Less Than a Year Later, Flipping is Dying

Last July I wrote an article outlining how short term investment and flipping properties had become a fad in 2022. Well fast forward less than a year and I think that the trend is actually waning. Part of what made the strategy of flipping homes attractive to investors, was the low interest rates and quick turnover on inventory. This worked fine and dandy as long as the Fed continued their low interest rate policies. But now it’s time to blame inflation once more for doing away with the house flipping business.

With rates, both short term and long term currently hovering around 6%, those loans that made it possible for people to purchase a home, renovate it and flip it have become much more expensive. High-interest rates mean that borrowing costs for financing a home purchase increase. This makes it more expensive for investors to buy a property, especially if they are using a mortgage. The higher borrowing costs mean that the investor will have to pay more in interest, which can eat into their profit margins.

In conjunction with the pressure of interest rates, the higher cost of borrowing means that there is lower demand for housing. High-interest rates lead to lower demand as it becomes more expensive for people to borrow money to buy homes. This can make it harder for investors to sell their properties quickly, which is crucial in flipping homes. A property that sits on the market for too long can result in significant holding costs, including property taxes, utilities, and maintenance expenses, which can erode profit margins.

Yet another kicker for the industry is how much inflation has affected the cost of raw materials for home renovation. Flipping homes requires renovating the property to increase its value and attract buyers. In an environment with high-interest rates, renovation costs can be higher due to the higher borrowing costs associated with construction loans. This can make it more challenging for investors to generate a profit, as the renovation costs will eat into their profit margins.

Lastly, we’re also seeing that homes are out on the markets for longer as homeowners with existing low interest rate mortgages are unwilling to sell their properties. As we all know, flipping homes is inherently risky, and high-interest rates can increase that risk. As borrowing costs rise, investors may find themselves unable to sell their properties quickly, leading to increased holding costs and potentially even losses if the market turns against them.

Hold on to Dear Life

However, all is not lost for people who are looking to invest in real estate, it’s just the name of the game has changed significantly. The first strategy that I would recommend would be to buy and hold properties in an effort to build equity. Equity in real estate is the difference between the market value of a property and the outstanding mortgage balance. Building equity in real estate means increasing the portion of the property's value that you own outright, beyond what is owed on the mortgage. There are several ways to build equity in real estate, but given the market conditions I would recommend that owners who can afford it begin an accelerated schedule for paying down the mortgage. Paying your mortgage on time and making additional payments towards the principal will reduce the outstanding balance on your mortgage, increasing your equity in the property.

Rent Your Properties

Aside from getting equity in your home from a long term strategy, one can generate income through rental properties. This income can provide a steady source of cash flow, which can be used to pay for the mortgage, maintenance, and other expenses associated with the property. Depending on the rental property and the management style, becoming a landlord can offer the potential for passive income. Passive income means that you can generate income without having to work actively for it. This can provide more time and flexibility to pursue other interests or investments.

Overall, flipping homes is a risky investment strategy, and high-interest rates can make it an even riskier proposition. Investors who are considering flipping homes in an environment with high-interest rates should carefully evaluate the potential risks and costs before making any investment decisions. They should also consider alternative investment strategies that may be less risky and offer better returns in a high-interest rate environment.