CBS News recently came out with an interesting piece titled “Americans Still Think They Can Make Money Flipping Houses,” and that brought up a really interesting question: is it still possible to make money flipping houses?
Tv shows on HGTV and information-based companies, like Fortune Builders, popularized house flipping when the market was going down.
While the market was tanking and most people were losing money, there were a few individuals or companies making a ton of money by buying dilapidated homes, fixing them up, then selling them.
But it wasn’t just the experienced investor that was able to succeed. In fact, many novices, newbies, and inexperienced investors were making a killing. You probably knew someone who profited from the downturn in the real estate market.
How was this possible? And is it still the case? Let’s explore the answers.
Bad Real Estate Markets Create More Opportunities
In a bad real estate market, there are just more opportunities to succeed. The number of potential homes you could buy, reduces the overall risk to an investor.
Let me give you one good example. Since your time is limited and you don’t have any prior experience, you’re likely to start looking for investments close to home. You start looking for homes on your drive to work, or you take a Sunday to drive around your neighborhood and understand it more.
In a bad market, like the last recession, there were plenty of opportunities to fix and flip homes right in your own backyard.
By knowing the neighborhood, you could — with a higher degree of accuracy — estimate how much you would be able to sell it for and how fast the home would sell.
When you’re forced to go outside of your zone of knowledge, you increase the risk that you make a mistake. That you buy a home for too much. Overestimate how fast you can sell it.
When there are more opportunities, there is a higher chance you’re going to succeed because a home is within your zone of knowledge. There are a lot of things you know, and that can make up for your inexperience when it comes to investing in real estate.
Timing Can Delude Inexperienced Investors
When the market is bad, it’s possible for time to cover the mistakes of an inexperienced investor — at least better than a hot real estate market could.
If you buy a home at the bottom of the real estate market, and the market is going to move up over the next few years, then you might make some money despite your mistakes.
Take a look at the data. You can see from 2016 to 2019, the median list price of a home in various counties of Michigan has increased.
For example, in Ingham County — home of Michigan State University and Michigan’s Capital — the median list price was $125,000 in 2016. By 2019, that number shot up to $157,000.
That’s a 25 percent increase in three years.
When the real estate market moves up like this, it can cover up your mistakes and still allow you to make a profit.
For example, let’s say you make an offer on a home for $90,000 and you should have bought it for $80,000. You put $30,000 of repairs into the home. Your all in cost is $120,000.
Once you finish fixing up the home, you realize homes are only selling for $125,000.
Ouch. By the time you pay real estate agent fees and closing costs (assuming around $8,750 or seven percent), you realize you’re going to lose money.
You decide to hold on to it.
Over the next two years, you pay the taxes, some general upkeep, and get a renter in the home to offset some of the cost. Total extra cost is for the two years is about $5,000.
Now, homes are selling for around $150,000 so you list the home. This time, you make a little bit of money. Not much, but at least you made some, right?
You’re pretty good.
But…
…a market moving up can delude inexperienced investors into thinking they have what it takes to become investors.
This is the mindset that I think has caused many Americans to believe they can make money flipping houses.
They hear all of these amazing stories of people doubling their money in a few short years or becoming a millionaire before they turn 30.
All of these stories never give credit to the real estate market, though. They undervalue the contribution the market made to their success.
And that sucks. It creates the delusion that anybody can be successful at real estate investing.
It’s A TON of B.S.
Hoping for the market to cover up your mistakes or hoping for the market to increase is called speculating.
That’s a bad idea. You might as well take your money and go to the casino.
All you’re doing is playing the odds.
Margins Are Being Squeezed
There is one rule you MUST never violate when it comes to real estate investing: buy it right.
Let me say that again…
Buy it right.
It’s the only hope you have if you want to make money in real estate investing.
Unfortunately, buying it right is becoming increasingly difficult.
Over the last few years, the real estate market has been hot. This has caused home values to rise, create multiple offer situations, and a low inventory. There are a lot of challenges a home buyer faces.
Now, the number of homes you can buy are few. During the recession, you could walk down your block and find a good investment opportunity. That’s just not the case today.
All of this is causing the margins to be squeezed. What do I mean by that?
In the past, you might have gone into a home and been the only one making an offer.
Today, you might be competing with three other investors who do this for a living. That’s going to drive up the price you pay for a home and lower your profit margins.
A few years ago, an inexperienced investor could expect a 20 percent or more profit margin. Now? You’re lucky to see 10 percent return.
So, yes. You can still make money flipping houses, but you have to buy it right. That’s becoming increasingly difficult to do.
It’s much more like a job to be successful at real estate investing than most people assume. Doing it profitably requires you to treat real estate investing like a job and not a passive, guaranteed way to make more money.
The ongoing housing crunch is drawing in more people who have the dream of making a quick profit.
It’s unlikely real estate investing is going to ever fade. If you plan to invest in real estate, focus on buying it right. If you can’t do that, you need to sit out.
Don’t risk your money just to get in and play.
For the average person or inexperienced investor, I would recommend looking elsewhere. The reality is that the average person tends to buy high and sell low, and lose their shirt.
