Some investors might think flipping a house is a great way to make extra money. After all, you can buy a house that needs some love at a low price, invest some cash in renovations, and sell it for more money.
Or, so you think.
Before you jump at the idea of making money on a renovation, reconsider whether you can successfully flip. In today’s current market, there are several factors that could stand between you and more cash.
So before you start searching out homes to flip, here are a few reasons you may want to take a step back, at least for now.
The cost of goods is rising
Inflation has affected the price of all kinds of goods, including items you need to renovate a home. Major appliances, for example, cost 7.5% more than they did a year ago, according to the Bureau of Labor Statistics.
Many other prices have also risen. On the other hand, lumber prices are declining after reaching highs in 2021.
With costs so volatile, you might want to be cautious about flipping until prices settle a bit. However, if you decide to go ahead with your plans, know that gutting a kitchen as part of a renovation project is going to cost you.
The cost of services is higher
Higher gas prices also can have an effect on how much it costs you to renovate a home. Gas is used in the transportation chain to move the materials you need.
Electricians, plumbers, tile installers, and others may now charge higher rates to cover their costs, including the rising price of goods, tools, and gas for transportation.
Higher mortgage rates will eat your profits
Mortgage rates have soared this year. The average rate at the beginning of 2022 was around 3.2%. By late July, it was 5.5%, according to Freddie Mac.
Higher rates mean you will have to pay more for your mortgage, and higher rates could take money out of your profits.
Higher mortgage rates will give you less time to flip
In addition to eating into your profits, higher mortgage rates also may put a timer on your project. The faster you flip, the lower your costs will be and the higher the profits.
You may want to factor in any potential delays in the process, which could raise your costs even higher. That might push you into some tough decisions, such as selling the house before the renovation is complete or speeding through work in a way that could lead to a sloppy or unappealing renovation.
Finding homes is difficult
Recently, the supply of homes has ticked up a bit in many markets around the country. Still, new residential construction and permitting activity is slipping, according to the Mortgage Bankers Association. That means fewer homes for those who want to buy them.
Fewer homes available for sale means a competitive housing market as you try and find that renovation gem.
You might be getting in too soon
The Mortgage Bankers Association also reports that the average loan size for new homes dropped from $430,855 in May to $426,966 in June. There are anecdotal reports of home sellers dropping their prices in many markets.
All of that news may be good for flippers, but you might want to consider waiting to see if housing costs move even lower before you dive in.
Prices remain high
Yes, housing prices may be slowing down a little, but you could still end up buying near the peak of the market.
Applications for mortgages in June 2021 averaged $392,370, according to the Mortgage Bankers Association. A year later, the average was $426,966.
Even if prices are slowing down, buying a house now could mean you’re buying a home to renovate near the housing market highs. And you could end up selling that renovation at a time when those sky-high prices are drifting down.
Skilled contractors are hard to find
Contractors are in high demand, and the supply of these pros might not be enough to meet those demands. So, while you might have big plans, it could be impossible to fulfill them.
Before you dive into a house flip, call around to local contractors to see what kind of wait you might face for plumbers, electricians, and others.
You will need to make a major time commitment
With more people working from home, you might think it would be easy to balance your current job with overseeing a home renovation. But depending on the project, a home flip may take up a large chunk of your time and could even be considered a full-time job itself.
Remember to factor in the time commitment you’ll need for a flip, and perhaps consider a home that might need less work so it fits with your current professional and personal commitments.
Competition is up, profits are down
There has been an increase in the number of homes being flipped, with nearly 115,000 homes flipped in the first quarter of 2022, according to real estate data firm Attom. That could be an issue if you’re trying to compete with other flippers to get the best homes to renovate.
In addition, the report also found that profit margins continue to fall, with flippers getting a gross profit margin of around $67,000 for a home flip — a 13-year low.
In some markets at some times, flipping a home may seem like a great investment and a good way to quit living paycheck to paycheck. But the current market has additional challenges that could cause you to lose cash.
So, think about how much you want to invest in a flip and plan a budget you can stick to so you don’t lose cash. Or perhaps reconsider a flip at this time, as remaining on the sidelines might be a great way to avoid wasting money in today’s market.
FinanceBuzz is not an investment advisor. This content is for informational purposes only, you should not construe any such information as legal, tax, investment, financial, or other advice.
Hard Money Loans Benefits
- Get approved for up to $5,000,000 in less than 5 minutes with instant term sheet + proof of funds
- Fix-&-flip loans up to 90% LTC, rental property loans up to 80% LTV, and ground-up construction loans up to 90% LTC
- No income verification, interest-only payments, and discounts for repeat borrowers