From the steady stream of comments on the previous article about flipping houses, it’s clear that many investors have remained in the flipping market because they believe capital requirements for the hold and rent market don’t deliver the higher level of returns that the flipping market does.
By the Numbers
Certainly, some flipping investors are still doing well but as an overall industry practice, the numbers no longer support this business model based on risk versus reward analysis.
There is truth in the fact that being a landlord is capital intense. But it’s also where the big money has moved. From corporate startup American Residential Properties Inc. (owning 6,300 rental properties) to the industry leader Blackstone Group LP (owning more than 30,000 rental homes) the money-making strategy remains rent for two years and then sell for the big profit.
The rental profit for these large investors isn’t huge. It varies between 7% and 2%. This isn’t enough money for smaller investors making a full time living off rentals but it is a positive rate of return for those wanting a low risk investment with positive cash flow. More appropriate for individuals managing future retirement funds in one or two houses for a combination of cash flow and future appreciation.
The Best Flipping Markets
According to a mid-year AOL study, these are the best markets to be flipping along with the typical profits being made:
Keep in mind, the profits shown in the chart are Gross Profits. The amount paid for the property subtracted from the amount it sold for. Closing costs, rehab costs, selling costs, and other costs are not accounted for.
Also note the low transaction volumes even in the best markets. Florida is the clear market leader when it comes to flipping. Although you’d expect these cities to be there, Phoenix and La Vegas don’t even make the top 15.
It’s only an opinion based on an analysis of the numbers. However, the flipping volumes in most of the leading markets are low. A few markets have more than decent returns on investment but many are also approaching the profits earned from rents. There may still be a market here for experienced flippers but the risk for beginners and part timers is clear.
Always keep your eye on the ever-changing market. In real estate, it’s always Location, Location, Location.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.