Although profit margins are shrinking, flipping is still a good business to pursue in 2020, according to industry experts. Todd Teta, chief product officer at ATTOM Data Solutions believes the industry remains in an overall healthy state, but notes in an interview that, “Push-and-pull forces in the housing market appear to be working less and less in investors’ favor. That’s leading to declining profits and a business that is nowhere near as good as it was a few years ago."
The volume of fix and flip transactions is at an all-time high, and rehabs now represent close to 6% of total transactions. Home flip lending volume was up 35% in the first quarter of 2019, to its highest level since 2007.
But profit margins are declining. Returns on home flips have dropped six consecutive quarters — and eight out of the last 10 — and are now at their lowest level since Q4 2011, according to ATTOM. Average returns in 2019 were at about 40%, down from 44% a year prior The average return in Q2 2019 was $62,700.
As fix and flips become a more popular investment option, savvy real estate brokers and investors need to stay one step ahead, understanding which markets will generate the greatest ROI and how to manage rehab costs to ensure the best possible return.
The Best (and Worst) Markets for Flipping
Although savvy investors must do their own research, using the most accurate integrated technology to assess property values, comps, rehab costs and trends, you can ascertain the geographies that show potential for the best ROI.
A recent WalletHub study of 172 markets revealed the 10 "best" cities to flip a house. The factors considered included market potential, renovation and remodeling costs, and quality of life. The top cities are:
- Sioux Falls, South Dakota
- Missoula, Montana
- Rapid City, South Dakota
- Billings, Montana
- Peoria, Arizona
- Tampa, Florida
- Fort Smith, Arkansas
- Greensboro, North Carolina
- Las Cruces, New Mexico
- Boise, Idaho
According to DLP Capital Partners, "2020 will be a year about finding value." Regions like those above may be among the one-in-four markets that are currently undervalued, enabling real estate investors to find and flip properties with the greatest potential for ROI.
Finding Fix-and-Flip Success
In this highly competitive fix-and-flip market, the ability to find and execute deals quickly becomes a competitive advantage. Many investors turn to private loans as a way of getting fast capital when they need it. The average time frame to flip a house in Q1 2019 was 180 days, up from an average of 175 in Q4 2018, but down from 182 year-over-year. Moving rapidly and having a trusted source of funds for renovations can help ensure faster flipping success.
If you plan to invest in fix and flips in 2020, you must:
- Select a market and properties with the greatest potential for ROI. Monitor national trends but do your own detailed research, too, at an individual neighborhood level.
- Secure a reliable source of funds geared specifically to this type of lending.
- Estimate rehab costs accurately and find contractors with experience and a solid track record for on-time and on-budget work.
- Stay on top of trends — both national and geographically specific. Knowing which neighborhoods provide sound opportunities for the future keeps you ahead of other investors.