Returns Rise as Single-Family Rental Flips Remain Viable Investment Option
Single-family property investors brought in some impressive returns during the third quarter with an average gross return on investment of 33.8 percent per flip, up from 32.7 percent in the quarter a year ago, according to RealtyTrac’s latest home flipping report.
The average gross profit for rental properties — the difference between the purchase price and the flipped price without including rehab costs or other expenses — was $62,122 for the quarter.
“Flipping as an investment strategy is proving to have legs in this housing market despite the dearth of distressed properties,” Daren Blomquist, vice president at RealtyTrac, told B2R Finance.
The share of properties flipped during the quarter, 5 percent, was up 18 percent over the third quarter of 2014, when 4.3 percent of properties flipped were single-family properties, according to RealtyTrac’s report.
Sweet Spot for Best Flipping Returns
RealtyTrac said real estate property investors are doing the most flips — 35 percent of all sales — on single-family properties that are priced between $100,000 and $200,000. That’s also a sweet spot for profits. The Q3 gross ROI on houses selling for more than $100,000 but less than or equal to $200,000 was 47 percent.
The other category bringing in the highest gross ROI were properties selling for over $2 million but less than or equal to $5 million. That category had a gross ROI of 42 percent. Investors, on average, failed to make a positive return on the cheapest flips. Properties selling for more than $50,000 but less than or equal to $100,000 had a negative gross ROI of -16 percent.
Best Markets for Flipping
Markets that have the most opportunity for real estate investors who want to buy and flip are those markets with a combination of lingering distressed property coupled with gentrifying neighborhoods.
ZIP codes with the highest average ROI in the third quarter were in Baltimore, Tampa, Chicago and Central Florida, according to RealtyTrac.
Want to flip to millennials? The markets with the best potential returns and large millennial populations were in Philadelphia County, Pennsylvania; St. Louis, Missouri; Baltimore City, Maryland; Cumberland County, North Carolina; and Kings County (Brooklyn), New York. These counties have average gross flipping profits of 63 percent or more.
Want to flip to boomers? Go to Florida. Charlotte and Hernando counties in southwest Florida, and Volusia, Brevard and Marion counties in central Florida had the best flipping returns and the highest share of boomers living there. These locations have average gross flipping profits of more than 48 percent.
Time to Flip on the Rise
It takes flippers nearly six months (175 days) to rehab, list and sell their product, according to the Q3 report, but Blomquist said he doesn’t see that time delay as a cause for concern.
“Most flippers I talk to will always say 90 to 120 days is ideal for the flipping turnaround, but typically when they send me an example it takes longer than that in real life,” he said. “I am not too concerned with the six-month window because it has been consistent over time.”
In addition, Blomquist said the RealtyTrac data compares the recorded closing date on the front end to the recorded closing date on the back end. Given that a typical escrow is 30 to 45 days, the actual risk window for the flipper is likely closer 130 to 145 days, Blomquist said.
A More Challenging Future for House Flippers
Flippers likely will find the U.S. housing market more challenging going forward, especially at high volume and with consistent high returns, he said.
“Rising interest rates along with moderating price appreciation,” Blomquist said, “are two trends that likely will be working against flippers going forward.”
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