Feb Market Trends and Outlook

[Katlynn Teague]

Good morning BP,

Okay Flippers, what trends are we seeing in your markets right now?

I am based in Atlanta, GA and we are back to bidding wars!
Average DOM as of last month is 41 days with a median sales price of $415k. 

[Chris Martin]

My 2 cents. 

All of the rentals I've sold recently (past two years) have been flipped vs. remained rentals. Why?

The following looks at hypothetical purchases, anecdotally and in relative isolation, meaning there may be a reason (for instance to generate large tax losses for "active participation" investors to offset other income) for some individuals to undertake a particular kind of purchase. Here are some scenarios.

For a (Raleigh median) $382,650 purchase, rented at $1,400 /month rent, let's assume an all-cash purchase. Other than taxes and insurance, I'll assume the best case in that there are no other expenses. Income would be roughly $12,706 ($16,800-$4,094) based on projected annual tax (Wake County 0.96% of AV (taxed at 0.5 market value)) and insurance (0.59%). That's a pre-tax return of 3.3%. As an alternative, that $382,650 placed in 4-week T-bills with zero risk will yield (at today's 5% rate) $1,594 per month interest income but with no tax benefits.

On the other extreme, for a (median) $382,650 purchase, rented at $1,400 /month rent, a mortgage at 0% down, 5% interest fixed for 30 years, the interest payment alone starts at $1,594 / month. Simple math results in a significant absolute negative cash flow if fully leveraged. This property would not pass my first screening (rent >= PITIH at full leverage). This scenario results in over $535 negative cash flow. 

At a typical 20% down ($306,120 loan), 5% interest fixed for 30 years, Interest starts at $1,276 / month. After taxes and insurance, your $76,530 down payment "investment" will yield a negative cash return for many years. The non-tax Depreciation Expense (assuming 80/20 improvement to land) will result in an annual $11,132 ($382,650 * 80% / 27.5) depreciation expense which will exceed the $3,000 IRS limit but will guarantee you have no current tax liability for this investment for a long time. As an alternative, that $76,530 placed in 4-week T-bills will yield (at today's rate) $318.88 per month interest income with no tax benefits.

At the moment, I see no compelling reason to buy rentals (arguably at the top of the market) that return less than the short-term treasury bill alternative. Hence, to answer the "trend" question, I see a large number of investor purchases becoming flips. 

https://www.americanfinancing.net/mortgage-calculators/amort...