You work full time, but you keep hearing you can make large sums of money flipping houses. How hard could it be? Buy property, fix property, sell property. Even if these steps are time consuming, the payday at the end makes up for it. Right? How much house flipping profit can you expect?
House Flipping Profit Starting Data
If you’re a regular reader, you’ve figured out I like data. In real estate, there are enough piles of BS and hype to cover Texas. Starting with hard numbers arms you with a large shovel.
RealtyTrac.com publishes a Home Flipping Report, which tracks data on homes bought and sold within 6 months. They were even so kind as to pick the 15 “best” markets. Sounds like a good place to start. To make my life easier, I’m going to look at their numbers 1 and 15.
For 6 months work, those are fairly respectable profits. There’s just one hitch: these numbers only compare the raw purchase and selling prices. It doesn’t include any expenses. Let’s fix that.
House Flipping Simple Expenses
Getting simple expense numbers wasn’t rocket science, it just took some legwork. There are a few things to note:
- I found online calculators for the property taxes in a given market.
- I didn’t find good numbers for Orlando/Kissimmee closing costs, so I prorated them from the Daytona Beach numbers.
- I’m assuming you’re not doing this professionally, hence paying the full broker’s commission.
The house flipping profit isn’t looking quite so nice. In Kissimmee, the average flip lost money! Don’t worry, things get worse.
House Flipping Profit From Appreciation
If you owned a home in these markets, and did nothing to improve it, the price would have still gone up. To figure out how much profit was derived from “flipping” as opposed to buying and holding, let’s subtract out this market boon. I calculated the 6 month appreciation by multiplying last quarter’s by 2 (according to http://www.neighborhoodscout.com).
This came out to around 4% for both of our markets.
Things are looking worse. But wait…that’s not all.
We’ve not touched on the most important expense: the cost of fixing up a property. There are just too many variables to get a good number for this (every investor has their own preferences, the state of the houses vary, material prices fluctuate, etc, etc.) I also don’t trust the data I found online.
Why not? Because real estate gurus are full of it.
I trust is what I’m familiar with. For the over 100 homes we’ve rehabbed, our average rehab and contractor costs were about $32,000. We do quite extensive improvements, but we also get incredible rates on material and labor, so it sort of evens out. I’m going to use our number, but if you think this is silly add a comment explaining why.
Wrap It Up
There it is. If you had been flipping homes for the last six months in the best market in the country, your average annualized return would be 24.2%. Toss in some financing and your return skyrockets (although your hourly wage would likely drop).
My average reader wasn’t investing in that particular market for the last six months. Your profit margin goes negative quickly as you move into “worse” areas.
One thing to keep in mind. If you’re working full time and considering flipping a house with your free time, I argue you will probably get less than an average return:
- You’ll pay retail price for the rehab materials and labor.
- You’ll step into a few traps that an experienced investor would be able to avoid.
- Life gets in the way, especially with a full time job, you can easily go past 6 months and run up holding costs.
Don’t get me wrong. There is house flipping profit to be had. I know many successful investors who flip homes. The problem is I know more who dump time and money into a project and wind up with nothing to show for it. Temper your expectations and be realistic before you start out.
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