Will Flipping Properties Ever Regain Its Past Popularity?



No one can predict how the real estate market will evolve. From the 1990s through 2007, flipping houses was very profitable for many investors. Today the investment model has changed. Investors have been a large influence in the real estate market recovery. Over the past year, investors have heavy handily made between 20% and 23% of all house purchases. But the business model is no longer flipping houses.

Hedge Funds Now Dominate

Hedge funds have had a major impact on the real estate investment business. In times gone by, it has been individual investors that molded the real estate market. It was individual investors that bought four or five houses each year, rehabbed them, and flipped them for a 25% profit. It was a good business.

Hedge funds saw a huge opportunity in the foreclosure market. They started buying up foreclosures by the tens of thousands. Certainly, this helped stabilize the market but it was also a big factor in why home prices took off with gusto. Hedge funds have been bidding against each other. They have priced individual investors, that haven’t switched to the new business model, out of the market.

© Alfonso de Tomás - Fotolia.com

© Alfonso de Tomás – Fotolia.com

The New Business Model

The hedge fund model is not flipping houses. There are multiple reasons for this. First and foremost, mortgages for Joe Average are almost nonexistent. People that have been foreclosed on are completely locked out of the market by their credit rating. First time buyers tended to be younger and lack an adequate credit history to qualify for a mortgage under the stringent rules that banks are applying. Additionally, young people no longer see owning a house as part of the American Dream after watching millions of people lose their home over the past six or seven years. The younger generation also prefers the freedom to relocate frequently that renting enables.

With major corporations (hedge funds) now firmly in control of the residential housing market, they are redesigning the investment business model. People can no longer buy a house so they must rent. That’s the new business model – renting houses. As an individual investor, it would behoove you to follow the new business model and become a landlord instead of trying to flip houses.

It’s always about local markets but in all major markets across the country, it’s now less expensive to own a house than it is to rent. But with most of the population either locked out of purchasing or electing not to purchase, rents will continue rising for years to come. This makes the rental market attractive to investors.

Profitable Flipping is Years Away

Flipping houses may or may not come back. It’s all about the economy. Unemployment is down but people have been forced into lower paying jobs than they previously had. That’s going to keep them in rentals instead of homeownership.  Even after a foreclosure has been erased from their credit history.

Beyond anything else, it’s about the evolving market. Flipping houses had a relatively short history as an investment model. It very well may be a dead business model. It certainly is dead for now. As an individual investor, it’s time to move on to the new business model of being a landlord and wait for the big payday when house prices take years, instead of months, to seriously appreciate in value.

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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.

Comments

  1. I was a real estate agent in the Austin, TX area. Now I work for a real estate appraiser. As an agent, it was really really hard to find houses to flip, so I stopped working with investors. The successful flippers I knew worked really long hard hours, were real estate Brokers, had their own crew of subs to do the work, and still didn’t make that much. It is harder than it looks. For houses we appraise, we don’t find that many comps that are/were flips, but the occasional one that was bought for $80k, then updated and sold for $160k makes me long to be in the flipping biz. The reality check tells me that the person who did that deal almost certainly paid his or her dues to find that property (dues = years of cultivating the ability to locate and acquire properties worth flipping).

    • Brian Kline says:

      Hi Alison,
      First thank you for the comment. A 80K to 160K flip is a great deal. I’d be looking for more of those as well. The Texas market is about the strongest market around, other than Manhattan NYC. In most parts of the country, the flipping market is weak, in my opinion.

  2. I agree with Mark and Dan. House flipping profitability may vary depending on the market but it will always profitable for an individual investor who does not have a huge capital advantage to buy and hold.

  3. Don’t agree with this article for the following reasons:

    1) Flipping is not dead; it has always been and still is viable if you do your homework and make your money when you buy the property.

    2) Depending on appreciation is pure speculation; there is never a guarantee of it. Investing for solely for capital gains is how the economy tanked before. Why be an idiot and fall for this same model again?

    3) Buy-and-hold investing is great – if you have millions of liquid cash like the hedge funds, otherwise it makes zero sense to borrow and then buy-and-hold for passive income with annual return less than 18%.

    Bottom line: given the above facts, why anyone would want to ONLY tie their precious cash in a buy-and-hold deal for a paltry 8-10% return a year when one can STILL make at least that in 2-3 months fixing and flipping homes. Obviously, someone here wasn’t successful with the latter.

