{"id":179949,"date":"2024-12-20T12:45:13","date_gmt":"2024-12-20T19:45:13","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=179949"},"modified":"2024-12-20T12:45:19","modified_gmt":"2024-12-20T19:45:19","slug":"flipping-properties-can-improve-housing-affordability","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/flipping-properties-can-improve-housing-affordability","title":{"rendered":"Actually, Flipping Properties Can Improve Housing Affordability\u2014Here’s How"},"content":{"rendered":"\n

Housing prices have increased more in the last four years than in the previous three decades, surging 47% since 2020<\/span>, according to a Case-Schiller National Home Price Index <\/span>report<\/span><\/a>.<\/span> The consensus among housing experts is that <\/span>supply shortages<\/span><\/a> are a primary driver of the housing affordability crisis and that the situation is particularly bleak for first-time homebuyers seeking starter homes. <\/span>Only 17% of renters can afford to purchase the median-priced starter home<\/span>, according to the <\/span>National Association of Realtors<\/span><\/a>, compared to 42% in 2019.<\/span> <\/span><\/p>\n\n\n\n

Some housing advocates say real estate investors are to blame for the shortage of affordable homes. The share of investor home purchases skyrocketed during the pandemic homebuying boom, and though the share has leveled off, investors still purchased almost a quarter of low-priced homes in the third quarter of 2024, according to <\/span>Redfin<\/span><\/a>. Various policymakers and pro-housing groups have proposed legislation to regulate or curb investor home purchases and home flips, including a <\/span>federal ban<\/span><\/a> on hedge fund purchases of single-family homes and a <\/span>65% tax<\/span><\/a> on house flipping gains in New York. <\/span><\/p>\n\n\n\n

But analysis of investor demand from <\/span>Freddie Mac shows<\/span><\/a> that investor purchases were not <\/span>a <\/span>main<\/span> driver of the rise in housing costs. Some house flippers <\/span>contend<\/span><\/a> their investments have even added to the supply of affordable homes because the homes they purchase <\/span>often<\/span> don\u2019t meet housing quality standards for the loan programs first-time homebuyers use. <\/span><\/p>\n\n\n\n

The impact of house flippers on housing affordability has been <\/span>nuanced<\/span><\/a>, and it\u2019s<\/span> often difficult to distinguish cause from effect, as house flippers <\/span>often<\/span> target neighborhoods where demand is already increasing, and prices <\/span>are expected<\/span> to rise. But whatever the <\/span>effect<\/span> of flips has been in the past, house flippers have <\/span>an important<\/span> role <\/span>to play<\/span> in the future of housing affordability, argues Joshua Ernst in an <\/span>article<\/span><\/a> for <\/span>MarketWatch<\/span><\/em>. Whether investors can meaningfully contribute to a growing supply of affordable homes may depend on future policy initiatives. <\/span><\/p>\n\n\n\n

The Need for Investment in Distressed Properties<\/span><\/h2>\n\n\n\n

New construction alone won\u2019t fix the country\u2019s shortage of more than <\/span>7 million<\/span><\/a> affordable homes, even if builders were <\/span>properly motivated<\/span><\/a> and <\/span>obstacles like <\/span>strict building codes<\/span><\/a> and zoning ordinances were swiftly removed<\/span>. <\/span>In fact,<\/span> no single housing policy will quell the crisis, argue researchers at the <\/span>Urban Institute<\/span><\/a>. Investing in the nation\u2019s existing housing supply, which includes a large share of old houses and homes <\/span>highly vulnerable<\/span><\/a> to natural disasters, could benefit housing affordability as part of a multi-pronged strategy. <\/span><\/p>\n\n\n\n

The<\/span> median owner-occupied home was built 40 years ago<\/span>, according to recent <\/span>data<\/span><\/a> from the American Community Survey<\/span>.<\/span> About <\/span>12% of housing units<\/span><\/a> were built<\/span> before 1940. <\/span>In 2021, <\/span>9.5 million homes were marred<\/span> with severe structural issues or lacked <\/span>basic<\/span> utilities like plumbing and electricity, according to a <\/span>report<\/span><\/a> from the<\/span> Joint Center for Housing Studies at Harvard University.<\/span> American homes need a collective $149 billion in repairs, the Federal Reserve Bank of Philadelphia estimates\u2014including $57 billion for <\/span>homes<\/span> occupied by <\/span>households with lower incomes<\/span>. <\/span><\/p>\n\n\n\n

\u201cThe government invests in rebuilding highways and other infrastructure, so where is the focus on remodeling housing?\u201d Ernst asks in the <\/span>MarketWatch <\/span><\/em>article. House flippers have the skills and experience to renovate the dilapidated homes that first-time homebuyers don\u2019t have the resources to upgrade <\/span>on their own<\/span>. <\/span>Flippers typically <\/span>aim<\/span><\/a> to get a great deal on a distressed property <\/span>in order to<\/span> sell at a competitive price for the area rather than dressing a home with luxury features <\/span>in order to<\/span> sell at an inflated price.<\/span> <\/span><\/p>\n\n\n\n

