Recent news reports suggest that more first-time home buyers are flipping houses and buying investment properties. This can be a smart move as it is a way to make a good return on a real estate investment in the best circumstances. As the real estate market has gotten hotter and demand for affordable homes has risen, more first-time home buyers are flipping homes to make money faster than they can with the IRA or 401k.
Why Many 1st Time Home Buyers Are Purchasing Investment Properties or Flipping Homes
Experts say that while people are flipping homes at the highest rate in 10 years, they are seeing smaller profits. Higher home prices, hot competition and few affordable homes are making it more difficult for people to make a profit on house flips and other real estate investments.
CNBC reported that 207,000 homes were flipped last year, which is defined as a property that was bought and sold in one year. That is the most flips we have seen in 10 years. The number of people and companies flipping homes stands at 138,000, which is a decade high.
But the flippers of today are different than those of 10 years ago, who were able to use cheap, easy money to finance their flips. The RefiGuide will help you shop and compare lenders that specialize in fix and flip loans with reduced closing costs and competitive mortgage rates.
Experts say that house flipping among first time buyers and others is built on a more solid foundation than the frenzy we saw 10 years ago. Financing for house flippers is still available for some flippers, 65% of flippers are using their own cash to buy and fix up homes. This is the reverse of 2004 to 2006, when the majority of flippers were using financing to buy. Today it is more difficult to finance investment properties and you usually need to have experience, a lot of money to put down, and a portfolio of homes as collateral. This can make it hard to qualify for the first-time buyer mortgage to get in the game with competitive financing.
Flippers these days are seeing a bigger gross return in dollars as they have higher home prices and margins. But they have to put more of their own cash into the projects. This makes net returns lower. The average flipping return for 2022 was 49%, which was down from 52% in 2023.
One flipper in Maryland has been doing flips since 2012 and he has a strict strategy to make 30% profits on each project. He says that as a real estate agent, he can buy and sell the deals himself and save on commissions. He also is a builder, so he has the in-staff contractors to do everything from start to finish. It also is important to have contacts in the industry to find deals that are off market. Those three things are what has made his business more profitable than many others.
The key is, he says, is to get the home at a low enough price. Far too many first-time buyers make the mistake of overpaying on the home. This makes it difficult to turn a profit. If you cannot get it under market value at least 10 to 20%, it often makes it difficult to make money. It also is important to buy in the right neighborhood. It needs to be in a hot and rising neighborhood but one that is not too overpriced yet.
Some flippers today are using financing, but they say that Fannie Mae will only back 10 investor loans per flipper. It is also tough with underwriting, so some flippers are going to hard money companies or private money mortgage lenders. But interest rates on these investment property loans are higher than the rate for the typical owner occupant buyer. You will pay at least 10% and up to 15% for a hard money loan. This really does tighten up the margins, and it makes it even more important to buy the home at a low enough price and to not overspend on repairs.
The bottom line on flipping homes for the first-time buyer is that you need to know what you are doing, have some cash available to finance at least part of the deal yourself, and to buy at a low enough price to turn a profit in a competitive market.
9 Reasons First-Time Buyers Are Purchasing Rental Properties and Flipping Homes
In recent years, more and more first-time buyers are choosing to invest in real estate through rental properties and home flipping instead of purchasing homes for their own residence. These strategies are proving to be popular ways to build wealth and create additional streams of income. Whether motivated by financial freedom, passive income, or the excitement of renovation, first-time buyers are drawn to real estate investing for various reasons. Below are nine key factors driving this trend.
1. Building Wealth Through Real Estate Appreciation
One of the biggest reasons first-time buyers are investing in rental properties or flipping homes is the potential for long-term wealth creation through real estate appreciation. Historically, real estate tends to increase in value over time. While the market can experience fluctuations, many buyers see real estate as a solid investment with the potential for significant returns in the long run. Flipping homes allows buyers to quickly capitalize on this appreciation by purchasing undervalued properties, making strategic renovations, and selling them at a higher price. Many borrowers will even take out a HELOC on the investment property to finance the down-payments on more real estate investing.
