With the Federal Reserve bumping interest rates this week plus indicating they will raise rates two more times this year and three times in 2018, the home flipping business is sure to undergo another transition.
That means it’s time for you to take stock, get ahead of the curve and ensure you are prepared for how rising interest rates will affect your fix and flip business.
In last week’s post, we looked at how rising interest rates actually could have a positive impact on the availability of properties for flippers. Today, we’ll look at the effects rising rates will have on you as a flipper and how you can respond.
The General Effect
Rising mortgage rates will affect how much house most buyers can afford, and in some cases will discourage buyers because they feel they cannot get the house they want, so they will remain as renters. The majority of home buyers push the high end of their affordability range, so they will have to look at scaling back their expectations when they buy.
This likely will put the brakes on the current escalation of home prices that has followed the collapse of the market a few years back. But as long as the economy doesn’t surge into inflation and interest rates remain reasonable, you can continue to make money in the housing market.
Immediate Reaction
What you are mostly likely to see is a temporary surge in the market as home buyers rush to get into a house before rates rise more.
That means if you have houses in the works or are ready to move on a house you think you can bring to the market quickly, you should get your rehab done as soon as possible and get the house(s) on the market.
Most regions still are experiencing a tight housing market, so you have the opportunity to profit and get a good cash-flow rolling.
Long-Term Thinking
If you enjoy your career flipping house and want to continue, it’s good to keep your eye on the trends and think about the best ways for you to respond.
One area that’s likely to suffer in the housing market from increased mortgage rates is the middle to upper-middle area. Depending upon where you are in the country will determine what your middle to upper-middle market is.
This gives you the opportunity to go high or go low, or both.
You can look at buying smaller houses, where the profit margins will be smaller. The advantages to going low are:
• Most regions have a shortage of lower-priced homes, so as buyers are forced to down scale, you can be ready for them.
• Smaller homes require less time and money to flip, so you can crank up your output. Instead of focusing on one house with a $60,000 profit, shoot for three homes with a $20,000 profit in the same time frame.
• You spread your risk when working on multiple projects, reducing your chance of taking a bath on one project. If you get stuck with a house, it’s also easier to convert a smaller home into a rental property temporarily so you aren’t sinking into a money pit.
Going big, on the other hand, puts you into a sector of the market that will be less affected by rising mortgage rates. High-end buyers aren’t limited as much by the monthly mortgage payments, plus they tend to climb faster as the economy grows, giving them even more income they can direct toward housing.
Whatever strategy you elect to profit from the coming changes in the housing market, contact us for affordable loans to purchase and rehab your properties.
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