How to flip houses in an inflated economy

Your Money

(NewsNation) — Mortgage rates in the U.S are at the highest levels since 2008. According to Bankrate, the average 30-year mortgage rate now stands above 6.3%.

As an example, here’s a look at some of the average monthly payments homeowners across the nation are on the hook for:

With a 20% down payment on a 30-year mortgage, homeowners in Austin, Texas, can expect a monthly payment of around $3,000. The numbers are similar in Miami and in the Washington, D.C., metro area. And when you take a look at Silicon Valley, that number sits at nearly $9,500.

The cost of buying fixer-upper homes is also up, with the current median cost sitting at $225,000.

The question of whether it’s worth it for investors looking to flip houses for profit is predicated on how they go about flipping a home in today’s market, including the areas they choose to do it and the materials and labor they utilize to make the repairs.

The popular investment model has spun off into trendy shows as the allure of buying a home, making upgrades, then selling it for more than the purchase price and pocketing the profit has become a cultural phenomenon.

“It used to be easier to buy low and sell high. Now, you have to buy kind of high in order to be able to sell relatively high and that makes it harder,” Victor Claar, an economist, told NewsNation’s “Rush Hour” on Tuesday.

But that isn’t stopping investors from trying.

One study shows that investors were responsible for 9.6% of all homes sold in the first quarter of 2022 — the highest level since 2000.

But while home sales by investors soared, profit margins declined to a 13-year low.

“It’s harder to find a fixer upper and flip it, much harder than it was even just a year or two ago,” Claar said.

Claar says the issue is three-fold: With a variety of jobs available, workers are more selective with the jobs they accept, making labor more expensive. 

This doesn’t include the fact that inflation is driving up the cost of materials or that homes are already selling at or near all-time highs.

“So if you buy high, you’ll probably sell high and the money won’t work if you’re thinking about flipping it,” Claar said.

His recommendation is to find a geographical location that is not red hot but sought after, then buy the worst home in the best neighborhood you can find.

Claar also recommends doing low-cost updates that increase curb appeal, such as adding a coat of paint or landscaping. Finally, Claar recommends doing as many of the repairs as you can in your free time to save on expenses.

According to the same study, investors are seeing the largest returns on investment during the first quarter of 2022 on typical home flips were in these markets:

  • Scranton, PA
  • Kingsport, TN
  • Reading, PA

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