also be attributed to a low-interest-rate environment (which dipped below 3% for fixed rates) paired with an unprecedented shortage of homes for sale, as well as a strong demand created by an overwhelming need for work-at-home lifestyles, far from virus-prone areas.
Further, the average time required to close on a flip dropped to its lowest level (147 days) since 2010.
If you’re curious about your income potential in the house flipping business, read on as we answer the following questions.
Reality television (i.e., HGTV, etc.) has popularized and, at times, even glorified the art of flipping homes. The glossy presentations on television fail to document the trials and tribulations of flipping, and the truth is that flipping houses as an investment strategy is not only lucrative, but it can also be a great creative outlet, especially for those with the skills and drive to tackle some of the renovations personally.
While the popularity of flipping has seen impressive growth, this increased competition vying for the same real estate investment properties has effectively dropped the profit margins of flipping transactions across the board.
It’s important to note these charts and figures represent house flipping at a national level. They don’t represent the potential returns an individual investor, like yourself, can achieve by investing in real estate with the right education, purchasing the right deals, with the right plan of action.
With a gross Return on Investment (ROI) of more than 30% (in a world where most investors are pleased and grateful to generate a 5% return), home flipping is still quite an attractive investment vehicle.
While the art of flipping homes is not for every investor, there are opportunities for positive investment returns for those who have the capability of investing prudently and working vigilantly.
With few exceptions, most careers sitting behind a corporate desk, working at a full-time job, have limitations to their earning potential. This is because one’s salary is set by someone up the corporate ladder and often independent of a worker’s productivity and output.
However, as a real estate investor with a house flipping specialty, you set your financial objectives and the potential timeline to complete the projects.
And while flashy house flipping TV shows neatly package a renovation in 30 to 60 minutes, flipping homes as an investment strategy is NOT a get-rich-quick scheme. But, with an established process, industry & lender colleagues, and an experienced mentor showing you the way, a flipper can potentially earn significantly more than working 9-5 in a corporation.
An experienced house flipping mentor can show you how to flip properties safely, including the pitfalls and potholes. They can teach you how to evaluate properties, neighborhoods, and the real estate market. But, perhaps the most important facet of a flipping investment is creating and sticking to a realistic budget. To ensure you avoid cash flow issues, the budget must include all relevant costs, which include, in part –
Renovation expenses can get out of hand easily, so it is important to seek professional guidance from a financial advisor, investment mentor, lawyer, real estate agent, or professional until such time you feel confident in your abilities to go it alone.
One of the main reasons to choose a career flipping real estate, or any other self-employed career, is that one’s earning potential is unlimited.
A salary, which is defined as periodic payment received by an employee and paid by an employer, does not come close to describing the way in which a real estate flipper generates an income.
Flipping and other self-employed professionals create income streams that vary and are based solely on the potential of the investment, the current housing market, and the flipper’s risk tolerance and savvy.
As of late 2021, the average profit per flip across the nation was $68,847. If an average house flipper completes only one deal per year, then it’s comparable to around a $69,000 per year annual salary.
That said, most real estate house flippers turn multiple houses per year once they understand the profit potential. An investor’s house flipping salary is limited only by their ability to scale.
Theoretically, a real estate flipper’s potential earnings are limitless but are not the result of making a killing on one flip.
Real estate flippers earn a living by flipping many homes as this investment strategy spreads the inherent investment risk. However, there are several factors that impact one’s potential earnings when flipping real estate.
A house flipper’s success is highly contingent on one’s experience and ability to develop mutually profitable relationships with other experienced flippers, realtors, wholesalers, real estate attorneys, and lenders.
While the exact level of profit for a property flip varies based on location and the price range in which the flipper works, most professionals are satisfied with generating an after-sale net bottom line of $25,000 per flip but always search for ways to generate additional value to a property.
Given a five-month (147 days) average closing time to close a flip, this calculates to about $5,000/month ($25,000/5) or $60,000 yearly – working at a steady, consistent pace. This net profit objective offers a bit of a cushion should a flipper encounter unexpected expenses by way of hidden repairs that were not included when estimating rehab costs and budget.
