Fix & flip as a real estate investment strategy has been really good to many of us for a long time. In rising or falling markets, we’ve had a great run, and we’re still seeing a lot of opportunity in today’s markets. It’s more difficult to find bargain purchases, as foreclosures are off and prices have risen due to investor competition.
Fix & flip profits come from three process phases, the purchase, the rehab, and the sale. You can make up for paying a higher price if you can increase your selling price or get a better rehab result at a lower cost. Investors in the current market are seeking out older homes in desirable neighborhoods to get a higher price on resale or higher rents. Flip Profits are Up RealtyTrac released a Q3 2014 report showing 26,947 flips, 4% of the total single family home sales and down from 4.6% the previous quarter. Since they can only track the purchase and sale prices and not the rehab costs, the report cites the gross profit on average (sale minus purchase not including rehab) to be $ 75,990. This 36% gross profit was up one percent from the previous quarter.
If prices are rising for the fix & flip investor on the buy side, but profits are rising as well, then they must be getting higher resale prices and/or getting a better profit on their rehab work. This is the situation we’re finding in some older homes in established and desirable neighborhoods. Sometimes the purchase price is still a bargain, as these older homes present a greater challenge in the rehab, so there is less competition for them.
If an older home is a sound structure and the rehab work required is renovation to appeal to today’s buyers and tenants, then it is probably a good candidate for fix & flip. As always, the kitchen presents the greatest opportunity to improve the structure, and also the highest rehab cost. A complete redesign is often unnecessary however, as often resurfacing cabinets and work surfaces, as well as upgrading to modern appliances is enough to take the home to market.
Bathrooms and converting to larger closets are also cost effective rehab projects. Get an education walking through brand new spec homes to see what buyers want, as builders are constantly adapting to the market. Older homes have charms that appeal, but they’re avoided by many buyers if they aren’t somewhat energy efficient and offering amenities they can get in a new home.
The cost-to-value ratio for renovation projects has reversed a long period of decline. For the second consecutive year, the value compared to cost for rehab projects has increased for all 35 projects tracked at one remodeling site. The average selling price of existing homes has increased about five times the increase in construction costs according to some estimates.
With resale prices rising and rehab costs holding pretty steady, there is a lot of opportunity in locating older homes in neighborhoods where buyers and renters want to live. Many of these neighborhoods have also enjoyed a higher historic appreciation rate than newer subdivisions. Many are close to downtown areas, desirable employment, and have high walkability scores. Take great care in selection, as older homes can present extra costs to conform to newer building or safety codes. All of the basics are still part of the deal. Get the lowest price going in, carefully control your rehab costs, and have a strong buyer list. The fixing part is wasted if you don’t have buyer demand for the flip. Dean Graziosi
There are a great many analysts and economics experts who use the percentage of income spent by consumers on housing in various ways to measure economic health and spending patterns. Real estate practitioners love times like these for marketing, as they can show that in most markets it’s cheaper to buy than to rent. With interest rates still low and owned homes having to compete with foreclosures in the market, prices of homes not in foreclosure haven’t been rising much. Two recent articles only a day apart at money.cnn.com present interesting contradictions.
In this article, the stats say that more than 40 million Americans are spending more than 30% of their income on housing (mortgage/rent, taxes, and home expenses). Renters are said to be in worse shape, spending 49% versus 26% for homeowners.
Though home prices are rising, they’re still below the highs before the crash. The economy is a major factor, with wage stagnation cited as aggravating the problem. Even with low interest rates and home prices overall, buyers are still few and far between. This data is alarming to some economists, as housing plays a big role in our economy. Rental property investors are still happy and buying, but that’s slowing as well with rising prices.
Robert Shiller, a Nobel Prize winning economist and one of the originators of the widely-used Case-Shiller Home Price Index, made a surprising statement at a recent panel discussion. He says that for wealth accumulation Americans should be renting and putting their spare money into the stock market.
He uses Switzerland as an example, where the home ownership rate is very low, people rent, and they’re in far better economic shape than the average American. The first contradiction seems to be in the numbers for the cost of rent-vs-own as a percentage of income. If the average homeowner truly does spend 23% less (49% – 26%) of their income to own, then they should be in better shape, with more money to invest.
Even more confusion results from Mr. Shiller’s CAPE Index, which predicts future stock market returns. Right now it’s not pointing to good news in the next five years, so why the buy stocks advice? In the same discussion he says that home ownership can ultimately be a good investment, especially if the homeowner avoids second mortgages and home equity loans. Wow, what should we be doing?
So, what’s the real story?
I believe that the real story is in the poor economy, stagnant wages, and shortage of good employment for graduating college students. Some of them aren’t equipped for the best jobs, as their degrees aren’t in areas needed, but there’s just not a lot of economic growth going on. If wages aren’t going up, and we know that rents are rising, it’s obvious that more of income will go to housing. This is especially true when stringent credit requirements and lack of a down payment are keeping people in rentals, increasing demand. But is that housing’s fault or just a lousy economy as a whole?
