I did an interview with Bonnie Petrie on KRLD Radio last week. It was an interesting conversation. She wanted to talk about the shift away from flipping homes to buying homes to use as income producing investments. We’ve been talking about this shift for the past several years yet the emphasis has remained on flipping houses.
Why the shift? The primary reason is the lack of “easy” money that once fueled the flipping engine. Investors were able to purchase properties, rehab them, and then get them back on the market. Buyers were able to take advantage of the “easy” money, securing a mortgage and becoming homeowners.
The lending market softened with mortgage meltdown. Underwriting guidelines tightened on both borrowers and the properties. This left fewer buyers able to purchase and lenders began asking lots of questions about why a property that sold for $100k two months ago is now worth $150k.
The conditions that have made flipping properties much harder are what make investing in income-producing properties the thing to do now.
Investors can purchase properties at a discount, rehab them, and then lease them to produce a steady stream of income. I find investors with cash have a much easier time of it but money is available. Investors need to be prepared to put 20 to 30 percent down and carry the costs of rehabbing the property.
Investors need to carefully select properties. Not only is initial price important, but the cost of rehabbing the property has a huge impact on the long-term capitalization rate. This is where working with a seasoned real estate professional and having a solid pool of trusted contractors is critical.
Property management has lots of pitfalls, so investors need to outsource the management of their properties or become very familiar with state and local laws.
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