How Have House Flippers Impacted Housing Affordability?<\/span><\/h2>\n\n\n\n

Jerry O\u2019Reilly, a real estate investor at <\/span>Cash Home Buyers Crew<\/span><\/a>, said house flippers have had a dual impact on housing affordability in northeast Ohio. \u201cThe supply of starter homes has expanded, but the prices <\/span>for these homes<\/span> far outstrips qualifying income of potential buyers in this area,\u201d he said in a conversation with BiggerPockets. <\/span><\/p>\n\n\n\n

It\u2019s difficult to determine whether <\/span>the declining affordability of starter homes can be<\/span> linked to investor participation in the market <\/span>directly<\/span>.<\/span> Analysis of <\/span>New York City<\/span><\/a> house flipping activity and housing affordability from the <\/span>Pratt Center for Community Development<\/span><\/a> posits that house flippers target low-income communities of color, increasing eviction rates and reducing the availability of low-priced homes for prospective owner-occupants. <\/span><\/p>\n\n\n\n

But house flippers, motivated by profit, are drawn to areas with increasing demand for homes\u2014and whether they cause the gentrification of low-income communities or merely cash in on revitalization already taking place is difficult to pin down, especially since experienced flippers dive into a market early on in the process. \u201cI look for transitional neighborhoods with only one sold rehab or fix,\u201d explained O\u2019Reilly. <\/span><\/p>\n\n\n\n

Wealth manager and author Ben Carlson, CFA, <\/span>argues<\/span><\/a> that house flipping may have impacted first-time homebuyers <\/span>in a different and unexpected way<\/span>: Popular house-flipping shows like those seen on HGTV have set unreasonable expectations for what a first home should look like, leading to higher demand for <\/span>turnkey homes<\/span><\/a>\u2014which flippers are happy to provide. <\/span><\/p>\n\n\n\n

In any event, the impact of investor activity on home price growth has likely been minimal, according to a <\/span>2022 report<\/span><\/a> from Freddie Mac, which notes that demographic shifts, low mortgage rates, limited supply, and migration away from cities were the bigger culprits. <\/span>CoreLogic <\/span>notes<\/span><\/a> the relationship between housing affordability and investor activity from 2019 onward hasn\u2019t been consistent, making it difficult to <\/span>draw a conclusion<\/span> about<\/span> cause and effect.<\/span> <\/span><\/p>\n\n\n\n

Is House Flipping Still Profitable for Investors?<\/span><\/h2>\n\n\n\n

If house flipping does have a role to play in increasing the supply of starter homes, is it profitable enough to motivate investor flipping activity? O\u2019Reilly said it\u2019s not, at least in relative terms, explaining: \u201cI\u2019m now moving to buying and <\/span>then<\/span> reselling after two years to qualify for federal tax protection on <\/span>capital gains<\/span><\/a>. Current margins are much lower than 2008, dramatically so.\u201d<\/span><\/p>\n\n\n\n

ATTOM <\/span>data<\/span><\/a> show the gross profit margin for the typical flip is trending downward. In the third quarter of 2024, the median investor purchase price was $245,000 and generated $70,250 in gross profit, meaning only a 28.7% gross profit margin before expenses. That\u2019s down from a 48.8% gross profit margin as recently as 2020. Returns were particularly low in <\/span>Austin, Texas<\/span><\/a>; <\/span>Honolulu<\/span><\/a>; <\/span>Houston<\/span><\/a>; and <\/span>San Antonio<\/span><\/a>. <\/span><\/p>\n\n\n\n

But flippers are still earning a worthwhile profit in affordable cities poised for growth. Gross returns were high in <\/span>Pittsburgh<\/span><\/a> and <\/span>Cleveland<\/span><\/a>, for example. And raw profits remain high in notoriously pricey markets like <\/span>San Francisco<\/span><\/a> and New York. <\/span><\/p>\n\n\n\n

For newbie investors, however, <\/span>financing<\/span><\/a> is a challenge in today\u2019s high-interest rate environment. In the third quarter of 2024, almost two-thirds of flips were cash-only purchases, according to ATTOM. <\/span><\/p>\n\n\n\n

Doug Perry,<\/span><\/a> strategic financing advisor at Real Estate Bees, told BiggerPockets there are financing options for investors who can\u2019t pay in cash<\/span>, but they<\/span> shouldn\u2019t expect any flip to be easy. \u201cHouse flipping remains a popular and profitable real estate investment, although it isn’t as simple or quick as the TV shows make it appear,\u201d he added. <\/span><\/p>\n\n\n\n

Perry said investors can acquire a property with only a 10% <\/span>down payment<\/span><\/a> and finance 100% of the rehab budget if they can show the lender the project is likely <\/span>to be<\/span> profitable, adding: \u201cThese loans don’t use the typical means of income qualifying. The loan <\/span>is based<\/span> on the projected profitability of the project itself and the borrower’s capacity to complete the project, including a credit check and a background check.\u201d <\/span><\/p>\n\n\n\n

These loans also typically have 12-month terms and require a personal guarantee, so it\u2019s key to have a good plan and move quickly and efficiently. <\/span><\/p>\n\n\n\n

What Policies Would Encourage House Flippers to Add to the Affordable Housing Stock?<\/span><\/h2>\n\n\n\n

Ernst outlines a few policies that would encourage investors to revitalize the existing housing stock. He said such policies should encourage:<\/span><\/p>\n\n\n\n