One of the constant challenges in the affordable housing industry is to avoid what they call “creeping affluence” – particularly in the nonprofit side of the industry where volunteers often are running the show.
It’s a natural urge to want to give the new homeowners a little something nicer in their homes, but each of those extras adds a cost for the homeowner and could add long-range costs for maintenance or utility usage.
Maybe this same issue is affecting your ability to find a niche in the fix and flip industry.
It’s a natural urge to want to move up the scale, find a nicer house to flip, get creative with amenities and expect to make a greater profit on each project. You watch the TV shows and you see that little cha-ching at the end where the “profit” goes from $40,000 to $60,000 to $120,000, and you want to follow the trend.
Running into Competition
One potential drawback to pursuing that strategy is running into stiffer competition the higher you scale up the housing ladder.
At some point, you’re going to be competing (both selling and buying) not just against other flippers and current homeowners, you’re also going to be bumping up against new construction and developers with decades in the housing business.
Your potential customers may be lured by the appeal of brand-new construction in a brand-new neighborhood, not a rehab in an established neighborhood that could carry its own drawbacks.
Rising interest rates and stricter loan standards also could be working against you as the pool of potential customers for higher-end houses is expected to get tighter over the next few years. Some of these buyers will need to scale back their expectations, or they will leave the market and settle back into being renters.
Thinking Smaller
One place you could look to establish a profitable niche in the fix and flip business is in the lower-scale market.
Most communities across the United States suffer from a shortage of lower-income housing, both in the rental and for-sale market. If your community has done a housing needs assessment, you could learn where your community is lacking and structure your business model to meet that unfilled need.
For example, if your community needs starter homes for young families, you can easily establish yourself to fill that need.
While the lower-priced homes may not have the glamour and appeal of the higher-end market, there are certain advantages to filling that niche:
• Your cost and turn-around time can be greatly reduced without really affecting your profit levels. You might expect only a $20,000 profit on a lower-end flip, but if you can flip three homes in the same time and for a lower investment than one higher-end home, you turn the same profit.
• You lower your risk when spreading your time and money over multiple homes. Remember, you’re facing less competition at the lower end, so you’re more likely to sell your homes quickly. You’ve lowered your investment because you don’t have to put in the expensive perks. And even if you get stuck with one home that you need to rent temporarily, that’s only a third of your investment and the rental market is more open for a lower-cost home.
• You will struggle less to find suitable houses to flip. Few other flippers are going to be working in your niche, so you will spend less of your valuable time scouring for just the right house.
Whether you decide to find your niche in the lower-end housing market or continue to scale up your operation to cash in on the high-end homes, contact us about loans to finance your purchases and rehab costs.
Center Street communications are not intended to provide business, legal, tax, investment or insurance advice. No Center Street communication should be construed as a recommendation for any business or investment strategy by Center Street or any third party. You are solely responsible for determining whether any investment, investment strategy, business strategy or related transaction is appropriate for you based on your personal investment objectives, financial circumstances and risk tolerance. You should consult your legal or tax professional regarding your specific situation.
