For years, real estate investors have enjoyed success by flipping houses. But these days, profit margins for house flippers are shrinking.
ATTOM Data reports that almost 95,000 homes underwent a flip during 2021's third quarter, representing 5.7% of all sales. But the average gross profit on house flips was just under $69,000 during that quarter, down 1.6% from the same time frame one year prior. Furthermore, house flippers' return on investment fell to 32%, the lowest level since early 2011 and a sizable drop from a year prior.
Why aren't house flippers doing better?
There are several factors that can explain why house flipping may be sluggish right now. For one thing, property values are up across the board.
During 2021's third quarter, home prices rose 18.5% year over year, according to the Federal Housing Finance Agency House Price Index. Because house flippers are paying more for properties to begin with, they may not be eking out the same returns as they did when home values were lower.
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The cost of building materials is also up, fueled in part by lingering supply chain issues that have been plaguing the construction industry throughout the pandemic. If house flippers are spending more money to renovate, it make sense that their profits are shrinking.
Finally, labor costs more these days, partly because it's more difficult to come by. That, too, could be contributing to lower profits in the house-flipping space.
Does house flipping still make sense?
Even though house flippers aren't seeing the same returns they may have a year ago, house flipping can still be a profitable endeavor. That said, if you're going to get into the business of flipping houses, you'll need to do a few key things:
- Find the right market: Ideally, you want one that's starved for inventory and isn't already saturated with fix-and-flip investors.
- Know the neighborhood: You don't want to overimprove the houses 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 sale price.
- Don't outsource too heavily: With labor costs at a premium, now be may the time to get your hands dirty if you have the skills to do some of that house-flipping work yourself.
While profits on house flips may be shrinking, they're still there. And if you're a seasoned house flipper, you may have your fair share of success, even in these more challenging times.
That said, if you're new to house flipping or aren't sure you have the appetite for it, there are other ways to dabble in the world of real estate investing that may be less risky. You may want to pursue options like investing in a short-rental or loading up on REITs (real estate investment trusts) until home values fall, building materials become more readily available, and labor gets less tricky to come by. While buying any sort of rental or income property means grappling with higher-than-average prices, you at least avoid some of the risk and hassle that comes with turning homes in poor shape into appealing living spaces.
