Why Many 1st Time Home Buyers Are Purchasing Investment Properties or Flipping Homes

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Recent news reports suggest that more first-time home buyers are flipping houses and buying investment properties. This can be a smart move as it is a way to make a good return on a real estate investment in the best circumstances. As the real estate market has gotten hotter and demand for affordable homes has risen, more first-time home buyers are flipping homes to make money faster than they can with the IRA or 401k.

first time home buyer rental income

Many first time home buyers are realizing that they can rent and live where they want and earn rental income with an investment property.

However, experts say that while people are flipping homes at the highest rate in 10 years, they are seeing smaller profits. Higher home prices, hot competition and few affordable homes are making it more difficult for people to make a profit on house flips and other real estate investments.

CNBC reported that 207,000 homes were flipped last year, which is defined as a property that was bought and sold in one year. That is the most flips we have seen in 10 years. The number of people and companies flipping homes stands at 138,000, which is a decade high.

But the flippers of today are different than those of 10 years ago, who were able to use cheap, easy money to finance their flips.

Experts say that house flipping among first time buyers and others is built on a more solid foundation than the frenzy we saw 10 years ago. Financing for house flippers is still available for some flippers, 65% of flippers are using their own cash to buy and fix up homes. This is the reverse of 2004 to 2006, when the majority of flippers were using financing to buy. Today it is more difficult to finance investment properties and you usually need to have experience, a lot of money to put down, and a portfolio of homes as collateral. This can make it hard to qualify for the first-time buyer mortgage to get in the game with competitive financing.

Flippers these days are seeing a bigger gross return in dollars as they have higher home prices and margins. But they have to put more of their own cash into the projects. This makes net returns lower. The average flipping return for 2017 was 49%, which was down from 52% in 2016.

One flipper in Maryland has been doing flips since 2012 and he has a strict strategy to make 30% profits on each project. He says that as a real estate agent, he can buy and sell the deals himself and save on commissions. He also is a builder, so he has the in-staff contractors to do everything from start to finish. It also is important to have contacts in the industry to find deals that are off market. Those three things are what has made his business more profitable than many others.

The key is, he says, is to get the home at a low enough price. Far too many first-time buyers make the mistake of overpaying on the home. This makes it difficult to turn a profit. If you cannot get it under market value at least 10 to 20%, it often makes it difficult to make money. It also is important to buy in the right neighborhood. It needs to be in a hot and rising neighborhood but one that is not too overpriced yet.

Some flippers today are using financing, but they say that Fannie Mae will only back 10 investor loans per flipper. It is also tough with underwriting, so some flippers are going to private or hard money lenders. But interest rates on these loans are higher than the rate for the typical owner occupant buyer. You will pay at least 10% and up to 15% for a hard money loan. This really does tighten up the margins, and it makes it even more important to buy the home at a low enough price and to not overspend on repairs.

The bottom line on flipping homes for the first-time buyer is that you need to know what you are doing, have some cash available to finance at least part of the deal yourself, and to buy at a low enough price to turn a profit in a competitive market.

About Bryan Dornan

Bryan Dornan is Chief Editor of RefiGuide.org. Bryan has worked in the mortgage industry for over 20 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States. Should you have any questions about articles like this, let him know.