Are you interested in making money in real estate? If you are, you’ve probably been brushed up your knowledge of making profitable real estate investments. If you want to invest in Texas, one real estate investment strategy that you must consider is flipping houses in Houston.
Flipping houses, when done correctly, can yield an attractive return on investment. If you are one of those fascinated by the many house-flipping TV shows, think again. What you see on TV is a glamorized version of house flipping. The process comes with financial risks and plenty of hard work as you plan, buy, fix, and sell.
This guide will help familiarize you with the fix and flip strategy and provide you with the knowledge and tools to make flipping houses in Houston profitable. Let’s begin with the basics.
What Is House Flipping?
House flipping is a real estate investment strategy that involves buying, fixing, and reselling a property for profit. You may get into it full-time or as a side hustle, depending on how much you would like to earn from it, the amount of time you would like to put into it, and the number of flips you can manage.
One of the principles of house flipping is buying low, selling high. You need to find a low-cost or undervalued property for your house flipping project. Undervalued properties are those that are foreclosed or in dire need of repairs.
Imagine a distressed property sticking out like a sore thumb in a pristine location. That single house has the power to pull down home values significantly in the neighborhood. However, after you rehab that property, it can also push up the values of the surrounding properties. Residents in the neighborhood where you flip a house are often receptive to this type of strategy.
Successful house flipping projects are influenced by two critical factors – your knowledge of the market and the turn-around time, and both require hard work.
Related: How to Find Distressed Properties to Invest In: 5 Ways
Is Flipping Houses Profitable?
According to ATTOM’s 3Q 2021 report, 94,766 houses and condos across the US were flipped in the third quarter of 2021, about 5% of total home sales in the same period. The third-quarter performance was up 5.1% from Q2 2021 and 5.2% from Q3 2020. The median resale price was $281,847, while the median investor price was $213,000. The said figures translate into a profit margin of 32.3% and a gross profit of $68,847.
However, the same report raised concern about a 33.2% fall in the profit margin from the second quarter and a 43.8% decline from 2020.
Meanwhile, investors continue to be drawn to the Texas house flipping market for several reasons:
- House prices in Texas are lower than the national average.
- The economy is better than most states, ranking No. 9 in the Economy category of a study of the best states to live in the US conducted by U.S. News. The affordability it offers attracts more people to it.
- Texas’s population is growing, especially with individuals and businesses moving to the state.
How do these performance metrics and Texas’s attractions impact house flipping in Houston?
2021 Houston House Flipping Market Analysis
The same ATTOM report also provided details about the home-flipping market in Houston, Texas, which ranked No.9 among the country’s top 10 metro areas for flipped homes in the same quarter.
The number of flips took a 5.6% share of Houston’s total Q3 sales, equivalent to 1,685 homes. The flipping rate went up by 33% from the previous quarter and 50% year-on-year (YOY). The median purchase price closed at $239,612, and the median resale or flipped price at $271,938, closing its average gross profit at $32,327. This gross profit translates into a gross return on investment of 13.5%, representing a 42% decline YOY. Flipped homes during the period took an average of 134 days to finish.
The decline in profit margin is attributed to several factors: (1) the prices of Houston investment properties are on the rise because of the high demand and supply shortage, (2) the high cost of repairs and renovations caused by inflation, and (3) problems in the supply chain brought about by the pandemic. Most house flippers are individuals who are not entitled to discounts enjoyed by big home builders, which compounds the problems of house flippers.
Despite the recent decline of profit margins in the house flipping market, investors remain positive about it. One reason is the growing trend among millennials buying houses without spending too much time fixing them.
Those who flip houses in Texas are further buoyed by the low- and fair-valued houses available, the state’s quality of life, and low remodeling costs. U.S. News ranked Houston as the third-best place to live in Texas in 2021, citing the city’s economy as its main advantage.
But the question remains: Is flipping houses in Houston still profitable?
Finding the Right House to Flip
Do not just purchase a house just because you are charmed by it or feel good about it. Do not lose your aim of why you are doing this, and that is, to earn profit. You need to consider three factors in your search for the best property for flipping houses in Houston. These are location, profit potential, the property’s condition.
Regardless of the real estate investment strategy you choose, the most important factor to consider is the property’s location. A new investor would tend to immediately find a distressed house in a nice location with basic amenities such as schools, groceries, and health care services. However, that would take a lot of time, so it’s best to narrow down your neighborhood research.
