The Pros and Cons of Fix and Flip Real Estate Investments in 2021
The real estate market’s responded to the pandemic in unforseen ways but what does this mean for fix and flip real estate in 2021? Here’s what you need to know.
You’ve combed through local real estate listings like a traveler searching for water in a desert. You worked hard to find a fixer-upper in a decent neighborhood that you thought would sell quickly. And then, when you bought the property, you made the type of improvements that would have made Michelangelo weep with jealousy.
But when you list the property for sale, you get crickets. Then the days turn into weeks, and the next thing you know, you’re living a fix and flip real estate investor’s worst nightmare.
When you fix and flip real estate, the odd sluggish sale is just the price of doing business. But you don’t want to have a year where the whole “How much money should I shave off of my profits?” conversation becomes a monthly ritual.
The real estate market in 2020 was red hot by the final quarter. But how likely will that trend continue? If you enter the market in 2021, are you at risk of being the fix and flip investor who’s sitting on multiple properties that just won’t sell?
Keep reading to find out the pros and cons of fixing and flipping properties this year.
Let’s Talk About the Pros of Buying Fix and Flip Homes in 2021
For many people, real estate has historically been the closest thing to a sure-fire, can’t-lose investment that you can get. After all, everybody needs somewhere to live, right?
If you’re angling to get your slice of the multitrillion-dollar real estate pie, here are three really good reasons why 2021 could be your best year yet as a fix and flip investor.
Pro #1: Demand for Real Estate Is Expected to Increase
In 2020, the Federal Reserve made headlines by cutting the interest rate to just about zero in response to the impact of the COVID-19 pandemic.
That cost of borrowing isn’t just low. That’s “We might never see interest rates that are this affordable in our lifetimes” low.
And for Americans who are feeling good about their job security and finances, there’s no time like the present to become a homeowner.
Because over the course of a 10, 20, or 30-year mortgage, even a half-percentage off from your home can put thousands of dollars back in your pocket.
This is coincidentally, also the reason why the demand for refinancing went up by 105% in 2020.
With the Federal Reserve suggesting that it has no plans to hike up the interest rate anytime soon, fix and flip investors can expect the real estate market to keep chugging along in 2021.
Pro #2: There May Be a Wave of Foreclosures Incoming
This one may seem a little bit offputting – but think about it.
When you have banks and lenders that are dead serious about not getting into the landlord business and a bunch of sellers who are desperate to sell, you can get some fantastic houses at eyepoppingly good prices.
And when there’s a whole bunch of foreclosures happening at once? Your odds of hitting the jackpot go up again.
It goes without saying that 2020 left a lot of people hurting financially. And with many mortgage relief programs and deferrals coming to an end in 2021, all signs point to an unusually good foreclosure market this year.
The particular dates and times might change from state to state so not a lot of people can tell you when the foreclosure auctions in your area are ramping up. But the foreclosure wave is coming.
And when it does, you’ll be swimming in investment opportunities.
Pro #3: Fix and Flip Investors Will Likely Make More per Sale
High demand for real estate. A low-interest borrowing environment. More buyers than sellers.
Any one of these scenarios is the stuff that real estate professionals dream of. But when you have all three going on at once? Well, now you’re talking Christmas in July for those of us who earn some or all of our money by fixing and flipping homes.
Because it’s no longer a matter of if or when the home will sell. It’s a question of how much you’ll sell it for. With prices expected to keep going up, you may find yourself able to make more per sale than you would have a year or two ago.
If you were asked to describe the market conditions that would have to be present in order to have a name-your-selling-price kind of year, 2021 would likely check a lot of the boxes on your list.
Here Are Some of the Potential Problems With Flipping Fixer-Uppers in 2021
Even if real estate is a solid investment in general, there’s still no guarantee that you’ll make money while doing it. This is especially true if you’re a short-term investor simply because so much of flipping homes for profit involves knowing what to buy as well as when and how to buy.
To that end, here are some pitfalls that could potentially stand in the way of your profits this year if you’re not careful.
Pitfall #1: You’ll Likely Have to Pay More per House
In real estate, we often talk a lot about the thrill of finding a good deal and decorating it to your heart’s content, but the truth is that your ability to keep doing this will ultimately come down to your ability to sell at a profit.
The downside of increased demand is that you may have to shell out more cash to purchase a fixer-upper than you otherwise would have in a cooler market.
And that can have serious implications for your ability to manage your cashflow.
For instance, if you have to pay more for each property, you could find yourself looking more at homes that are closer to move-in ready, or maybe you’ll have to scale down your efforts at a fix and flip renovation.
If you have access to fix and flip loans, this issue may not be a dealbreaker so much as a yellow flag. And if you’re an investor who’s operating on a slightly smaller budget, you may have to flip fewer houses this year. But either way, it’s an issue that you may want to be prepared for going into the selling season.
Pitfall #2: There Are Fewer Houses to Choose From
All fix and flip investors have that one thing that takes their houses from “Yeah I could see myself living here.” to “Oh my gosh! Put in an offer now!”.
Maybe you’re a wizard at transforming kitchens or you remodel and finish basements as if you were born to do it.
In a market where there’s no shortage of houses to choose from, if you see a house you don’t care for you can always pass and move on to the next one.
But in 2021, “Beggars can’t be choosers.” isn’t just a pithy common sense saying. It’s your professional theme song.
And when there just aren’t that many homes on the market, you can easily find yourself buying homes that leave you feeling an odd mixture of “Meh” and dread.
From there, you’re just a hop, skip, and a jump away from being caught up in an “If I don’t make a purchase, I won’t make money but I also think this will be way too expensive to renovate the way I want it to.” type of situation.
If you’re committed to buying homes this year, you’ll definitely want to factor this issue into your fix and flip strategy.
Pitfall #3: A Lot Depends on Your Local Market
Although the real estate market was unbelievably hot in 2020, the increased sales prices only tell half of the story.
March, April, May, and June of 2020 real estate market had significantly reduced sales volume compared to the same months in 2019.
As such, depending on what else is happening in your market, it’s possible to be in a situation where the sales prices might be higher but you may have to hold the property a little longer in order to sell it.
Here’s What You Need to Know About Being a Fix and Flip Real Estate Investor in 2021
Fix and flip investing is a combination of art and hard work.
You have to find the right house, manage the purchasing process, and renovate while walking a fine line between a remodel that you’re in love with and making sure your investment is profitable.
And then when it’s all over, you have to do it all again.
The good news is that even if 2021 is likely to have some challenges, the pieces are definitely there to make this your most profitable year yet as a fix and flip real estate investor.
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