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Can You Actually Turn a Profit Flipping Homes in Today's Market?

Devon Thorsby

Back in 2012, house flipping seemed like the perfect opportunity for a person with extra cash and an eye for remodeling. The market was flush with homes left vacant from waves of foreclosures prompted by the housing bubble that burst a few years earlier. You could buy a home from a bank, make any necessary repairs, install hardwood floors and splash on a fresh coat of paint and then sell it at the top of the market.

Nowadays, with a largely recovered economy, more and more potential flippers have that extra cash in hand. And they've been studying TV shows like "Flip or Flop" on HGTV and "Zombie House Flipping" on A&E, just waiting to find the right bargain to start their flipping career.

But with the housing market back to pre-recession levels, the number of homes coming on the market each month is low. Bidding wars are beginning the day a property is listed, driving home prices above asking in many cases. Buyers willing to pay more to occupy the home they purchase are having a tough time finding affordable real estate, which means it's even tougher for investors looking for houses at a rock-bottom price.

[See: 10 Secrets to Selling Your Home Faster.]

With a tight inventory and no expectation for single-family home development to catch up with demand any time soon, is it still possible to make money in the house-flipping game?

"Honestly, probably not," says Kevin McGraw, primary broker at Reinvest Consultants, a full-service real estate brokerage specializing in investing in Cincinnati.

It's not just a matter of fewer homes going on the market -- there's also a saturation within the home-flipping industry. At real estate auctions, McGraw says where 20 people would bid on 40 homes a few years ago, now there are 150 people bidding on 20 homes.

"Maybe 40 of those people have real money [in excess to invest]. The rest will spend every penny they have," he says.

The situation is similar in Boise, Idaho, where Dan Rowe, broker and owner of Dan Rowe Realty, often represents investors as buyers. Rowe says it's hard to stick to a budget when it comes to the few homes that end up on the auction block these days.

"Every time we go to an auction or something like that, you're thinking you're going to get a deal, and the price just blows right by it," Rowe says.

But that's not stopping people from trying to flip homes. Last month, ATTOM Data Solutions released its 2016 Year-End U.S. Home Flipping Report, which reveals 193,009 single-family homes and condos in the U.S. were successfully flipped last year. That's a 3.1 percent increase from 2015 and accounts for 5.7 percent of all single-family home and condo transactions last year.

The last time this many home flips sold was more than 10 years ago -- 2006 saw more than 275,000 flipped homes sold.

With such a high number of flips, it's not only hard for those trying to break into the industry -- it's hard for investors who have been flipping homes for years. Rowe says it's gotten to a point that the homes investors are looking for simply aren't on the market.

"My investors call me up thinking they're going to make 50 grand on a flip, and I try to manage expectations. If I could find them, I would," Rowe says.

[Read: Not All Dollars Are Spent Wisely: How to Avoid Overspending on Renovations.]

House flipping isn't necessarily dead in the water, but both McGraw and Rowe stress the profit margin is much smaller than it was a few years ago -- or what you might be seeing on TV, where profits over $40,000 appear common and are sometimes close to $100,000 for a single property.

Some good news for those who want to begin real estate investing, whether flipping homes or serving as a landlord: You don't necessarily need to have the capital to buy property with cash. Susan Naftulin is the owner and president of Rehab Financial Group, a lender for real estate investors in Rosemont, Pennsylvania, and she says her firm takes the pace of the market into account to help borrowers remain competitive with cash-heavy buyers.

"We work as hard as we can to wrap up our side of it and underwrite as quickly as possible so as not to be an impediment," Naftulin says.

But whether you finance or use your own cash, Naftulin says first-time investors should check their expectations before jumping in for the sake of their own finances. "Better to make your mistakes with a smaller rehab and a smaller loan than bigger," she explains.

Here are three things you can do to increase your chances of earning money through house flipping.

Invest small. If you still want to try flipping a home, don't go for the former crack den with burst pipes and a hole in the ceiling. Naftulin says you're more likely to turn a profit with a home that doesn't need much work, but with minor fixes and some skillful staging can sell at a higher price point. It'll also be easier to entice a lender when less risk is involved, especially if it's your first dive into real estate investing.

Your profit won't be gigantic, but you won't have inadvertently bought a money pit, either. "You don't make a lot on each property, but you can do a lot of houses," Naftulin says.

Invest in a different way. Single-family homes are the classic type of flip, but don't discount other options. McGraw says condos have been overlooked in the Cincinnati market.

Commercial real estate is often a missed opportunity for small-time investors, though you'll likely need a bit more capital than with a single-family home. "The allure of the single-family rehab is you don't need a lot of money to go into those. In the other classes, you need some cash to do that," McGraw says.

You could also try purchasing and holding onto your property for rental income, though you would also take on the role of landlord -- and all the maintenance and management responsibilities that come with it.

[Read: 5 Essential Financial Terms Every Single-Family Real Estate Investor Should Know.]

Wait for the economy to tank. It's not an optimistic approach to real estate investing, but when it comes to flipping houses, you need a surplus of homes for sale to be able to snag good deals on properties to flip. The only way to really guarantee an excess supply of homes is when people can no longer afford to live in them. And that means an economic downturn. But the current outlook remains bright for real estate values and the larger economy.



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