For more than a decade, real estate investors have been drawn to fix and flip projects, as they have consistently generated favorable profit margins in a comparatively quick timeframe in a competitive market. Data compiled by ATTOM indicated that an impressive 4.9% of all real estate transactions in the second quarter of 2021 were fix-and-flip properties.
That figure definitely changed over the course of 2022. With lagging supply chains prompting significant delivery delays, material costs raising exponentially thanks to rampant inflation, and widespread labor shortages making it hard to keep rehabs on track many would-be fix-and-flip investors were questioning whether the strategy was still a viable option. The short answer is yes, fix-and-flip investing is a potentially lucrative approach— if properly planned and responsibly managed.
Successful fix and flip investors moving forward will need to account for dynamic market conditions and emerging trends to stay ahead of the game. Keeping that factor in mind, here is a closer look at some recent issues in the fix and flip sector and how to navigate them to mitigate potential risks. Note that as is the case with anything related to real estate, the importance of these concerns will fluctuate between different geographic markets around the country.
The past couple of years have certainly unveiled the pain points in the global supply chain. These complications were partly attributable to the pandemic-induced workplace shutdowns, with natural disasters, manufacturing gaps and employee shortages all compounding the effect. The construction industry immediately felt the negative effects of inefficient supply chain logistics. Essential materials including roofing, lumber and drywall were hard to find in-stock from major retailers.
Keeping a construction project on-time is of particular importance when it comes to a fix-and-flip investment. Financing terms afford investors a strict timeframe for renovating the property and repaying the outstanding balance. Recent data shows that the median pay-out time of investors has scaled upwards as a consequence of delays linked to supply chain issues. Savvy investors looking to pull off a rehab project must factor in additional flex time to account for material shortages linked to supply chain delays. They must also be proactive in immediately submitting orders for in-demand products as soon as funding is obtained. Typically, this is the phase where investors are coordinating construction permits. Investors should also thoroughly vet potential vendors to ensure they can be relied upon to provide needed materials on schedule.
As inflation continues to rise around the world, seemingly everything is more expensive than it used to be—and building materials are no exception. Economists estimate that costs for essential construction products have ramped up almost 40% since the beginning of 2020. Fortunately, there are numerous exceptions and good cause to be optimistic on forecasted prices. Lumber and panel prices have been trending downwards for town months, with lumber prices falling over 6% to $829 for 1,000 board feet. It goes without saying that sticking to a budget is now more important than ever. Fix-and-flip investors would be well served building in actionable contingency plans and earmark a greater reserve percentage to unanticipated expenses and changes in the real estate market.
Having a reliable lender you can depend on to facilitate efficient access to the capital you need to buy and renovate properties is an irreplaceable asset for real estate investors. Gauntlet Funding is a private money lender comprised of experienced and knowledgeable industry professionals who pride themselves in their ability to deliver innovative funding solutions for all types of investment ventures—including fix and flip projects. With inventory levels still lingering at all-time lows, would-be homebuyers simply require more available properties. Seize this opportunity today by getting in touch with us!