I have been investing in real estate for 16 years, mostly by buying properties at the foreclosure auction. For most of that time, I have been a ‘fix and flip’ investor, buying houses well below actual market value, paint them and add new carpets and some other cosmetic improvements and then quickly selling them. And I made a fortune doing it.
In order to make money doing this, there has to be sufficient spread between the selling price at auction, and the actual market value. You have to figure in all your costs for improvement and all the holding costs and have room for profit. It’s fairly simple; it’s all about the math.
Some evidence suggests that the math isn’t working for this strategy right now. Auction prices on homes that need only cosmetic improvements like new paint and carpets are selling much closer to market value, so the spread isn’t there. It may be time to adjust your strategy from ‘fix and flip’ to ‘fix, rent, and hold.’
There will still always be gems at the foreclosure auction where the spread still exists, but the competition will probably be stiff. When that happens, the winning bid goes high enough to close that spread, making a ‘fix and flip’ very risky if downright impossible.
The ‘fix, rent, and hold’ can be very profitable, but your big profits come later. If you can positive cash flow a rental property, you hold it and let appreciation do its work, and sell later when the conditions are more favorable.
Part of being a successful real estate investor is being able to change your strategy as the market changes. This has helped me make profits through the rapidly changing real estate marketplace of the last 16 years.
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