Cofounder of InstaLend, a non-bank real estate lender providing loans on single-family and multi-family properties for acquisition and rehab.
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Home flipping can be a lucrative career. Consider this stat from the 2020 U.S. Home Flipping Report published by ATTOM Data Solutions: homes flipped in the United States 2020 “typically generated a gross profit of $66,300 nationwide (the difference between the median sales price and the median amount originally paid by investors.”
However, while home flipping gross profits rose in 2020, the findings indicated that profit margins declined to a 40.5% “return on investment compared to the original acquisition price.” This return on investment was lower than in 2019 and 2018, and in fact, “stood at the lowest point since 2011.” Additionally, according to the research, home flipping activity in the U.S. declined in 2020.
As the cofounder of a non-traditional real estate lending company, I predict that home flipping activity will rise again, ushering in higher profits and profit margins. If you’re a home flipper, you can prepare for this resurgence by taking several steps to scale your business.
1. Revitalize Your Deal Flow
Since most of the deals you come across won’t be worth pursuing, one of the most important keys to a successful home flipping business is having a strong deal flow. Ideally, you want to have an abundance of potential properties on your radar so that you can move forward with the best of the bunch.
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Assess your current deal flow, and then, if you realize that it’s been stagnant, brainstorm how you can revitalize it. You might decide to make a habit out of attending estate and foreclosure auctions, dedicate an hour a day to sifting through online “for sale by owner” listings or join a real estate investment group, just to name a few ideas.
2. Build And Strengthen Your Industry Relationships
Reflecting on your industry relationships can minimize your financial risks. For instance, partnering with a reliable contractor can safeguard you financially and save you countless hours of frustration. Building a connection with a savvy realtor can help you correctly estimate the sale value of your property once you complete the rehab work.
During your evaluation, if you realize that your current industry relationships are not living up to your business expectations, make the necessary adjustments. For instance, if your current contractor has been challenging to interact with, you could either have a sit down with them to discuss your concerns or start searching for a new one.
3. Consider Getting Outside Your Geographic Comfort Zone
Chances are that you started home flipping in the neighborhood you call home. This makes perfect sense. It’s easier to find distressed properties and oversee the renovation process from a few miles away rather than from hundreds or thousands of miles away.
However, especially if you’re an experienced home flipper, consider getting outside your geographic comfort zone. Seek distressed properties beyond your usual location, whether it’s in a new neighborhood in your city, a new city in your state or a new state altogether.
As you expand geographically, you’ll get access to a broader deal flow. You’ll also get the benefit of diversification; geographic scaling can protect you against fluctuations in different neighborhoods.
Most notably, geographic variety opens the door to higher profits. According to ATTOM Data Solutions, the typical gross profit in the 28269 zip code (Charlotte, North Carolina) was $24,000. In zip code 85032 (Phoenix, Arizona), the typical gross profit was $81,300—more than triple what it was in Charlotte!
If you decide to geographically expand your home flipping business, do your due diligence. Doing business in a new environment and with new people can be a risky, time-consuming endeavor. Consider exploring property in a state or city where a trusted family member or friend lives. That way, you’ll have someone on hand who can take care of things if you can’t make it there in person.
4. Evaluate Various Lenders
A key element of home flipping, of course, is the lending stage. Do your research and stay on top of market trends to determine if you’re getting the best, most flexible rates at the fastest speed possible on your properties.
Each time you prepare to close on a property you want to flip, you may want to speak to several lenders and compare notes. Try to meet with (and ideally, develop professional relationships with) a mix of traditional and non-traditional lenders so you can see what options are available and get the quickest, most reliable access to money. This will help you stay competitive in your closing timelines on offers you make.
There are pros and cons to each type of lending partner. For instance, banks may offer lower interest rates based on your unique financial history. However, they tend to move through the lending process more slowly and don’t typically lend to LLCs (which can shield you from liabilities when you flip homes for a living). On the other hand, non-traditional lenders usually move through the lending process faster and give out loans to LLCs, but one con is that they tend to have higher interest rates than banks.
As you revitalize your deal flow, build and strengthen your industry relationships, explore getting outside your geographic comfort zone and evaluate various lenders, remember that a business decision that works for one home flipper won’t necessarily work for another. Ultimately, you know your home flipping business best and should make choices accordingly.
The information in this article is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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