Trends in the Home Flipping Industry: Profits Up, but Costs Up Too

Home flipping profit margins continue to go up even though the inventory of starter homes is down in many towns and cities throughout the U.S. According to an article by, trends in the home flipping industry point to higher costs even though gross profits are up. In terms of average gross profit, experts say the highest gross profit for home flipping in the first quarter of 2016 was about $58,000. The gross profits in the home flipping industry is at a 10-year high. Part of the reason there is just a high gross profit is because many real estate investors choose high-end or luxury homes, some of which require more elaborate staging, renovations and updates. Experts say the cost to rehab the real estate asset typically adds 20 to 30 percent to the original purchase price. When looking for financing, calculate how much you want to spend on repairs and renovations and how you will keep up with the latest trends in the competitive home flipping industry.

Consider a luxury home

When thinking about ways to make money in the home flipping industry, it’s important to realize there is a shortage of starter and move-up homes. Builders in recent years focused on luxury homes, which means there is greater inventory of larger, nicer homes. Experts say the national inventory of move-up and starter homes is down 10 percent this year compared to last year. Even though move-up or step-up homes are nicer than entry-level homes, they are just as quickly snapped up by real estate investors. When buying a luxury home, choose one offered at a discount due to foreclosure or short sale. Many eager home buyers received the approval for a mortgage on a luxury home, but deal with unforeseen circumstances that prevented them from making their payments on time. Keep in mind, you will likely need to spend more money on staging and decorating a luxury home after you fix it up to sell.

Avoid carrying costs

When an investor flips a home, they typically buy and sell it within a year. Every month your real estate investment stays off the market, you end up paying more in “carrying costs.” Some of the carrying costs include the mortgage, property taxes, utilities, home owner association fees, home owner’s insurance. One way to minimize carrying costs is to rely on workers, contractors and professionals you trust. When you work with tradesmen you have worked with in the past, you already know what to expect. Work with professionals who are time-oriented and conscientious. Although home flipping costs are going up, you often get better deals when you establish long-term relationships with contractors and retailers.

Work backwards with the money

Experienced home flippers say it’s important to know how much you will eventually sell the home for after renovating it. It’s a good idea to find out how much materials cost as well as the cost of permits and labor. When you accurately estimate your costs and potential profit, you know better what kind of offer to make to the seller. A good guideline is to pay 70 percent of the home’s original cost, but the latest trends in the home flipping industry is to pay about 75 percent of the initial cost. In 2011, investors got better steals by paying less than half of the home’s initial costs. It’s not the bottom of the housing crisis anymore.

Enlist the help of friends

Other ways to make money on flipping a house in the current housing market is to enlist the help of family and friends. Although real estate agents, a lender, contractors, appraisers and home inspectors are part of your team, your relatives will often help paint or do work for free.

Other tips include realizing you are an investor rather than a home owner. Avoid letting your personal preference and taste take precedence over the popular styles and home decorating trends. Also, focus on a good location even if you find a good deal in a poor location. When you find a 10 to 20 percent profit margin, you know you are on the right track. Some of the best locations for high gross returns include Pittsburgh, Penn., Flint, Mich, New Haven, Conn. and Buffalo, N.Y.

At Center Street Lending, we help real estate investors with financing as a reputable private money lender. Unlike traditional lenders, we ask for minimal documentation. For more information about our 24-hour turnaround financing on non-owner occupied real estate properties, please contact us.

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