2. Generating Passive Income
For many, the idea of creating passive income is highly appealing. Owning rental properties allows buyers to generate steady cash flow each month through rental payments. By purchasing a rental property, first-time buyers can build an income stream that doesn’t require constant, active labor. While managing a rental property does involve some work, many buyers find that the rewards outweigh the efforts. Some choose to hire property managers to handle day-to-day operations, making the income even more passive.
3. Taking Advantage of Low Home Loan Interest Rates
In recent years, interest rates have remained relatively low, which has been a major incentive for first-time buyers to enter the real estate market. Lower interest rates reduce the overall cost of borrowing, making it more affordable to purchase properties. First-time buyers are seizing this opportunity to lock in favorable mortgage rates, which can increase profitability when flipping homes or renting out properties. If you do not meet the eligibility for conventional loans, consider portfolio loans that may open the door to financing opportunities that Fannie Mae, Freddie Mac and FHA may have ruled out.
4. Tapping Into Potential Tax Benefits
Real estate investments come with a range of tax benefits that appeal to first-time buyers. Deductions for mortgage interest, property taxes, and operating expenses can help reduce taxable income. Additionally, depreciation on rental properties provides a significant tax break by allowing investors to deduct a portion of the property’s cost each year. These tax advantages make real estate investing more financially appealing, especially for those looking to minimize their tax burden.
5. Diversifying Their Investment Portfolio with Real Estate
For first-time buyers looking to build wealth, diversifying their investment portfolio is a smart financial strategy. Many individuals are turning to real estate as an alternative to traditional stock market investments. Real estate offers a tangible asset that can provide steady returns, whether through rental income or appreciation. By investing in properties, first-time buyers are diversifying their risk and creating a balanced investment strategy that can withstand market fluctuations.
6. Taking Control of Their Financial Future
Owning rental properties or flipping homes gives first-time buyers a sense of control over their financial future. Unlike the stock market, where investors have little control over daily market movements, real estate offers a more hands-on approach. Buyers can make decisions about which properties to purchase, how to manage them, and when to sell. This control allows them to actively influence the success of their investments and achieve their financial goals.
7. Leveraging Real Estate for Retirement Planning
Many first-time buyers are looking ahead to their long-term financial future and using real estate as a tool for retirement planning. Rental properties can provide a steady income stream during retirement, supplementing other retirement accounts like 401(k)s and IRAs. Additionally, buyers who flip homes can accumulate wealth more quickly, allowing them to save for retirement or reinvest in future properties. The ability to leverage real estate for retirement planning is a key factor driving many first-time buyers to enter the market.
8. Exploring House Hacking
“House hacking” is a popular strategy among first-time buyers who want to reduce their own housing expenses while investing in real estate. This approach involves purchasing a multi-family property or a single-family home with extra rooms, living in one part of the property, and renting out the other units or rooms. By generating rental income from the property, buyers can cover part or all of their mortgage payments, making it easier to afford homeownership while building equity.
House hacking provides an opportunity for first-time buyers to live in their investment property while generating income, helping them transition into real estate investing without taking on the full burden of two separate properties.
9. Challenging Housing Affordability
For some first-time buyers, purchasing a primary residence in certain housing markets can feel out of reach due to high home prices. As a result, many are opting to invest in rental properties or flip homes in more affordable areas, where they can enter the market at a lower price point. This approach allows them to build wealth and potentially save for their dream home while generating income from their investments.
By flipping homes or purchasing rental properties, first-time buyers can focus on markets where prices are more reasonable and opportunities for profit are greater. They can then use the equity and profits from these investments to eventually purchase their own home or continue expanding their real estate portfolio.
The appeal of rental properties and house flipping for first-time buyers stems from the numerous financial and personal benefits they offer. Whether it’s the potential for wealth building, passive income, or tax advantages, these strategies provide first-time buyers with an opportunity to get a foot in the real estate market. As housing affordability challenges persist and the appeal of financial independence grows, more first-time buyers are turning to real estate as a viable path to achieving their financial goals. Real estate investment offers flexibility, control, and long-term growth potential, making it an increasingly popular choice for those entering the housing market for the first time.
About RefiGuide
Bryan Dornan is a financial journalist and currently serves as Chief Editor of RefiGuide.org. Bryan has founded several mortgage and marketing companies and has worked as a loan officer and mortgage broker in the industry for over 25 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States. He also writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. Find him on Twitter, Muckrack, and Linkedin
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