Flipping #1 Mistake - Real Cap Daily
I’ve been through multiple real estate cycles at this point. And in every cycle, there is someone flipping property be it homes, condos, apartments, retail, whatever, that gets caught in a property and ends up loosing money. The ones that end up loosing almost always are making the same mistake. I’m not referring to budgeting, cost controls, or delays. What is the number 1 mistake flippers make?
Flipping property is risky. There are many things that can go wrong in the process. Lack of experience can make those problems bigger. This is why flippers want to buy property as cheap as possible. Not just for profit, but because things go wrong. No matter what the property type, homes, condos, apartments, commercial real estate, all are subject to this rule. Never flip property in a rising rate environment.
Let me expand on this. Interest rates are a component of affordability and price. The more affordable the property is to purchase, the higher the prices rise. When interest rates rise, the cost of ownership rises hence it becomes less affordable. Let’s look at three time periods.
First, 1976 - 1986. During the 1960’s through the early 1980’s, the US experienced inflation for many of the same reasons as today, supply chains and an energy crisis. In order to combat this, the Fed raised rates just like today. On this chart we can see as rates increase the number of transactions decreased and vice versa. The 30 year mortgage is in green, the number of transactions is in blue expressed as a percentage change year over year. This period was one where the US was building more homes than the turnover of existing homes.
The next period is 1991 - 2012. Here we see the turn of the century and rates declining. The average 30 year mortgage in the 90’s was 7.5%. Coincidentally, this is also the historic average for mortgage rates. After 9-11, rates were pushed lower into the 5’s which spurred more activity until 2006 when pricing had run too far and rates began to rise. Sales fell off leading us into the Great Recession after which rates fell to new all time lows and sales skyrocketed.
The last phase is the last 10 years. During this period, rates have been kept artificially below the average of 7.5%. From 2020 to 2022, rates were kept at all time lows causing a spike in activity again. As mortgage rates increased, sales are falling. The home purchase sentiment index confirms this most people not interested in purchasing. Why? Because they can’t afford the payments so the number of sales will slow. When you flip property, you want to flip into stable or falling rates. This increases the number of buyers who can afford to pay more for a property increasing your chances of success.
What are your thoughts on flipping property? Please share your thoughts in the comments below. As always, if you know of anyone looking to buy, sell, or invest in real estate, please give us a call.