Why flipping is better left to the professionals.
Last weekend, Cliff and I attended a wedding in Minneapolis, Minnesota. Our dear friends’ son and his fiancee walked down the aisle, reaffirming once more young love’s commitment to partnership, unity, and hope (for better or for worse).
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Unfortunately, it was a quick trip for the two of us as work was looming large, so we boarded the 6:00 am flight on Friday morning and returned early Sunday; in and out in less than 48 hours. Knowing nothing about Minneapolis, or Minnesota for that matter (the land of 10,000 lakes?), I expected the trip to be fairly perfunctory.
It wasn’t. Imagine our surprise when we arrived at SFO at 4:30 am and found the security line already well backed up. Once we boarded, it was clear we were on a sold-out flight.
“Is this plane full?” I asked the attendant.
“Everyday,” she responded matter of factly.
Really?
“Who are all these people going to Minnesota?” I asked my husband, somewhat incredulously. (I’ve clearly spent no time in the Midwest.)
As it happens, Minneapolis is a lovely and uncomplicated city, both modern and historic, and beautifully maintained, with a skywalk system composed of nearly 10 miles of pathways connecting more than 80 city blocks of skyscrapers, restaurants, shops, and bakeries. But the most noteworthy thing about Minneapolis is that it’s teeming with incredibly NICE people. “Minnesota Nice” isn’t just a motto, it’s how Midwesterners live, converse, and conduct their lives. (Imagine that.)
They make it look so easy.
What’s more, Minneapolis prides itself on becoming one of the top bicycle-friendly cities in America and it shows. Built along the mighty Mississippi, Cliff and I downloaded the Lime app Saturday morning and bicycled for miles along the scenic river trail, through tree-lined neighborhoods of stately homes (selling for well under $1 million) before returning to the hotel to shower and change for the wedding. It was a spectacular day with perfect weather and time together is always a bonus. Turns out, I underestimated Minnesota by more than just a little. In other words, you don’t know, what you don’t know. (A reminder to keep an open mind.)
That’s true for real estate as well. With a proliferation of programs on TV that spotlight everything from clever renovations to multi-million-dollar sales making it all look quick and easy, it’d be a mistake to believe that flipping houses is anyone’s game. It isn’t.
But it’s also a way of doing business — and not for amateurs.
With the cost of labor and materials skyrocketing, “flipping” isn’t for the feint of heart, nor for rank amateurs. If there’s a profit to be made, the budget must be followed closely, and overruns avoided at all costs. Moreover, the location must be able to support the expense. And finally, as investors won’t benefit from the “two out of the last five years” tax break afforded homeowners, they’ll need to pay taxes on any profits they accrue. Between the purchase price, costs to carry, renovations, and capital gains, remodeling for profit is a high-risk venture to be sure. Put another way, “flipping” is a business – not a pastime.
Listen, I’m a gal who loves a good “fixer,” having renovated six homes during our lengthy marriage (we’ve just celebrated 34 years). I live for “good bones,” and hope there are a few more remodels in our future. I’m not sure Cliff agrees. But having seen others fall short, I’m also clear that being a “professional flipper” requires a bigger bankroll, and a lower entry point than our market currently provides – or what we could afford to lose.
And let’s face it, COVID didn’t help. Once the price of goods and services went up due to “supply-chain” delays, they haven’t reverted to their previously lower prices now that COVID is less restrictive. But truly, it’s the entry point that eats up the profit. If you start at a million dollars to buy a junker of a property and then put hundreds of thousands into it, you’ll need to sell that property for significantly more to make the numbers work – and that’s hard to do in a short amount of time. I’ve just watched the large property across the street sell to an investor for nearly $1.5 million; conservatively, it will likely cost another million to fix it. It has tons of potential but is there really enough profit there to be made? I don’t know, but thankfully, it’s not my circus.
And given that much of the budget of a “flip” will be spent on labor, permits, and professional fees, unless you’re truly adept at the design and build part of the equation, renovation costs for most of us will need to be absorbed over years – not months. Even homeowners who plan to stay in their remodeled home often won’t see a return on the cost of renovations right away. Like a good marriage, TIME is a homeowner’s most important investment, but unless you keep your home in good working order, time will also take its toll . . .
And on that note, mazel tov to the beautiful bride and groom. We wish them years of wedded bliss and all that goes with it.
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Julie Gardner & Sarah Abel | Compass Realty
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