Will Flipping Houses Still Be Profitable in 2023?
By: Charles Sells
Already in January 2022, this article in the Motley Fool announced that house flipping was becoming less profitable but that there was still money to be made. Here we are at the beginning of 2023, and conditions are even less promising. A key development in the second half of 2022 was that the Fed started raising interest rates for the first time in over a decade. Currently, economists seem to have one of two views: either that a recession has already started or that one is imminent.
The Bad News First.
This article will end on an optimistic note, but it’s important to address some obvious points about how rising interest rates will affect real estate investors in the flipping business.
Property prices are already pretty high. Residential real estate prices have been rising fairly consistently for over a decade. Even though this trend has started softening in the past months, we have not seen any dramatic fall in prices, and profitable house flips are tough to find.
The cost of capital is increasing. This directly affects purchasing costs and holding costs for a house flip. We also need to think about the tail end of the transaction and that higher interest rates are making it tougher for buyers to buy your finished product.
Cost of materials and labor. A related trend that started during the pandemic is that building material is harder to get and much more expensive. Also, for various reasons, labor costs have shot up as well.
Softer demand. The key to flipping is turning over a property in the shortest time possible to get it sold. As the demand for houses softens, properties are sitting on the market longer than they used to before selling.
Is There Any Good News?
There is if we focus our energy on the right things. In his 1989 book the 7 Habits of Highly Effective People, Stephen Covey distinguished between people who focused on the things they could influence vs. things they could not. Focusing on things we cannot change leads to frustration while focusing on the things we can change is empowering.
Strategies For Flipping In 2023
Know your market. To find good deals in 2023, you need to know your market better than anyone else. Know which neighborhoods and types of properties give you the best chance of success. And most importantly, understand what buyers are looking for.
Sharpen your analysis. Analyzing a real estate deal is both an art and a science. You need firm metrics in deciding which properties to buy, and you need to keep refining those metrics as the market changes. At the same time, you cannot robotically trust the numbers, question your results and look at a range of scenarios from best to worst.
Is it time to buy and hold? There will always be a debate between investors who flip properties and those who choose to be landlords as their primary real estate investing strategy. It’s worth saying that both have their pros and cons and neither is the gospel.
Flexible exit strategies. When you have a property on your hands that isn’t working out for whatever reason, you might need to change your exit strategy mid-flip. If you can’t sell immediately, can you AirBnB the property until the property sells or perhaps operate it as a corporate rental?
Reducing risk and finding a buyer upfront. It’s tempting in business to provide a product that appeals to the broadest audience possible to ensure the biggest chance of success. However, choosing a specific niche might be the perfect strategy in a challenging market. For example, finding a business partner that needs your house flipping expertise to combine with their niche rental idea. In this way, you can stick to flipping properties, and your partner takes over the property to manage as an AirBnB, student accommodation, or assisted living unit.
This list is not exhaustive, but hopefully, it inspired some hopes or ideas. Each market and each property is unique, and success might be limited only by our imagination.