With the Federal Reserve all but certain to continue boosting interest rates in coming months to keep the economy from overheating, it's time to pause and think about how rising interest rates will affect the house flipping industry.
It's also a good time to stop and take stock of your role in the flipping business. Because one thing the rising interest rates are sure to do is separate the contenders and the pretenders. If you consider yourself a contender, that's going to be to your benefit. If you're ready to admit to being a pretender, now's probably the best time to take your profits and find a new investment strategy.
For the remainder of this post, we'll be addressing the contenders, talking about why the pretenders will be exiting and noting how you will benefit from their exodus.
Unusual Years for Industry
Whether you're a veteran of the house flipping business or a relative newcomer, you must understand how unusual the past few years since the housing bubble burst has been for this industry.
In the initial years after the bubble, you could get crazy-good deals on foreclosed homes that could be cleaned up and flipped with little work. As the housing market got tighter, finding good deals was more difficult, but the crazy-low interest rates kept buyers in the market and pushed prices up, so you still could turn a substantial profit with a little more work.
The Making of the Pretenders
A couple of factors played into making it more difficult for serious real estate investors to find good deals during the economic uptick:
• More buyers were taking the plunge into fixer-uppers (inspired by innumerable TV shows) and tackling the work themselves. Historically low interest rates also allowed them to stretch their dollars to get more house than they imagined they could afford.
• More investors were getting into the business, thinking real estate was a place they could turn a quick buck since their easy investments (CDs, money market accounts, etc.) were netting them bupkis. These investors fell primarily into two camps – passive investors who put their money into a syndicate that handled the investing and active investors who got their hands dirty doing the hard work of flipping.
The Advantage for Contenders
Rising interest rates are going to affect all three of these potential competitors in ways that will work to your advantage as a contender.
First, buyers looking for their own homes will not be able to stretch their money as far, so they are going to need to look for smaller homes with lower mortgages. Or they are going to realize they cannot buy into the market they desire, so they will remain on the sideline as renters for a longer time. Either way, it frees up more properties for the serious flipper.
Second, new real estate investors are going to realize the hard work that goes into making money in the industry and retreat back to their safe, interest-rate-based investments. Even better, those who got into real estate thinking they could be landlords will realize they don't like working with difficult tenants, vacant units, et al., and put their properties up for sale.
In a future post, we'll offer more advice on how contenders can position themselves to take advantage these changes in the real estate market as well as understand how rising interest rates will affect your flipping business, on both the front end and the back end.
In the meantime, if you've got properties lined up ready to purchase and rehab, contact us to learn more about how private money lending can ensure you remain a contender in the house flipping business.
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