When I look at the stunning highs the stock market keeps hitting, it’s scary. It looks a bit like the housing market in 2006. It isn’t in my playbook to move money from real estate into stocks, but I don’t have the expertise to predict a stock market crash either. So, what is one to do?
Consumers: If you’re able to buy, it may be a good decision, as prices will continue to rise, though slowly.
Rental property investors: Times are still good. Until and unless the economy and wages improve, rents will continue to hold or rise. If you can buy at a bargain below market value, offering a nice property at just below prevailing rents should keep it occupied.
These type of conflicting articles are everywhere, indicating a lack of any definite trend for either the general economy or the housing market. Whether you’re a consumer or an investor, just use caution and buy right, a strategy that is always wise in any market. Dean Graziosi
Hey, everybody. Welcome to this week’s Weekly Wisdom. This is Dean Graziosi. I’m here in my backyard on my iPhone, but I had a really important message I want to share with you today.
You know, heading into the holiday season there’ll be a lot of presents, and gifts, and happiness. And I wanted to share with my children that happiness is more than just external factors that give you a temporary boost.
What I said was, “Hey, guys. If you get what you asked Santa for, will that make you happy?” And they’re like, “Yeah!” And I said, “But what if I took that present and I wrapped it for you and I gave it to you next week, and gave it to you the next week, gave it to you the next week? Would it kind of wear off?” And they were like, “Yeah….”
And what I was trying to say to them is, enjoy your presents and love them, but happiness comes from the inside. It originates when you become the thermostat of life and not the thermometer.
Not changing who you are, how you feel when there’s too liberal of a president or too conservative of a president or when the economy’s good or when the economy’s bad or when your husband or wife is good to you or when your husband or wife is bad to you. When your kids are good or when your kids are bad. When you have money in the bank or no money in the bank. Believe me, I am in no way saying that money doesn’t help with happiness.
Dan Sullivan says, “If you can cut a check for a problem. You don’t have that problem.” That is true. When you can cut a check to help other people or build security in your own life or help strangers, that money is an amazing thing to go after.
And what I’m sharing today is that I want to make sure you don’t chase things… because I did for years thinking when I made that certain amount of money, when there was something different going on in my life then that will make me happy.
Don’t put off being happy until tomorrow. Find your happiness now. And, maybe that’s easier said than done. You might be saying, “Well, Dean, you’ve got money now. It’s easy.”
No, I didn’t find happiness because of money. What I found was when I truly understood my purpose and what really made me buzz on the inside and I did more of that and less of the things that frustrated me or that stripped my confidence, I started to find happiness.
So what I urge you this month, this time of the year going into the holidays, is really start being aware of what is it that drives you? What is your inner purpose?
If we were 100 years old right now, or you were 100 years old right now and you were looking back on your life, would you say, “Well, I had all the money but I wasn’t the greatest parent?” Or, “I was a great parent and I would do nothing different.”
You know, what are the things that drive and motivate you, that you could rewind your future and come back to right now in this present time and say, “That’s my purpose. That’s who I am,” or maybe it’s just a, a dirty diamond and you need to polish it.
This is a great time to reflect, a great time of the year to reflect and polish that own inner diamond of yours and find something that allows happiness to shine out rather than waiting for those exterior things to shine light in.
That’s my message for this week. It’s kind of the message I shared with my kids and I wanted to share it with you.
If you’re new, I am SO glad to have you. If you’ve been coming for years, thanks for coming back.
If you don’t have my first New York Times bestseller, a personal development book called, “Totally Fulfilled,” or my #1 Real Estate book 30 Days to Real Estate Cash then go get them for free at Deansfreebook.com. No shipping and handling, just free.
I’m Dean Graziosi and thank you so much for your time. I’ll talk to you next week!
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OK. Today, I want to talk to you about lying to yourself. We all do it. And a lot of us lie to ourselves because without realizing it, we can’t face the truth, and it’s easier to craft a story, to craft a lie.
You say, “You know what, I’m happy with my job. You know, I should be content. I can pay the bills, and you know, my kids don’t have to worry about eating, so, you know, I like my job.”
No! Don’t lie to yourself. If your relationship isn’t good, then focus on it, and, and, and be honest, “It’s horrible. I go home and I’m sad. I go home. It’s not working. I go home and I want to run, but I just stay there for the kids, or I stay there because of money…”
No! If it’s that bad, stop lying to yourself. Let the pain sink in, because if you get disturbed, you will take action. But if it’s a lie just to get through the day, then stop lying to yourself. Look in the mirror and say, “I don’t like who I am… I have to make a difference.” Read a book. Go online. Get help.
So my challenge for this week is to find out where you’re lying to yourself. I just know that so many of us create lies, because we can’t face the truth, and it’s just good enough to get by. If you want to stay status quo, if you want to be OK, if you want to just get through life, then keep lying to yourself.
But if you want to actually make a change you have to find the lies, and go, “What are you doing? No, that’s a lie. The truth is you’re unhappy. It’s disturbing. Find an answer.”
If you tell yourself the truth then you can find an answer.