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Should Investors Hit Pause on House Flipping?

[Updated: Jul 28, 2020 ] Jun 17, 2020 by Maurie Backman
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Flipping houses has long been a viable income stream for real estate investors -- particularly those who are handy enough to do renovations themselves, thereby trimming their costs by avoiding outside labor fees and increasing their profits. But while house flipping is as popular as ever, the returns haven't been stellar of late.

In 2019, a good 245,864 single-family homes and condos were flipped, according to the U.S. Home Flipping Report, and the number of flipped homes represented 6.2% of all home sales nationwide.

But all of that hard work may not be paying off so well.

Homes flipped in 2019 drew in a gross profit of $62,900, measured by taking the difference between the median sales price of those properties and the median amount paid by investors for them. But that gross profit is down 3.2% from 2018 and 6% from 2017. And if this trend continues, investors may see even lower returns in 2020, especially in light of the greater economic crisis spurred by the COVID-19 outbreak.

It therefore begs the question: Is house flipping still worth the time and effort, or are investors better off putting their money elsewhere?

House flipping is still alive and well

Despite a downward trend with regard to returns, house flipping can still be a lucrative endeavor. But 2020 may not be the optimal year to go that route.

The COVID-19 pandemic is already making would-be buyers hesitant to go out and commit to home purchases, and rampant job loss has made getting a mortgage even harder than it used to be. As such, house flippers may have difficulty getting buyers to pay top dollar for renovated properties in the near term.

There's also the appeal of the rental unit to consider in light of the COVID-19 crisis. Americans who haven't lost their jobs may be grappling with financial uncertainty nonetheless. As such, we may see that a lot of prospective buyers switch gears and opt to rent in the coming year or two in an attempt to wait out the pandemic and sit tight until the U.S. economy recovers. That means flipped homes could take longer than usual to move off the market, which is generally an investor's nightmare.

So does that mean that house flipping is a no-go this year? Not necessarily. But between economic conditions and declining returns, real estate investors should most certainly proceed with caution if they're planning to go the house-flipping route.

That means being judicious with their renovation budgets and taking great care not to over-improve homes at a time when buyers' means may be more limited than usual. It also means choosing the right housing market for a house flip and taking care to price flipped homes accordingly.

House flipping is still a great way to make money in real estate. But whether 2020 is the right time to do it remains questionable.

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