Conducting a neighborhood research is essential in locating the best location for flipping houses in Houston. It will direct you to areas likely to earn the most profit. You will need a real estate investment tool like Mashvisor’s Real Estate Heatmap to conduct extensive research.
The heatmap shows you the top-performing and low-performing neighborhoods based on the filter you choose from among the following:
- Traditional Cash on Cash Return
- Airbnb Cash on Cash Return
- Traditional Rental Income
- Airbnb Rental Income
- Listing Price
Mashvisor’s Heatmap provides you essential data for deciding on a location, including cap rate, cash on cash return, rental income, the number of properties available for sale, and the price.
After making a shortlist of possible neighborhoods for your house flipping project, you can start checking on each neighborhood’s basic amenities and whatever they have in terms of leisure and recreation. If the location has facilities that cater to a diverse lifestyle, e.g., gym, theater, museums, parks, etc., then those would be welcome bonuses, along with a good employment rate. These attractions should be helpful when you are ready to resell the house. In addition to neighborhood research, consider working with a seasoned local real estate agent to help you with your search.
Related: How to Find the Best Houston Income Properties
Once you’ve selected a neighborhood for flipping houses in Houston, the next logical step is to choose a property. It’s not enough that you are in a good location – you have to decide which property will bring you your expected returns.
Several sources are available to help you search for the right property.
One such source is the Mashvisor Property Marketplace, designed to find off-market investment properties, including auctioned homes, bank-owned, foreclosed homes, short sales, tenant-occupied rentals. You can streamline your search by applying the following filters:
- You can do simultaneous searches of up to five locations
- How far do you want the property to be away from the city?
- Rental strategy. Choose between traditional and Airbnb
- Property type. Select from the drop-down menu
- Listing type. Select from the drop-down menu
- Number of bedrooms
- Number of bathrooms
- Desired cash on cash return
- Desired cap rate
When you’re done setting the filters, the tool will provide you with a list of available properties for sale that match your criteria. The list is arranged in descending order of potential return on investment, making it easier for you to choose a property for home flipping.
Related: How to Flip Houses With No Money: 5 Steps
Besides knowing the market, another factor that can help flipping houses in Houston a rewarding experience is the turn-around time; that is, the speed with which you can resell the property after its purchase.
To ensure a quick turn-around time, select a property with high profit potential that requires quick repairs. Look for cracks on the walls and flooring, mold, water damage, signs of leaks, rust, and other indicators of repair requirements. As much as possible, purchase a property that will only require minor repairs.
If you do not know what to look for, it might be wiser to bring in an expert. You do not want to start doing repairs only to find out later that there are more damages to take care of. You wouldn’t want that because that will mean additional expenses that might eat up your budget and delays in the fixing stage.
Making Your Property Profitable
So now you have your property to flip, and all you need to do is purchase it. At this stage, you start taking measures to maximize your profit. However, before you can even make an offer for the property, consider the following:
One of the terms you need to learn about flipping houses in Houston is After Repair Value (ARV), which is the estimated value of the distressed property after all the renovations and repairs are completed. The ARV is an important figure for house flippers because it provides insights on the following:
- Potential resale price
- Profit margin
- Renovation budget
- Property purchase price
ARV is the sum of the property’s current value and the projected renovation cost.
Property’s Current Value
This value represents the property’s worth in its current condition, usually equivalent to the price you pay for it before doing any repair. This value is also referred to as the as-is value. It pays to have professional real estate appraisers assess the property’s current value because they have a better eye for details. They can easily spot any issues that may impact the property’s worth. Let the pros provide you with an accurate estimate of your property’s current value.
Projected Renovation Cost
This value refers to the value added to the investment property after completing the renovations. You need to make a good estimate of the renovation cost and ensure that costs are smaller than the renovation value to make a profit.
Source estimates from at least three reputable contractors to make your cost estimates accurate. Have each contractor provide you with an itemized list of repairs needed to make a better comparison.
Check out local home stores for materials prices, and be on the lookout for stores that give discounts. Find out what the buyers within the location’s market are expecting in terms of quality. You would want to keep your costs as low as possible without sacrificing the quality and safety of the renovated property.
Factor in other costs such as labor, holding, closing, financing, and marketing costs.
After calculating your property’s ARV, perform a comparative market analysis to check how it fares against real estate comps. It should tell you at what range you can effectively set your resale price.
