Is Property Flipping Worth It For You?

If you’re on the fence about house flipping, it’s hard to know if you should try it or leave it alone. 

There’s a lot of conflicting information when you search this topic on Google. 

In this article, we’re going to try to point you in the right direction if you’re in this spot.  

House Flipping Meaning 

If you’re not familiar with house flipping, but you’re curious (e.g., you’ve heard your friends talking about flipping properties and how lucrative it can be), house flipping is when someone buys property, fixes it up for a short amount of time, and then sells it for a profit. The most common strategy is to purchase property that needs work (think auctions, foreclosures, or inexpensive homes that need repairs) and improve the property to sell it for more than you bought it for.  

The Current Market 

Now we get to the million-dollar question. Okay, maybe not a million, but a valuable one, nonetheless. Is house flipping in today’s market worth it? 

For context, the percentage of homes flipped in the first quarter of 2022 was at its highest point since 2000, flippers didn’t make a profit that reflects that peak. Attom Data reported that profits were at their lowest since 2009. The median profit was $67,000 for each flip, though, which is still an appealing prospect for many. 

One of the main reasons profits dwindled is because it’s more difficult to find good opportunities for house flipping. The market is hot right now, and that means sellers have the advantage. Increased demand and lower inventory also tilt things in sellers’ favor. 

According to the National Association of Realtors, homes in 80% of markets had double-digit price appreciation in the second quarter of 2022. Meanwhile, nationwide median house prices increased 14.2% during 2021. And rising home prices create a less lucrative environment for house flipping. 

Now we get into 2023. The quarterly gain in the typical profit margin of 22% represented a decent reversal of fortune for investors after three years of almost continuous declines that started well before a slowdown in the larger U.S. housing market last year. 

The entire United States saw the gross profit of typical deals (the difference between the median purchase price paid by investors and the median resale price) increase from the last quarter of 2022 ($53,500) to the first quarter of 2023 ($56,000). 

However, the total gross profit of common deals remains at one of the lowest levels since 2012. 

Additional Things to Keep in Mind 

So, the current market isn’t exactly booming in 2023. That’s the first thing you need to keep in mind as you try to decide whether to flip houses or not. But that’s not the only thing you should focus on. Here are four more things to keep top of mind as you consider your options: 

Hidden Costs  

Capital gains tax can cost up to 20% of a flip’s profit margin. And that’s without factoring in the cost of buying the property and selling it (e.g., agent and escrow fees).  

This is extremely important to keep in mind as you budget. You don’t want hidden fees torpedoing your budget because you didn’t factor them in. 

Timing 

House flipping requires speed and efficiency. A realistic and carefully thought-out timeline can be the difference between a large profit and a slim one. You need to schedule repairs in a logical order and ensure contractor’s availability ahead of time. 

Flipping and repairing a house usually takes between three and six months, so you want to sell the home in less than two months. 

Labor 

Most people who make serious money flipping properties are usually trained general contractors. This doesn’t mean it’s impossible if you’re not a trained general contractor. It’s just something you want to consider. 

Labor is time-consuming and even if you paint the house yourself, that isn’t going to be insignificant time spent working on the property. Again, this doesn’t have to be a deterrent, but it should be something you think about as you make your decision. 

Latent Defects 

A latent defect is a hidden defect or damage discovered after an initial property inspection, usually after the purchase has been completed and the new owner has taken possession of the property. A latent defect is also referred to as inherent defect, and it is defined as something that could not be discovered by reasonable and customary observation (by contrast, a patent defect is a defect easily observable to the naked eye and known before the purchase).

Latent defects are a concern in every property purchase. Defects like mold, pest infestations, or electrical problems can result from poor workmanship or faulty materials. Fixing them may or may not be covered by your insurance. Whether you can recover damages at all will depend on your sales contract, although most sellers will be exempt from paying for repairs if they’ve made the proper disclosures.

Latent defects can impact your house flipping calculations and throw off your planned ratio of initial investment to improvement costs. Even after performing a thorough reasonable inspection, you still may find that a latent defect has thrown off your timeline or put you back on your real property financial goals. For this reason, latent defects are an inherent risk in property flipping, especially as house flips already tend to have many needed repairs.

Is it Worth it? 

Now we get to the million-dollar question. Okay, maybe not a million, but a valuable one, nonetheless. Is house flipping in today’s market worth it?  

You already know the answer: It depends. There isn’t one-size-fits-all guidance that works for house flipping in 2023. For instance, if you’re handy, find yourself in an advantageous local market, find the right house, and do thorough research, you’re probably in a good spot to get a house flipping profit. 

However, if you can’t do basic repairs, can’t find a fixer-upper that fits your budget, and don’t want to conduct the necessary research, you’ll want to think twice before flipping a property. 

It’s important to gauge your commitment to this process. House flipping isn’t a recreational activity; you need to have goals going into it and an understanding of what needs to be done beforehand. 

Conclusion 

House flipping is often worth it for individuals who have the skills, financial resources, and willingness to take calculated risks. That said, it’s not a surefire way to make money and involves a significant amount of work and potential challenges.  

Thorough research, a reliable business plan, and a realistic view of your abilities will increase your chances of a successful house flipping endeavor.