Buying a House to Flip at a Profit? You May Want to Rethink That

It's a risky move that could really backfire on you these days.

Some people buy fixer-uppers thinking they'll renovate and create their dream homes. But you may be motivated to buy a home that's not in such great shape so you can fix it up and sell it at a profit. It's a concept known as house flipping, and it's something some investors actually do for a living.

House flipping comes loaded with potential risks, though. If it costs more to renovate a home than expected, you may not profit, but end up losing money. And also, people who flip houses for a living often finance those purchases with cash, not a mortgage loan.

Signing a mortgage requires you to pay closing costs, which can equal 2% to 5% of the loan amount you take out. Those costs will eat into your profit if you then try to flip the house you're selling, so often, house flippers find other ways to round up capital, whether by coming up with cash or taking out hard money loans (short-term loans that carry their share of risk).

But these days, you may be taking on an even bigger risk than usual by purchasing a home to flip. That's because as of the third quarter of 2022, house flipping profits were down 11.4% from the same time last year, according to ATTOM, a provider of real estate data.

House flipping profits were also down 18.4% during the year's third quarter compared to the second. And last quarter's profits were also the lowest for house flippers since the end of 2019. So if you've been thinking about jumping into your first house flip, you may actually want to reconsider.

A bad time to try to turn a quick profit

Over the past few months, home price gains have slowed down and buyers have slowly pulled out of the real estate market. This isn't to say that the market has crashed. Quite the contrary -- buyer demand is still strong, and there's still more demand to purchase homes than there is available supply of them.

But even so, rising costs are making it harder for house flippers to profit. And that's within the context of many house flippers being experienced at renovating homes. So if you're a newbie trying to fix and flip a home, you might really run into financial issues that make you regret your decision.

The right way to buy a fixer-upper

You may decide that since housing supply is limited, you're going to purchase a home, renovate it, and then live in it yourself. That's not necessarily a bad move. In that situation, you're not looking to turn a quick profit. Rather, you're making an investment in a property that you're planning to hold onto.

Through the years, your home might appreciate in value quite nicely. And even if it doesn't appreciate at the rate you're hoping for, you're still getting a roof over your head. So while buying a house to fix and flip isn't necessarily a smart move right now, if you're willing to take on the work of a fixer-upper, you may find that doing so makes it possible to become a homeowner and end up owning a place you're happy with.