For years, real estate investors have found success flipping houses. But these days, the profit margins of domestic fins are shrinking.
ATTOM Data reports nearly 95,000 homes flipped during the third quarter of 2021, representing 5.7% of all sales. But the average gross profit on house flips was just under $69,000 this quarter, down 1.6% from the same period a year earlier. Additionally, the return on investment for house pinball machines fell to 32%, the lowest level since the start of 2011 and a significant drop from the previous year.
Why aren’t house flippers getting better?
Several factors may explain why the house flip may be slow right now. For one thing, property values are up across the board.
During the third quarter of 2021, house prices rose 18.5% year over year, according to the Federal Housing Finance Agency’s house price index. Since home buyers are paying more for properties upfront, they may not be getting the same returns as when the home values were lower.
The cost of building materials is also on the rise, fueled in part by ongoing supply chain issues that have plagued the construction industry throughout the pandemic. If home swimmers are spending more money on renovations, it makes sense that their profits will go down.
Finally, labor costs more these days, in part because it is harder to find. This, too, could contribute to lower profits in the house flipping space.
Does house flipping still make sense?
Even if house flips aren’t seeing the same returns as a year ago, house flipping can still be a profitable business. That said, if you want to get into house flipping, you’ll need to do a few key things:
- Find the right market: Ideally, you want one that lacks inventory and isn’t already saturated with fix-and-flip investors.
- Know the neighborhood: You don’t want to over-improve the homes you’re flipping, but you also don’t want to skimp on features that are common in the area and could result in a much higher selling price.
- Don’t outsource too much: With labor costs high, it might be time to get your hands dirty if you have the skills to do some of this house flipping work yourself.
While the profits on house flips may shrink, they are still there. And if you’re a seasoned swimmer, you can have your fair share of success, even in these tougher times.
That said, if you’re new to house flipping or aren’t sure you want to, there are other ways to get started in the world of real estate investing that may be less risky. You might want to pursue options like investing in a short-term rental or loading REITs (real estate investment trusts) until home values drop, building materials become more readily available, and the hand -work becomes less difficult to find. Although buying any type of rental or income property means facing higher than average prices, you avoid at least some of the risk and hassle of turning homes in disrepair into attractive living spaces.