Flips are dead ends, smart investors are pivoting to new builds

[Patrick Knapp]

This post is to help those just starting out or realizing it’s not as profitable as they thought.

Little bit about me, I’m a full time investor and General Contractor. I have completely changed my investing strategy in the last three years only focusing on new builds mostly. I have rentals and even in the process of building more rentals in Raleigh NC and Wake Forest NC. I was also a paratrooper in the Army at Ft.Bragg

So let’s get into it with today’s current environment buying a property is becoming more and more difficult even with inventory increasing. The reason it’s still difficult for many people to invest in flips or rentals is that the current dynamic has changed ever since Covid. Let me explain, Home price is sword unlike anything we’ve ever seen before. Sellers now believe they have a certain amount of equity and they refuse to let go without getting the price they want. This is making it more difficult for investors to purchase a property with the intention of either reselling or turning into a rental property. Think about it how many times in the last year have you gone and looked at a property, done your numbers, and realized there’s no meat left on the bone……

So what are you doing in this environment? You should have a mentality similar to the properties of water. Water flows in the path of least resistance it moves. So that’s what I did. I started seeing how much easier it is to purchase a property, tear it down and subdivide the land thus making it more affordable to build the future home I plan to either sell or rent out. Sounds great, right let’s talk about some of the disadvantages behind it before we talked about the positives. #1 This method of investing is not for those with low amount amounts of Capital. You really need to have about $200,000-300k sitting in the bank realistically for most homes in today’s environment. It’s gonna take six months to a year to get started and finished. A lot can happen in a year.

Let’s talk about the positives. There’s no unforeseen issues when constructing other than possibly having an issue with having to dig deeper for foundations. You’re gonna have every single items starting out new so your cap X is easier to plan for. You have all the numbers associated with the build of the property so your cost segregation tax depreciation is much easier to do. A lot of the times there’s better equity. There’s less stress.

I’ve I’ve seen a lot of investors starting to switch over to new construction and leave the flips behind . There’s less risk involved because there’s no unforeseen issues unlike a home where you might tear into a wall and find termite damage.

I’m gonna start filming the entire process of me building this duplex in downtown Raleigh and will start posting videos for anybody who is interested in seeing the entire process.

[Stuart Udis]

Yes, house flipping is an overcrowded space. It feels like anyone who has watched HGTV or has a social media account is now an “investor.” You're right, ground-up construction is capital intensive and does alleviate some unknowns (but only when you have a strong design team). 

It is however important to recognize that new construction does not pencil in most asset classes or most markets right now. It is just as broken as buying and rehabbing properties. The costs are the costs—foundations, lumber, and core building components do not get cheaper just because it is an entry-level product. Higher-end homes in the same markets can absorb those cost inputs; starter homes cannot. Also the land that's ripe for higher end construction is more scarce and more accessible to those with long standing industry relationships and track records. 

Building codes are also becoming less forgiving nationwide, especially for multi-family. Municipalities claim they want affordability, but their own requirements push costs higher. Fire ratings, STC ratings, sprinkler systems, air barrier testing, and costlier mechanical systems—much of it driven by regulatory changes—are all at all-time highs. If you are not dealing with these code shifts yet, they are coming.

This is my way of saying new construction is not a viable solution for most.