Improving and selling or refinancing houses for investment purposes has long been the purview of part-time entrepreneurs looking to earn additional income. However, as capital available to ‘fix-and-flip’ and ‘fix and hold’ investors becomes more institutionalized through the issuance of Residential Transition Loan (RTL) and Debt Service Coverage Ratio Loan (DSCR) securitizations, the opportunity to turn part-time investing into a full-time business for these entrepreneurs will continue to grow substantially.
Professionals in the industry, which are generally small businesses structured in the form of an LLC, deliver quality homes to end-buyers at competitive prices or rents, with their profit derived from the value added by repositioning or improving the home prior to sale or lease. A recent report from ATTOM showed gross profits on typical flips across the country increasing to approximately $73,500, a promising sign for continued growth.
Also driving the trend towards professional home flipping is the persistent shortage of housing in the United States — estimated to be 4.5 million homes and growing. While ground-up construction of new units by national homebuilders is part of the solution, these builders generally don’t address the aging current housing stock, or the need to create additional density and living space in infill areas where each property may have different attributes. As a result, the fix and flip industry provides an opportunity for knowledgeable entrepreneurs to earn a return on their investment, while at the same time helping to expand the nation’s housing stock.
As part-time investors move toward dedicating their careers to the home flipping industry, there is growing competition and many factors that contribute to a successful project. Some key strategies are highlighted here:
Identify the right location
It is often said that the three most important factors in real estate investing are location, location, and location. Professional home flippers focus on cities and neighborhoods that have housing demand, and where there is positive energy around renovating or repositioning outdated housing stock. The process of permitting and development can vary widely depending on the municipality, and should be considered when selecting a location. Knowing which properties to pursue is key, or there may be some difficulty finding a buyer when the renovation process is completed. Professional flippers become experts in certain markets and partner with local professionals such as realtors and contractors with strong reputations. Many professional flippers look for homes that have cosmetic needs such as out-of-date interiors or unused exterior space, or which could benefit from moving walls or adding square footage.
Research economic conditions
Metropolitan regions can be identified as favorable with significant job growth and other economic activity. An important factor to consider when deciding where to flip full-time is the job environment in the location being considered, and specifically whether businesses are relocating or expanding there and need more workers. Denver is one example of a city where such major companies as Google, Amazon, and Palantir opened new offices, and the fix and flip market is growing to meet the ensuing demand for housing. Even after identifying a favorable metropolitan region, it is important for full-time flippers to extensively research the details of the neighborhood and specific property they intend to pursue. Factors that are important to consider include underlying zoning, school districts, local taxes, and infrastructure projects as well as access to utilities, municipal services, and public transportation. Once positive economic conditions are observed, it is also essential to find a great project and obtain a reasonable upfront price when purchasing a property, or the chance of making a profit might be over before it starts.
Make a positive impact
Partnering with and listening to local stakeholders by attending community events and supporting local vendors and organizations produces long-term relationships and a positive impact. The most successful flippers are known in their local markets for the quality of their work and their integrity, which leads to referrals and goodwill for future projects. In many communities, professional flippers serve on local municipal boards, are involved in meaningful charitable activities, and support the neighborhoods they are active in. Working with local vendors helps the economy in the area, which in turn increases demand for improved housing there. The most successful professional investors create long-lasting positive impacts to the communities they work in.
As more part-time investors become full-time developers, institutional capital available to fix and flippers — generally supplied through knowledgeable lenders in the space — will enable those with experience in the industry, and an entrepreneurial mindset, to become successful and provide much needed housing to communities in the process.
Justin Land is Chief Executive Officer of Merchants.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
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