    The reality is that both business models can and do work depending on the markets and the cash positions of the investors. The author forgets the very basic fact that 99% of the investor population are not billion-dollar hedge funds with bottomless wells of cash, therefore, buying to hold is not a viable scenario to build wealth unless one has a minimum of $3-4m to get started.

    • Brian Kline says:

      Hi Mark,
      I appreciate your points. I’d like to know what local market you are successfully flipping in and the details about your most recent deals.
      Brian

      • I have been working the Phoenix market for the past year. The sheer volume and diversity of submarkets within Phoenix seems to be unmatched, other than perhaps So. Cal – however, inventory is starting to pile up. A recent example of a successful flip:
        Purchase price: $175K
        Rehab: $35K
        Selling price: $270K
        Turnaround time: 3.5 mos.
        Net profit after selling/holding costs: $30K

        Vegas was good, but is too saturated with buy-and-hold investors and the hedge funds that have driven up pricing, leaving no margin for profit. Great rental market, but again, unless you have loads of cash to park indefinitely, not a viable option. But if I had $5m, I would be allocating 50% of that in multi-family housing as opposed to SFRs for long-term cash-flow. I would still do flips to better my cash-on-cash return. I see pricing softening from increased active listings now and will continue into next year. That means, pricing on acquisitions needs to be adjusted. Also – banks are starting to pick up on the shadow inventory and starting to foreclose more. If you’re going to sell, better do it now.

        • So my question would be: did you work full-time on that flip? Is that $30k shared with anyone else? was it your only flip during that time?

          • Brian Kline says:

            Alison,
            I’ve been out of the flipping market for years. But yes, you typically have to share a portion of the profit at least with a contractor and in many business models have an investor involved. Today, the business model that is working for many is having investors (retirement money) hold houses with positive cash flow with a plan to sell for a profit in a couple of years.
            Brian

      • One other thing I wanted to add:
        If I had my choice, I would much rather have a nice, steady income from passive rental income than transactional income from flips. It’s just so much more work doing flips, but I don’t have a choice. Therefore, I must build up cash reserves doing flips with the goal of acquiring rental property at some point in the future. I have unlimited access to hard money, but that does not work when buying rentals.

  4. Brian,

    I liked your article and I do agree with you. The landscape for the small investor has changed. Not only because of large institutions “bulk buying,” but also because the investor market is drying up. We’re seeing so few investor grade properties for sale in the Columbus market that competition is very hot. Being in the REO listing world I know that overall foreclosures are slowing down dramatically. Single investors as well as institutions are struggling to find new property.

    I do believe home ownership is still a very high priority for most Americans, whether they can afford it or not. Luckily, low home prices and cheaper financing rates are still making purchases attractive. Most people I meet don’t tend to be put off by home ownership, their dislike is for banks and mortgages in general. We still want the white fence and the big back yard.

    • Brian Kline says:

      Hi Drew,
      I agree wholeheartedly with your comments. Of course, how many foreclosures and REOs are available is a local issue. Long term, I see the institutional landlords running up rental prices to the point that home ownership is the clear economic choice. I look for the institutions to start selling off those rental houses in about two years.

  5. Im still flipping and so r all my friends. Nothing has change. I been at it 16 years now full time

    • Brian Kline says:

      Hello, there are still limited opportunities to flip properties in some local markets. Especially if you can offer owner financing. However, other investment models offer a better return on investment in many markets.

      • My take:

        1) Flipping is not dead; it has always been and still is viable if you do your homework and make your money when you buy the property. I do agree, however, that it doesn’t work as well in certain markets.

        2) Investing for solely for capital gains (appreciation) is a risky bet and pure speculation and how many investors like myself got into trouble when the bubble bursted – and it will burst again. If you are going to do buy-and-hold, you buy for the cash flow, never appreciation. If you do get appreciation, consider it only a bonus. Never invest for capital gains.

        3) Buy-and-hold investing is great and the way to go if you have millions of liquid cash like the hedge funds, otherwise it makes zero sense to borrow and then buy-and-hold for passive income with annual return less than 18%. Seller-financing is in theory a solution to limited funds, however, not practical to depend on.

        Bottom line: given the above facts, why would one would with limited funds want to tie up their precious cash in buy-and-hold deals for a paltry 8-10% return a year when one can STILL make at least that in 2-3 months fixing and flipping homes?

        The reality is that both business models can and do work depending on the markets and the cash positions of the investors. The fact is that 99% of the investor population are not billion-dollar hedge funds with bottomless wells of cash, therefore, buying to hold is not a viable scenario to build wealth unless one has a minimum of $3-4m to get started.