First, the good news for house flipping: Average gross profits have risen steadily over the last few years.
As the 2018 house flipping report from research firm ATTOM Data Solutions shows, completed house flips in 2017 yielded an average gross profit of $68,143, representing a 49.8% return on investment. Gross profit is defined here as the difference between purchase price and flip price, not accounting for expenses incurred. In fact, the 2017 gross profit number was up 5% from the previous year’s $64,900 and represents a new all-time high.
The housing market’s steady rise in prices recently —which has contributed to strong house flipping profits—cannot continue forever. As a recent CNBC story points out, US house prices are rising at twice the speed of inflation and wages. Most analysts forecast this trend to continue for another year or so—but then expect increase in home prices will begin to slow down for the next several years.
The question is: how should this affect your expectations as a house flipping investor?
Does a Slowdown in Housing Mean Less Profits as a House Flipper?
It would be impossible, of course, to state definitively what a potential cooling-off period in the housing market will mean for the average return on a house flipping investment. MarketWatch recently reported, the current data gives us two reasons to remain optimistic about the future.
First, Richard Moody, the Chief Economist for Regions Financial, told MarketWatch that despite having passed the cyclical peak of existing home sales, the housing inventory has been shrinking for years. This means that demand will remain high and even a downturn in housing would not result in an all-out crash like the one in 2008, but simply “less upward pressure on prices.”
Second, according to Sam Khater, Freddy Mac’s Chief Economist, due to this years-long shortage of available housing, if there is a recession it will be a “modest, plain-vanilla recession. If that’s the case, I think what it might do is cause inventories to rise modestly and home price growth to slow. My base case is that: an economic recession but not a real estate recession.”
House Flippers Have Reason to Remain Optimistic Going Forward
If you are a house flipper or are interested in becoming one, the potential to earn strong returns on these investments, even if the housing market does slow down, remains.
As Freddy Mac’s Sam Khater explained, housing downturns are usually caused by an over-supply of housing stock. That is not the case we are seeing; in fact, nationwide we have been experiencing an extensive contraction in the housing supply.
Although it is logical to assume that eventually housing price increases will slow down nationally, the data does not indicate that you should expect a rapid, steep drop in prices in the foreseeable future.
Which means you might want to account for this shift and manage your expectations of record-breaking returns on your house flips going forward. Depending on your strategy and investment selections, we feel confident about the potential for healthy returns on these investments.
A Final Thought on Future Flipper Returns
When you’re ready to invest in a fix-and-flip property, there is a strong case for seeking financing from a private money lender, specifically one that is also a direct lender.
Because of less regulatory constraints relative to their traditional bank or mortgage counterparts, private money lenders can move much more quickly to get your house flip project funded. This will save you time and the hassles of a typical loan application.
With their own capital to lend, a direct lender can green light your house flip in a matter of days. We all know that time is a major factor when purchasing investment property.
Are you looking for fix and flip loans? Black Square is a fix and flip lender. We help you secure hard money construction loans from our hard money lender for rental property. When you’re looking for lenders for real estate investors, or private investor for real estate. We can provide rental property financing because Black Square is a rental property lenders.