House flipping

Remodeling certainly helps to accelerate the appreciation process but let's not be fooled. The nation, from coast to coast, has seen real estate prices increase in record time over the last 2 or 3 years. The appreciation rate is being driven by extremely low interest rates and a unpredictible stock market. Many people that would typically invest in stocks have opted for real estate over the last 36 months. Don't expect this continue for much longer. I'm not suggesting that the real estate bubble is going to burst, it may but I doubt it, but I believe it will level out here in the next 6 to 9 months. Interest rates are slowly creeping up which will keep appreciation in line with more traditional rates of increase. That's not to say that real estate will become a bad investment because I believe real estate, in most cases anyway, is a great investment. It just means the amazing returns we've seen in the last few years will not be seen in the next 3 years. For example, 3 years ago you could buy a typical "cookie cutter" townhouse where I live for about $125,000. Today that townhouse is listing for $250,000 and getting multiple offers the first day on the market, all offers higher than list price. I bought my house 2 1/2 years ago in a very rural area of Maryland (in the hills) for $207,000. It's on the market now for $340,000. I added a deck and finished the basement, that's it.

Real estate, over the last 3 years, has almost become a "get rich quick" investment becuase of the inflated appreciation rate. Traditionally, real estate is a very safe, very lucrative long term investment. I believe real estate will continue to be safe and lucrative over the long term, particularly if you can be classified as a real estate professional for IRS purposes, but the days of buying and flipping for huge profits will likely slow WAY down very soon.

Pug

 

I agree with you, but I'm not talking HUGE profits--I don't need to stick my butt out there in risky speculation and try to make $250K a year. A person can live quite comfortably in small town Midwest America for $50K. In an area where you can buy a four bedroom restored Victorian for $80K - $90K (what we payed for ours) in a decent neighborhood, it doesn't take much to live.

Some houses similar to ours--except unrestored--recently came on the market a couple blocks away. I know it sounds absurd, but these homes, apparently without significant structural defects, were going for $16K each! They were two story Victorian duplexes, the duplex angle probably drove down the value, but looking inside, they looked fairly easy to convert to single family, and at least one of them still had the lovely original woodwork. When you can find a place like that with 2,500 sq. ft. for such an absurd price that needs only painting, HW floors sanded, some re-wiring and plumbing done (wife's the amateur electrician, I'm the amateur plumber), a coat of paint on the outside, and a new kitchen and bath remodel, you might get away with doing it for $10K - $15K yourself plus 3-4 mo hard work. You might be able to turn around and sell a house with $30K in it for $80--I'd be surprised if you couldn't.

There are houses like that all over this place. People at the vintage architectural salvage places in the big cities come into the small towns, snatch these bargains up for nothing, strip out the woodwork, clawfoot bathtubs, chandeliers, pedestal sinks, historic cabinets, multi-pane windows, crown molding, baseboards and the like, and leave these beauties boarded up and abandoned. Some of these entrepreneurs, siezing on the historic remodeling craze, are getting rich by stripping away the heritage of little towns like mine. I'd just like to get by--maybe even get affluent--by preserving some of this beauty. I think there's a market to be tapped, and precious few are tapping it in the small towns.

 

Sounds promising. My two questions for you would be: 1) How much do you believe the true cost to renovate would be? 2) Is there enough demand in this area to quickly sell the home once you are finished?

If so, go for it. Rule of thumb for flips: Take your projected costs (renovation, mortgage payments, closing, etc.) and add 10%. Take a realistic sales price and drop 5%. If your projected profit is less than $10,000 don't touch it.

Pug

 

That's good advice. I'd agree that $10K profit is too thin, probably $20K profit is pushing the lower boundaries for me.

There are some real steals in small towns. So long as one has an eye for structural defects or other major expenses, I think profitable flips could be swung. There are many elderly who live out their lives in these small towns, they move on to assisted care or pass on to their reward and then the kids from the big city are left with mom/dad's house, a faded relic from 80-120 years ago. It's been paid off for decades, and they don't know what to do with it, they don't have time to remodel it, they just want some money, so it goes on the market or goes up for auction and gets stolen. I was at an auction last year of a small 1,000 sq. ft. Victorian with beautiful wordwork--I mean really beautiful--all original fixtures and 10 foot ceilings. It really only needed cleaning up, painting, sanding of HW floors, and new countertops and sink in the kitchen and bathroom. The thing went for $6,400. A total investment of an additional $5K and two months would've likely netted $20K. That's not amazing money, but neither is there much rick involved, either on a house for < $10K.

Thanks, I appreciate your insight.