Home prices are rising in some Midwest markets and available inventory is scarce, but real estate experts say it's still possible for smart investors to make a profit in the area by fixing up and reselling or renovating and renting out.
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But turning real estate into a profit is much harder than the renovation and resale TV shows make it seem — and those same shows are watched by hopeful homebuyers, says J. Scott Seale, founder and CEO of Commercial Academy, which offers coaching and other services to people interested in real estate investing.
“I think people are a little more sophisticated and are looking for quality as well as value in the marketplace.”
Scheer said remodelers won't fool smart buyers with cheap finishes or shoddy workmanship, so investors who want to be successful buying, renovating and flipping homes need to spend wisely and know what buyers want in their local market to make a profit without cutting corners.
“Any good quality product on the market today sells out quickly at or near the asking price,” Scheer said.
According to the latest data from ATTOM Data Solutions, 48,457 single-family homes or condominiums were resold nationwide in the first quarter of 2018, accounting for 6.9% of all home sales. That figure was unchanged from the previous year and matches the highest home resale rate since the first quarter of 2012, according to the real estate data provider.
However, renovators face the same situation as the average homebuyer, paying higher prices in many markets and meaning there is limited inventory to choose from when picking their next real estate project. So while average gross profit per deal rose to $69,500 in Q1 2018 compared to $66,287 in Q1 2017, return on investment compared to the original acquisition price averaged 47.8%, down from 50.3% a year ago.
As bidding and purchasing becomes more competitive and expensive, experts say renovators are beginning to explore new areas. For example, Scheer says the suburbs of the Second Belt could be chock full of profitable properties for investors who understand the local market.
“The suburban areas on the Second Belt that were developed in the '60s, '70s and maybe '80s are really good sweet spots,” says the Ohio-based Scheer. “The infrastructure on these properties is solid, and I think there's certainly an opportunity to refresh them.”
Angel Oak Prime Bridge expanded its lending footprint in 2018 as demand for renovate-rent and repair-and-flip financing grew, said Robert Mulcahy, vice president of specialty lending at the firm. The Georgia-based company already has a strong presence in the Midwest.
“Many real estate markets are booming right now with investors renovating vacant properties,” he said. “Cities like Kansas City, St. Louis and Chicago are seeing an uptick in financing inquiries.”
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In fact, a recent report from ATTOM Data Solutions shows that home resale rates are on the rise in many Midwestern metropolitan areas, including Chicago, Detroit, Lincoln, Nebraska, and Madison, Wisconsin. But even in the hottest markets, Mulcahy cautions his clients to carefully vet contractors, make repairs the right way, and price their property for sale. He and his team have seen plenty of resale fiascos, from doors 10 feet above the ground with no steps to living room floors so tilted that marbles rolled from wall to wall. Even successful resales take an average of 183 days to complete, according to the ATTOM report.
“Make sure you have a realistic exit strategy. It's not realistic to sell your home for more than any other home in the neighborhood, so it's essential to trust your sources and research the neighborhood before you buy,” Mulcahy says. “Investing in real estate offers the opportunity to generate income and wealth, but not everyone can renovate a home.”