The 70% Rule
If you are serious about flipping houses in Houston, you need to understand and apply the 70% rule. The rule helps you determine the maximum sale price you should be paying for a property to enjoy at least 30% profit.
The formula for the 70% rule is:
Maximum Offer Price = (ARV x 0.70) – Repair Costs
The resulting figure tells you the maximum amount you can spend on a home that you would like to flip. If you go over that value, you risk reducing or losing your profit. For example, if the median price of a property in Houston is $239,612 and your repair costs are estimated at $32,000. Your maximum offer price would be:
(239,612 x 0.7) – 32,000 = $135, 728
The key here is to keep to your budget and check where you could cut down costs. Remember that the costs are not limited to repairs. Consider the initial purchase price, carrying costs, selling costs, and more.
Purchasing the Property
Suppose you have found the best property to get you started in flipping houses in Houston. Your next move is to buy the property. You need to decide if you will buy it in cash or have it mortgaged.
If you have the resources, a cash purchase is a better choice. Aside from saving on interests, you are at liberty to make the purchase whenever the market is favorable to the buyer. A cash purchase not only speeds up the closing process; it also reduces the closing costs.
Additionally, sellers favor cash buyers because it saves them from worrying about the financing option falling through. It is also easier to negotiate the price if you buy the property in cash.
Most importantly, no matter what happens after purchasing a property in cash, the house is already yours. When you buy a property through financing, and something happens that makes you unable to pay, you risk losing your property.
If you cannot afford to pay in cash, there are other options that you can explore to purchase your property through financing.
You may opt for a hard money loan, a short-term loan with a relatively high interest rate. Hard money loans are usually used in real estate, availed by flippers who intend to use their property for flipping as collateral. The loan term is usually one to three years.
Another option is the home equity line of credit (HELOC), which is a line of credit derived from your personal home equity. It works like a revolving credit line, in which you borrow up to a preset maximum amount against the credit line, pay, then borrow again. Although it feels like having cash on demand, you need to have a good credit score to avail this option.
A third option is the home equity loan (HEL), which you get as a lump sum payment derived from your home equity. Typically, this type of loan has a fixed rate, making it easy for you to remember what your monthly payments are. This type of loan is good for a one-time expense, such as a home office renovation. However, you need to pay several fees, including origination fees, appraisal fees, loan processing fees, and more.
5 Best Neighborhoods for Flipping Houses in Houston 2022
You may explore the following cities if you want to go house-flipping in Houston. These are cities with low median sale prices, based on January 2022 data.
Hunterwood has a population of over 9,300. Located in Harris County, it has a suburban character, with most residents owning their homes. The median sale price of properties in this neighborhood is $220,000. The place is ideal for young professionals and those raising their families. Hunterwood public schools are above average.
2. Eldridge West
This neighborhood ranked No. 10 in the Best Neighborhoods to Raise a Family in Houston. Eldridge West has a population of 99,392. Most residents rent their homes, and the median sale price of homes here is $275,000.
Binz is a charming neighborhood within the Museum District and a haven for people into arts and culture. It is among the most accessible neighborhoods in Houston. The place is a hit among medical professionals and students, with Houston’s Medical Center lying south of Binz. With a property median sale price of $285,000, Binz presents several real estate options.
4. Afton Oaks – River Oaks Area
Afton Oaks has a gentle, neighborly feel and benefits from 24/7 patrol services, modern amenities, and common area maintenance. The place, characterized by large lots, has a median property sale price of $309,000. The homes are a mix of ranch-style and modern architecture.
5. Washington Avenue Coalition – Memorial Park
The place is urban, with several bars, coffee shops, parks, and restaurants. Washington Avenue Coalition is popular among young professionals and is among the best places to live in Texas. It has a population of more than 36,000. Most homes in the area are resident-owned, and properties have a median sale price of $313,042.
Is it profitable to flip houses in Houston in 2022? Yes!
Despite the decline in profit margins reported in Q3 2021, many people are still interested in investing in real estate by flipping houses in Houston, whose economy is better than most cities nationwide. Houston is considered one of the best cities for the fix and flip strategy with its comparatively low property prices.
Like other investments, flipping houses in Houston requires careful planning and hard work. You need to have a good understanding of the market, a good turn-around time, and an understanding of making the investment profitable. To achieve these, you need to have reliable real investment tools like those offered by Mashvisor. Book demo or sign up to get your 7-day free trial.