How to Flip Houses During a Market Downturn
Flipping houses has been a notable way to invest in real estate. It gives investors the opportunity to get their hands dirty and use their own creative vision, while also potentially making a profit. However, flipping houses can feel scary during a market downturn. After all, if an investor purchases and fixes a house, and then isn't able to sell it — they've spent a lot of money and made no return on their investment.
However, even in a market downturn, it can be possible to keep flipping houses and potentially make a profit on the investment. For any investor who wants to flip homes during a downturn, it can help to gain a little knowledge about buyer behavior, how to make properties appealing when the market isn't thriving, and how to manage a flip so that it could be profitable. Here are some tips to keep in mind to help mitigate risk in real estate investing during a market downturn.
Buy cheaper houses than normal
Look for houses that are more affordable than what you normally buy. Tighten up your budget. If you spend less money than you usually do to buy a house, but you're able to do renovations at a similar cost, you could sell the home for less than you would normally list one—and still potentially make a profit. Listing homes at a lower price during a downturn encourages buyers to make offers and may help ensure you don't end up selling at a loss.
Look for foreclosures
When there's a market downturn, that can mean an increase in the number off houses that have gone through foreclosure and are now potentially owned by banks. Banks typically don't want to own houses — they want to own the rights to promissory notes and mortgages. So, one good way to find extremely affordable houses to flip during a market downturn is to go after bank-owned (aka real estate owned or “REO”) homes. These homes can be in relatively good shape because they've been maintained by a recent owner or bank, and they're owned by someone who is eager to sell and likely for a cheap price. Buying a bank-owned home is a good way to invest less in the property expense, improving your chances of making a solid profit in the end.
Consider buying, renovating, and renting
During a market downturn, one of the smartest moves is to buy a home and then hold it — rather than trying to fix and sell it quickly. After the renovation, you may consider renting out the property to a tenant. Fix up the house first, and then, pay off your bridge loan with a new rental loan. Charge rent that will cover the house's expenses, and hold the house until the market's in a better place or through the remainder of your loan term. Then, you'll be able to sell the home for a potential profit.
By nature, house flippers can tend to be the kind of investors who want to see a return on their investment nearly immediately. Once the work is finished, they want to sell and enjoy the potential profit. If the market is in a downturn, however, the best thing a house flipper can do is: be patient.
It may take longer to sell the house. You may want to make the renovations more slowly than you normally would, or you may want to take on some of the work yourself, when possible, so you don't have to pay a professional to do it. This may lengthen your normal renovation process. However, if you can be patient and wait for the market to change, you might be able to see a profit from the sale of the house — maybe just not as quickly as you're used to experiencing it.
Flipping houses can be a good way to invest in real estate — even when the market isn't thriving. Market downturns don't need to scare investors away by making them afraid they won't be able to turn a profit. By learning how to mitigate risk when they're putting money into a house to flip, investors can try to ensure that their investment is worth it — in terms of time, effort, and financial payoff.