Is It Still Profitable to Flip Houses

Is it still profitable to flip houses? It depends. If you buy smart, keep repair costs down, and know what it will sell for, house flipping can be profitable. On the other hand, if you pay too much for the property, make expensive repairs that don’t bring in extra money, and do it in a low-demand area, it could end up costing you.

Let’s explore the state of the house flipping market and whether investors can still profit in 2023.

How house flipping works

House flipping is a real estate strategy where an investor purchases a property — usually distressed and needing repairs — makes improvements to get it market-ready and quickly sells for a profit. In a hot market, it can also be purchasing a home and holding the property until it’s sold for more than what was originally paid.

The ultimate goal is to buy low and sell high, but it doesn’t always work out this way.

When done correctly, investors can purchase properties and sell them for much more than they paid. This involves researching the local market and being smart with your money.

Is it still profitable to flip houses in 2023?

House flipping has grown in popularity over the last few years, but flippers have recently gone through a rough patch.

According to ATTOM Data, investors flipped approximately 407,417 single-family homes and condos in the U.S. in 2022, up 14% from 2021 and 58% from 2020. This is the highest recorded level since at least 2005. Homes flipped by investors last year represented 8.4% of all home sales nationwide. Again, the largest since 2005.

Even though turnaround rates went up, gross profit margins on home flips dropped to their lowest level since 2008.

Homes flipped in 2022 generated a gross profit of $67,900 nationwide — down 3% from 2021 — with just a 26.9% return on investment compared to the acquisition price. This was the fifth drop in profit margins over the past six years. Why?  Resale values slowed while acquisition costs soared, ATTOM Data noted.

Record low mortgage rates during the early days of the pandemic sparked a buying frenzy across all U.S. real estate markets. But as mortgage rates began to rise along with consumer price inflation, many regular homebuyers were priced out of the market, limiting the buyer pool as investors completed home rehabs.

At the same time, inflationary forces pushed up the cost of materials and labor used to improve properties, which jumped between 20% and 35% in cost last year. As a result, investors were pocketing less on resale.

These numbers were also the average across all analyzed markets.

According to ATTOM, investors saw the largest profits after flipping homes in San Jose, San Fransisco, Washington DC, New York City, and Seattle while the lowest profits were in Kansas City, San Antonio, Houston, Indianapolis, and Dallas.

Investors must overcome more challenges, but this doesn’t mean house flipping can’t be profitable in 2023. Investors must make smart decisions about what they’ll pay for a property. New flippers should also be wary of what can go wrong with a fix and flip.

Common flipping mistakes

Overlooking some of the smallest details can end up costing you big.

For example, let’s say a flipper purchases the perfect fixer-upper and creates a budget based on rough estimates. However, they fail to account for unforeseen issues like plumbing problems or structural damage. As a result, they run into unexpected costs that exceed their initial budget and eat into their potential profits.

Here are some common house-flipping mistakes to avoid.

1. Overpaying

Paying too much for a property is the most common mistake that new flippers make. If you overpay, your initial investment plus renovations, carrying costs, and transaction fees could put you in the negative.

Before purchasing a property, estimate repair costs and how much you could sell it for before making an offer. This is where the 70% rule comes into play.

According to experts, the property’s purchase price should be 70% of the home’s after-repair value (ARV), minus repair costs. That means you’ll pay $150,000 for a property that will sell for $250,000 after $25,000 in repairs.

2. Not getting a thorough inspection

Most flippers look to purchase distressed properties, but not too distressed. Some problems, like holes in the roof or a rotting floor, are easy to spot. But others, like bad plumbing or structural issues, are expensive to fix. This is why it’s essential to hire a licensed home inspector to evaluate the condition of the property.

If you skip this step, you could end up with a property that needs more work than you can afford.

3. Hiring out too much of the project

Flippers can save serious cash by overseeing the work themselves. But if you don’t have the time in your schedule, you’ll have to hire a general contractor.

General contractors typically charge a percentage of the overall cost of the project. You can calculate this by taking the total cost of labor and materials and multiplying that number by the contractor’s fee, which ranges from 10% to 20%. For example, a $5,000 bathroom renovation would cost an additional $500 to $1,000 for a general contractor to oversee the project.

For a small project, consider hiring your own plumber, electrician, and handymen, then schedule and oversee the work yourself.

House flipping tips

House flippers didn’t see as much of a profit in 2022, but that doesn’t mean they didn’t see any profit at all.

Is it still profitable to flip houses? It takes work to bring in the big bucks. Let’s take a look at what investors can do to increase the likelihood of success in 2023.

• Study the local real estate market: Not every property is profitable. But to know which ones have the potential, investors need to study and understand the local real estate market. You should also work with local real estate agents and appraisers to help you make better-informed decisions, but this doesn’t mean you shouldn’t do your own due diligence.
• Be patient and look for the best bargain: Another important step in a successful flip is to buy a property for the right price. This means finding distressed properties — either short sales or foreclosure auctions — and making a purchase at 70% of the AVR minus repair costs.
• Get familiar with your financing options: If you don’t have the cash on hand, then you’ll need to secure financing. Luckily, plenty of financing options are available to fund your fix and flip. The key is knowing which one best matches your needs. Not every lender will approve a loan for an investment property that needs some work, but others specialize in these types of deals.
• Research the latest remodeling trends: Not all renovations deliver the same return on investment or appeal to your target buyers. This is why investors must follow remodeling trends and which ones attract top-dollar offers. The latest Cost vs. Value report from Zonda Media shows that most projects offering the greatest ROI in resale value are related to curb appeal, not expensive projects like bathroom and kitchen remodels.
• Be prepared to get your hands dirty: The more work you can do yourself, the more money you could end up taking home. Labor costs are high, so If you plan on hiring professional contractors to renovate the property for you, this could significantly impact your profit margins.

Fund a profitable flip with fix and flip financing

Is it still profitable to flip houses? There’s a big potential for loss in the current market, but that doesn’t mean you can’t make it work.

If you’re ready to start flipping houses, you need to find a lender who specializes in fix and flip financing. The best loan for you depends on your goals, experience level, and financial situation.