Investors: Flipping Average Houses Versus High End Homes
Most speakers about real estate investing will talk about what worked for them. Should you look at flipping average home or high end homes? Depends on your comfort for risk! I was at an investors Meetup group the other night where they were discussing doing fix and flips. The speaker was talking about the high end homes bringing much better profits and that as an investment strategy that he found this to be the best of his career.
The problem is he compared the benefits of flipping high end property to the alternative options (in this case average priced flips) to be a problematic flipping solution.
What they do not realize is new or wanna be investors in the room are only hearing, “You only want to focus on flipping high end property”. This is a message that can be misleading. These presentations should be centered on the pros and cons of each so people can make a decision based on their personal circumstances and investment objectives.
This is often how speakers come across regardless of what they are talking about. The week earlier there was a speaker talking about mobile home investing being the best buy and hold strategy because it is one where he found the most success.
The best investments are the ones where you feel most comfortable
Clearly investors make money through a large variety of investing strategies. There is not necessarily one that is better than the other because everyone has their own investment styles, objectives and their own risk tolerance. As the ole saying goes, "the bigger the risk the bigger the reward."
20% return example
Obviously a high end fix and flip will have a higher dollar return and along with that higher dollar return comes more risk because of the higher exposure to expenses. In the case of high end versus low end flips, you can make the same 20% profit on each.
Let's assume you have a property with a total investment of $300,000 which brings in a 20% profit, you will have generated a nice $60,000 profit where a 20% profit on a $100,000 flip will only bring in $20,000 in profit. So yes, the profits are bigger but what about the risk (your exposure). Compare the differences and decide which makes you more comfortable.
Considerations when flipping property
- Down payment: A 20% down payment will be $60,000 on a $300,000 property and $20,000 on a $100,000 property
- Acquisition: Acquisition fees and expenses are often tied to the price point so these fees may rise as prices rise
- Repair costs: The higher end buyers will require higher end finishes and cost of each item may rise exponentially as the quality and price point of homes rise
- Labor: The interesting part is labor cost to install a cheap product versus a higher priced product is often about the same. A $50 faucet or a $300 faucet pretty much involves the same labor application.
- Holding and Marketing time: Each day you own the property you have expenses. The higher the price point of the flip often translates into fewer buyers which equates to longer marketing times which increase expenses.
- Closing expenses: As these fees are also often tied to the price point of the property the dollar value of these fees also rise, however maintaining consistent in the realm of percentage of value.
- The Plan B: Yes, the often overlooked plan B. What if the property fails to sell or is slow to sell? Holding costs mount and you are bleeding money every day the house sits empty. A safe investment is one that has a plan B which generally entails dropping the price or renting the property to stop the bleeding. Buyers of both high end and low end property can drop the price. A 5% price reduction will be a lot more dollars lost to the high end flipper than the lower end flipper. Renting the property for a high end flipper rises in complexity as rental demand and affordability rise hand in hand with the salability of a property. It is my belief that part of the upfront diligence in flipping is to check marketability of renting the property before purchasing. My strategy is if it cannot cash flow as a rental then the risk may be too high.
- Renovate to the neighborhood: A mistake many new flippers make is to over improve. Regardless of high end or low end flips, make sure you do not over improve for the price point of the neighborhood. You do not want to be the highest priced home in an area. Coming in toward the middle is often your safest position.
- Make sure the home will qualify for all loan programs: This is more of a concern on low end flips. Many buyers use FHA loans so make sure your property meets all their lending requirements.
- Brand yourself: New flippers tend to focus only on profitability. Seasoned investors know their flip is being discussed by neighbors and buying prospects. Quality work will be required by all buyers. Paint may hide a lot of flaws, but these flaws will rapidly emerge as buyers move in and the negative talk will spread fast. This negative talk will shout your business down quickly. Always do quality work to propel your flipping business forward. When buyers ask “where is your next project, I have a friend who may be interested” you know you have done good work.
- Outside first: I find it interesting that all the flipping shows do the yard and landscaping at the very end. I have a different perspective, for marketing purposes I find a quick transformation outside will have the neighbors watching and talking about your property. Additionally, it is no longer a magnet for vandalism as it looks occupied. This great exterior transformation will have people chomping at the bit for you to finish so they can see the results.
No right or wrong
Whether it be a high end flip or a low end flip there is good money to be made in them all. This higher the risk the bigger the reward versus safety in smaller numbers. The investment that best matches your risk tolerance is probably the best choice for you. The important thing is knowing your exit strategy or strategies and being very purposeful in your up front diligence.