In the 3rd quarter of 2021, the average gross profit for a flipped transaction – defined as the difference between 2021-Q3’s median sales price and the median cost to buy and flip, was $68,847. This translates to a nearly 3% increase from the previous quarter ($67,847) – 2021-Q2 but a 1.6% decrease compared to one year previously, in 2020-Q3 ($70,000).
When evaluated based on the money invested by a real estate flipper, these flip transactions generated the investor a 32%+ return. Even new investors know that a 32+% return on short-term investments is more than respectable.
But note, profit margins for flip transactions (known as the ROI) have fallen because the price on the resale of a flipped home has appreciated at a slower pace than the appreciation rate of real estate at the time the flipper bought the property.
No, real estate investors, in general, have no higher education requirements to meet to succeed in the business of flipping homes.
As some may also wonder if they need a license to flip houses, many flippers choose to earn a state real estate license (and work for a real estate brokerage as a real estate agent) as this is a smart way to reduce the costs of doing business – in terms of real estate commissions paid for a purchase and a sale.
With or without a college degree, real estate flippers should avoid these common flipping mistakes -
Flipping houses can be a great career choice for investors who take the time to educate themselves regarding proven strategies rather than trying to re-invent the wheel. It is equally important to know that flipping houses would not be the right fit for investors looking to make a killing on one deal.
Additionally, with increased pricing pressures from a more competitive market, many flippers have been forced to buy with cash as this helps ensure they win a bidding war if one exists.
In the third quarter of 2021, 60.4% of investors who purchased a flip property paid for it in cash. This was an increase from 57.7% from one year previously. As one would expect, the number of flipped homes bought with financing in 2021-Q3 was down to 39.6%, a drop from 42.3% one year earlier.
Like any other type of business, flipping houses requires planning, shrewdness, market knowledge, perseverance, and a dash of luck. Flipping houses also require a professional-grade level of patience and solid business judgment because flipping houses is hugely dependent on timing.
However, real estate flipping is not for the faint of heart. This is because even if you, as the investor, began with accurate property and market assumptions, evolving market conditions might mean that the basis of your original judgment has become invalid.
The two primary areas to be hyper-vigilant about for those new to flipping houses include –
Flippers who have a finely tuned system can flip 6 – 8 houses per year (and sell to home buyers or other investors), which translates to a six-figure gross profit.
Yes. Flipping houses can be quite profitable but requires a smart investor with a well-thought plan, a savvy mentor, and execution follow-through.
As noted previously, in the third quarter of 2021, the average gross profit for flip was $68,847. The amount of profit and return on investment fell from the same period one year ago but is still a generous 32%+. So yes, flipping houses is profitable.
Flipping enough houses can certainly make you rich. It can even be a great career, especially for those who want to be their boss, set their hours, and have the opportunity to earn a significant income. But flipping houses is an investment that is fraught with risk.
The best way to make a wise investment in a property to flip is to ensure you understand how to evaluate a property’s potential. Many flippers team with professional appraisers who can provide an accurate depiction of the value of the home after the repairs have been completed. Then, they employ the 70% rule.
This rule is more like an investor’s guideline. The 70% rule essentially is the maximum amount you, as a flip investor, should pay to avoid overspending. The calculation is simply –
Here is an example to help clarify this important investment concept -
The estimate of the home, after it has been renovated, is $300,000.
The home needs $50,000 in repairs and upgrades.
The purchase price of the property, in the above example, should not exceed $160,000.
When sold, the possible profit for this deal will be - $90,000
Note, however, that this simple example did not reflect certain expenses (like closing costs or financing costs) or for the investor’s time or the time value of money.
Yes, house flipping can be worth it, but an investor needs to understand the realities of the market and the nature of the investment.
First, flipping a house is not easy money and can be risky due to -
The reality is that an investor’s success is heavily dependent on the professionals in your network but worth the effort for the right investor.
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