COVID-19 has not left any sector of the real estate industry unscathed. From investing in rental properties to the fixing and flipping real estate strategy, COVID-19 has shaken up trends and made it difficult to know what to expect. This has left many wondering “Will a fix and flip be profitable in 2021?”
In order to answer this question, we need to look at exactly how the coronavirus has affected house flippers in the US real estate market this year.
The Impact of COVID-19 on House Flipping
These are some of the effects of the coronavirus pandemic on house flipping:
Less Inventory
Inventory refers to the number of properties available for sale on a market. Once lockdowns and stay-at-home orders were issued, many sellers assumed that there would be a scarcity of buyers. As a result, they removed their listings to avoid accumulating days on market. Others took their property off the market to avoid showings which would expose them to the coronavirus. This created a shortage of property in the market and has made it difficult for some house flippers to find the right properties to pull off this strategy.
A Drop in the Number of Fix and Flip Deals
According to the U.S. Home Flipping Report by ATTOM Data Solutions, 53,705 condos and single-family properties were flipped in the first quarter of 2020. This figure represented 7.5% of all home sales nationwide, and an increase of 6.3% from the fourth quarter of 2019. In addition, this was the highest number of homes flipped since the second quarter of 2006. Regions that reported the largest increase in house flipping in the first quarter of 2020 included:
- Olympia, WA
- Boston, MA
- York, PA
- Minneapolis, MN
- Springfield, MA
- Richmond, VA
In the second quarter, however, the Home Flipping Report showed that 53,621 condos and single-family homes were flipped. This drop from the first quarter was due to stay-at-home orders and social distancing rules imposed to slow the spread of the coronavirus. In addition, there was growing unemployment due to the impact of COVID-19. Areas that reported the largest quarterly decreases in house flipping include:
- Salt Lake City, UT
- Denver, CO
- Provo, UT
- Durham, NC
- Boston, MA
A Surge in Demand
Due to the coronavirus, the U.S. experienced the lowest mortgage rates in history. As a result, more people can now afford to buy homes. This was a generally positive trend for those implementing the fix and flip real estate investment strategy this year. With this increase in demand and the shortage in inventory, selling a fix and flip likely became easier when buyers flooded back into the market, only to find few options.
Rising Home Prices
A reduction in the supply of homes and an increase in demand resulted in rising home prices. Besides forcing appreciation through renovations, this increase meant a good return on investment when it came to flipping houses.
An Increase in Fix and Flip Profits
Though the flipping rate dropped from the first quarter, profits and profit margins saw an increase. The average profit on a flip in Q2 2020 was $67,902 (gross), an increase from $63,000 in the first quarter. It was also an increase year over year, up from $61,900 in 2019. This was equivalent to a 41.3% return on investment.
So, Will Fixing and Flipping Be a Profitable Strategy Next Year?
Yes, housing market predictions say that a fix and flip will be profitable in 2021. There are two main trends that lead us to this forecast. For one, the profits house flippers were earning actually increased in Q2 2020. This occurred despite the fact that COVID-19 was still taking its toll on local economies. So it’s safe to say that if fixing and flipping could continue to bring in profits during a health and economic crisis in 2020, not much will slow it down in 2021.
Additionally, some experts are forecasting an increase in distressed housing inventory next year, after the federal forbearance on mortgages comes to end. While this is not likely to bring about a crash and a huge drop in prices, it still means a little more supply for flippers.
How to Find a Fixer Upper for Sale in 2021
While it’s true that the forecast for fix and flip returns is generally positive for 2021, you still have to know how to find a fixer upper that will make you some money. So, how do you go about finding a fix and flip that will generate a good return on investment?
Find the Right Real Estate Deals
Finding the right home at the right price is crucial for success in house flipping. You can find off market properties via real estate auctions, direct mail, public records, expired listings, and networking with attorneys and agents. Another great source for foreclosures, short sales, bank-owned homes, and auctioned homes is the Mashvisor Property Marketplace. You can narrow down your search using filters like the number of bathrooms/bedrooms, location, miles, cash on cash return, cap rate, and property type.
So, what kind of fix and flip should you look for? Ideally, it should be one that satisfies the 70% rule. This rule states that you shouldn’t pay more than 70% of a home’s after repair value (ARV) minus rehab costs. For instance, if the home’s ARV is estimated to be $300,000 and you need $40,000 for rehabbing, your buying price should not exceed $170,000 ($300,000 x 70% – $40,000 = $170,000).
Calculate Closing and Holding Expenses
Don’t forget to calculate the costs of a fix and flip.
Besides determining the after repair value and rehab costs, you should also consider the closing and holding costs of the investment property. Closing costs are expenses incurred when completing a real estate transaction. These costs could include appraisal fees, loan origination fees, credit report fees, deed recording fees, and title insurance fees. Usually, closing costs are between 2% to 5% of the buying price.
Holding or carrying costs are the recurring expenses that house flippers are expected to pay for the period they own an investment property. The amount could vary greatly based on factors such as the age of the home, its location, and the loan type. Some of the carrying costs that come with owning real estate include the mortgage payment, utilities, insurance, property taxes, and homeowners’ association fees.
All these costs should be factored into the total acquisition cost before seeking funding for a fix and flip.
Get Financing
As a flipper, you will need to raise money to buy and rehab the home. Besides traditional banks and financial institutions, there are other sources of funding you could consider for fix and flip loans.
Here are some of the financing options available for fix and flip loans:
- Conventional mortgage
- FHA mortgage
- 203k loan
- Home equity line of credit (HELOC)
- Hard money loan
- Private money loan
- Owner/seller financing
- Real estate crowdfunding
- Partnerships
When creating a budget for a fix and flip, be sure to include a reserve fund. This is a contingency for unexpected things that could come up during the fix and flip project. For example, you could add $10,000 to cater for any unexpected repairs.
Conclusion
Is fix and flip profitable? Yes, studies show that flipping houses is lucrative and likely to remain profitable in 2021. However, take time to learn all you can about house flipping tricks and trends before venturing out. To enhance your chances of success in the US housing market 2021, consider assembling an experienced and reliable fix and flip team. This could include a real estate agent, a title attorney, lending partners, and licensed tradespeople (roofers, painters, electricians, plumbers, appliance installers, and heating and air specialists).