Private hard-money lenders have been a significant financing force behind the Fix-and-Flip (F&F) business model, which has risen to prominence among real-estate investors during the past 10 to 15 years. Yet, given the hefty increase in mortgage rates during 2022, and a somewhat cooling housing demand, real estate investors might be hesitant about starting an F&F process during 2023. Even though fix-and-flipping profits are the lowest in 13 years (as reported by ATTOM, which was reported by realtor.com last December), some seasoned investors in Houston have let us know that good opportunities can still be had with some patience and reasonable due diligence. That ROI for F&F still outpaces that of many other industries and investments at their disposal. Let us investigate this subject in this short blog.
"Compressed" returns on fix-and-flips are still at very healthy levels.
Generally speaking, among many other issues, two key factors have "compressed" returns on fix and flip: (1) a shrinking market demand which has caused prices to keep steadier in the short term (three to four months) instead of increasing rapidly, and (2) a longer average time to sell the property which adds to the flipped property's financing cost. And we have used quotation marks around compressed because, as compared to other industries and investments, the third quarter of 2022 data reported fix-and-flipping at a healthy average ROI of 25%, levels which have been unfairly compared as uninteresting (in our humble opinion). Yes, they might be uninteresting concerning previously observed F&F ROIs, which have been upwards of 100% for some markets! But last year's stock market did not yield positive returns on average, and risk-free government papers still yield only below 5%, so a 25% ROI sounds sweet.
Some housing markets are better for flipping properties than others.
The previously quoted report notes that there are markets where housing demand levels benefit from population and job growth (a constant theme we have espoused in several of our previous articles). These prove to be ideal when fixing and flipping a property. Over the past few years, some of these markets have included Phoenix; Winston-Salem, NC; Atlanta; Spartanburg, SC; and Gainesville, GA. It is a characteristic of said markets that flipped properties comprise an interesting percentage of home sales, having been in the range between 12.5% and 13.7% of total market sales for the past few years. For comparison, the market where F&F property sales are the lowest percentage is Honolulu, with 1.6%.
So, fixing and flipping depends on your local market. We believe it can even go to the neighborhood level, whether your return on investment is tight, healthy, or spectacular. Houston, in our opinion, is still a healthy market for F&F, given that our city is expected to strengthen and grow its economy in the next few years.
In a recent article, Clare Trapasso writes about why some homes still cause heated bidding wars while others sit unsold. Suppose you are a real estate investor looking to F&F a property. In that case, you might want to take into consideration some of Ms. Trapasso's insights:
- Well-appointed, well-situated turnkey homes are still selling fast, often receiving multiple offers.
- Competition for turnkey homes in good school districts remains fierce.
- The odds of several buyers wanting a given turnkey home are high.
- In a market with 7% mortgage levels, buyers with tight budgets don't have much room for costly repairs.
- "What's not selling are properties that need a major renovation and updates, like a new kitchen or bathroom and major systems," which is just what F&F is all about (offering the market an updated home).
We should go back to basics. First, ROIs in the 20% to 30% range would be "to-die-for" levels in most other industries. Still, flippers seem to think that their time is not worth those return levels. Really? Second, F&F opportunities can still be had in Houston, with local investors reporting opportunities for those not dreaming of 100% or above ROIs. Third, given that fixer-upper in the right markets has stopped being hot commodities, a real-estate investor can purchase them at reasonable prices to turn an interesting profit once the property has been fixed into a turnkey home. Finally, as a final product, you should consider offering well-appointed, well-situated homes in good school districts with new kitchens and/or bathrooms and updated major systems.
AMI Lenders is here to help you.
If you are looking for a hard money residential loan for an F&F ("una hipoteca con un prestamista privado" para hacer un flip in Spanish) in the Houston area, look no further. At AMI Lenders, our advice as mortgage lenders is always geared toward financing the right investment property at the right price, for the right reasons, and with the appropriate loan terms.
We are one of Houston's fastest hard money lenders regarding closings and will become your financial ally. We fund our loans and can close loans as fast as the law allows. Houston flippers will also have difficulty finding better rates for hard money loans or private loans than those we offer.
We want our customers to succeed and take advantage of the financial opportunities provided by investing in real estate. Visit our website today and fill out an application for a loan backed by a mortgage. We speak Spanish, by the way.