Reality shows make house flipping look like profitable fun, and their popularity has led to more and more people entering the house flipping business. It’s rewarding to transform a run-down, neglected home into something beautiful, and if you’re smart you can make more on one house than many people make in a year.
But successfully flipping houses is trickier than you’d think. Even if you think you’ve budgeted for every eventuality, unexpected repairs or a property that takes longer to sell could wipe out your profits.
Before purchasing a property to fix up and flip in Tennessee, you should hope for the best but prepare for the worst. If you’re new to flipping, enlist a team of professionals to help you reach success. From a loan officer to a handyman, to a realtor to help you find potential properties, don’t start buying flips until you have the right people backing you up.
2019 Tennessee Housing Market Analysis
The median home value for homes in Tennessee is $166,500. They’ve risen 8.2% in the last year and Zillow predicts that they’ll rise another 5.4% in 2019.
Home values vary across different areas of the state, which you should consider when deciding where to buy a property to flip. In Nashville, the median home value is $266,000, and while the city’s homes grew 7.0% in values last year the market is expected to cool off in 2019, with only 5.4% growth expected. Homes in Memphis have a lower median home value, at $85,800, but values grew 5.3% in value last year. Clarksville home values are at $160,900 after rising 7.7% in 2018 and could rise another 5.1% this year.
If you’re a novice flipper and don’t know the Tennessee housing market well, partner with an experienced, local agent who can guide you to the best cities and neighborhoods to meet your investment goals.
How to Tell if a Tennessee Property is a Good Investment
The key to a successful flip is to not pay too much for the property. When looking for a home to flip, try to find a house that is priced well below its fair market value once it’s been fixed up and is in a desirable neighborhood.
Carefully evaluate the home’s current condition before adding it to your fix and flip portfolio. Beginning flippers should steer clear of major structural repairs such as roof or foundation issues. These types of repairs can become quite costly. When you’re just starting out and getting a feel for the cost of fixing up a home, try to find a home that needs more cosmetic repairs.
When you’re either ready to buy or trying to decide between neighborhoods, ask your realtor to prepare a comparative market analysis. A comparative market analysis takes data on recent home sales and the time it took for homes to sell to identify trends which could influence your potential profit and timeline. A novice house flipper should take advantage of all the help they can find when assessing prospective investment properties.
How to Turn a Profit When Flipping a Tennessee House
A fix and flip property is an investment, so while you should listen to your gut when buying, don’t forget to crunch the numbers If the math doesn’t work to net a profit, walk away from the opportunity.
The 70% rule of flipping house advises that flippers shouldn’t pay more than 70% of the home’s after repair value or ARV minus the cost of repairs.
If a home in Memphis is worth $85,800 after repairs, multiply it by .70 to get $60,060. Then deduct the repairs, say $15,000, and you’ll have $45,060. According to the 70% rule, you shouldn’t pay any more than that for the house.
Written out as an equation, this would be $85,800 (ARV) x 0.70 = $60,060 – $15,000 (repairs) = $45,060.
The return on investment is a percentage that expresses how much you’ll make for every dollar you put into the investment. The formula to calculate it is to take the investment’s current value, subtract the investment’s cost and then divide by the investment’s cost.
With a hypothetical house in Memphis, it would be $85,800 less the $75,060 for the mortgage and repairs, divided by the $75,060 for an ROI of 1.14%. This example doesn’t include other costs such as realtor’s fees, closing costs, and any loan payments. Since these costs will reduce your ROI, try to find a low-commission realtor to save on costs.
It’s important to note that the ROI on a house in Nashville, following the same 70% rule and the same amount for repairs would only return 32% on your investment. This is why you must get comfortable with numbers and calculations because just because a home can sell for more in a different area doesn’t mean that it’s a better investment.
If the home’s numbers do make sense, also keep in mind the average time to flip or sell a home where you’re considering buying. Add the time needed for repairs to the average time on the market to get an idea of how many months you’ll be making loan payments, and talk to a realtor experienced in house flipping to check your math.
Paying Cash vs. Taking Out a Loan
How you finance your house flipping investment can have a big impact on its eventual profit. Options for financing investment properties include traditional mortgages to loan products designed for house flipping, or paying cash.
Alternative and hard money lenders offer fix and flip loans with rates from 12% on up. Fix and flip loans rarely have a term longer than a year, and your monthly payments are typically interest-only. This can become a problem for you if the home doesn’t sell quickly and the loan comes due. Few hard money lenders will work with inexperienced or new flippers.
It’s often not worth the trouble to obtain a traditional mortgage. Banks only work with buyers who have excellent credit and a minimum 20% down payment. Down payment requirements can be higher for investment purchases. But you don’t need to spend the time going through months of the approval process for an asset you only plan on holding less than a year.
Cash is king when it comes to financing a fix and flip. Markets can slow while you’re fixing up the home, or repairs can take longer than expected. If you financed the property with a short-term fix and flip loan you could start to bump up against your repayment deadline. You don’t want to feel pressured to sell at a loss to satisfy your fix and flip lender.
If you borrowed from a traditional lender and don’t have the pressure of a short repayment period, making payments while the house is on the market eats into your profit. Once again, you can only afford to hold out for a great offer for so long in this situation.
Taking out a loan increases your risk. What if you purchased that house in the Memphis example above for $60,060 and took out a renovation loan at 12% interest for the repairs. Your monthly mortgage payments are $322 and your payment on the renovation loan is $215 (or more).
Repairs cost $8,000 more than expected and take an extra two months, so you’ve now paid four months of payments when you’d budgeted for two. Then it takes six months for the house to sell. Your numbers now look like this;
- Purchase loan $60,060
- Renovation loan $15,000
- Estimated financing payments $5,370
- Extra repairs $8,000
- Closing costs of 2% $1,201
You’d only realize a profit of $1,000 instead of what you’d hoped for of $7,400. It’s still a profit, but not a huge profit, and it took you longer to make that money. In the meantime, you likely couldn’t invest in other deals.
3 Best Cities in Tennessee for House Flippers in 2019
The Tennessee housing market has been a hot one for house flippers since 2016.
Memphis had the highest percentage of flipped houses in the country in 2016. Of all the homes that sold, 11.7% were flips. The gross flipping ROI was 75.6%. The city has seen growth from Millennials moving to the area, which has driven up demand for homes as many Millennials are starting their families.
Clarkesville came in second for percentage of flipped houses out of total sales at 10.1%. The city has been adding jobs, though it has a slightly higher unemployment rate. There is a lot of opportunity in the city, however, due to high demand from military families at nearby Fort Campbell and stable housing stock.
In Nashville, 7.1% of home sales were flips. There are signs that the market for flips has been slowing in Nashville, as many of the bargains have already been scooped up by investors, but if you put in some effort you can still find a good investment.
Next Steps for Tennessee House Flippers
While you can make a lot of money flipping houses, you can also lose a lot of money. Novice house flippers should work with an experienced agent to have access to the best advice.
Clever Partner Agents work for a fraction of a realtor’s typical commission, which helps you maintain the highest possible margin on your flip. But they still offer full-service, so they can get the best price for your property and help the sales process go through without a hitch. If you’re ready to learn more about flipping houses in Wyoming, contact Clever today to be put in touch with one of our expert agents.