The opportunity to realize profits is compelling at any time in any market. In real estate, fix-and-flip investing presents an opportunity to realize profits with remarkable efficiency—as long as you choose properties with discretion.
While the short hold period limits exposure to market fluctuations and rising rates, knowing which properties to purchase is a steep learning curve. To navigate the markets for fix-and-flip properties, it’s important to understand the value of research and pricing correctly to see reliable returns.
Best Markets for Fix-and-Flip Investing
If you’re waiting for the right market cycle before you consider fix-and-flip investing, you’ll be waiting for a long time. The best fix-and-flip opportunities aren’t a matter of which market you buy in as much as the quality of acquisition.
There will always be homeowners downsizing or moving in with family and waves of older people leaving their homes behind. Those homes need updating, and if you can find them at the right price, you can fix and flip them profitably despite the broader challenges of the housing market.
Buyer’s Market vs. Seller’s Market
The distinction between a buyer’s market and a seller’s market is the balance of negotiation power. In a seller’s market, there are fewer homes than there are buyers, which often brings greater demand and profits. There can also be greater acquisition costs and competition from investors.
In a buyer’s market, there are more homes than there are buyers, which can lower acquisition costs and increase the range of properties available. At the same time, a buyer’s market has the potential to increase holding periods and carrying costs for investments.
Each comes with advantages and disadvantages, but shifts in market dynamics can happen almost overnight, so plan cautiously to mitigate potential losses. Be prepared to pivot in case your negotiation power reverses when it’s time to sell.
Pros and Cons of Fix-and-Flip Investing in a Recession
There are both pros and cons to investing in fix-and-flip properties during a recession. They include:
Pro: Reduced Acquisition Cost
Property prices often decline in recession, and distressed properties become more abundant. This presents an opportunity to increase profit margins when the market rebounds.
Con: Increased Financing Challenges
Recessions support a tight lending market with less favorable terms, strict requirements, and higher down payments. When conventional loans are unavailable to fund investments, hard money financing can allow you to act quickly on the right opportunities.
Pro: Reduced Competition
Some investors will shy away from real estate in economic uncertainty. This results in better access to properties and the potential to negotiate more favorable deals with motivated sellers.
Con: Increased Costs and Depreciation Risk
The cost of materials and labor may not decrease alongside property values, impacting profitability with higher renovation expenses. Additionally, properties purchased at a low price may continue to decline in value.
Pro: Increased Rental Demand
Homeownership may become less attainable in a recession, leading to an increased demand for rentals. Fix-and-flip investors can pivot their strategies to hold and rent out properties for steady cash flow until the market is more favorable to sell them.
Con: Reduced Buyer Demand
Economic downturns can lead to a decrease in buyer demand for real estate as potential homebuyers may be more cautious about making significant purchases. This results in slower sales and extended holding periods, which increase carrying costs.
Ensuring Profitability of Fix-and-Flip Investments
Reliable returns for real estate investments are heavily dependent on pricing properties correctly. This requires conducting thorough market research before committing to a project. No matter how beautiful a property is once it’s been renovated, it may be out of reach for potential buyers or may not align with local market trends and cut into profits as the turnaround is drawn out.
Pricing and market research go hand in hand for strategic investing. With any fix-and-flip project, your priorities should be to maximize the market value of the property, sell quickly, and minimize expenses.
Fix-and-Flip Strategies to Maximize ROI
To maximize the ROI of your flips, keep these tips in mind:
Follow the 70 percent rule.
To ensure you purchase at a good price, multiply the property’s expected value after repair by 70 percent and subtract your budget for renovations. The resulting figure should determine a purchase price that positions you for profit—as long as your renovation budget is realistic.
Buy in high-demand areas.
Research the local market to see where homes are selling in the greatest volume, how long they were listed, and comparable prices. This better informs your after-repair value and your turnaround timeline.
Focus on cost-effective renovations.
After addressing necessary repairs, prioritize what buyers want in the local market you’re purchasing in to keep your project on track, within budget, and positioned to sell. Spend money where it makes the most marketable impact.
Build your budget to account for surprises.
It’s better to be ahead of schedule and under budget than find yourself under extra pressure. Add extra time and funds into your budget for predictable variances.
Target for efficiency.
Look for properties that can be turned around quickly to increase potential profits, such as homes in foreclosure or probate or those for sale by the owner. These can often be acquired below market value and require less significant renovations to flip.
Stick to smaller projects.
Homes with light rehab needs will take less time and expense. If you can flip the home quickly, your exposure to market risks, such as increasing interest rates, will be minimal.
Finance Your Next Flip with Socotra
Fix-and-flip properties are a good investment in a seller’s market—and a buyer’s market—if you get the right property for the right price.
Be prepared to act quickly and learn how working with a hard money lender can give you a competitive advantage. Read The Borrower’s Guide: Fix-and-Flip Hard Money Loans for more insights.