Any real estate that costs more money than it makes is the worst type. But how would you know what type that might be?
Zillow Group, the online real estate marketplace, recently announced that it’s shutting down its homebuying section, Zillow Offers. Why? Because having a business based solely on the assumption that houses will appreciate in the short term is a risky business, one that’s proved to be a losing proposition. Not to mention that the costs of fixing up houses has risen amid inflation, supply chain problems, and a labor shortage.
It was difficult for Zillow, even with its fancy Zestimate algorithm, to accurately predict housing prices. And indeed, this mega-real estate tech player is going to take a bath on much of its inventory of 7,000 homes by selling them, not to the public as planned, but to institutional investors. On top of being a financial setback, it shows the enormous challenge of buying homes with the goal of flipping them.
Real Estate Bought for the Appreciation
So where does that leave us mere mortals who are in the same fix-and-flip game as Zillow was during these unprecedented times of low supply and high prices? Some real estate investors are still making money flipping houses, but in the future, “investors may need to reframe how they look at these deals,” Todd Teta, chief product and technology officer of real estate analytics firm ATTOM, told CNBC.
The trick to being successful flipping houses these days is to pick a good location. According to CNBC, the worst areas as of the second quarter of 2021 to flip houses are the following:
- Gulfport, Mississippi: -8% profit
- Corpus Christi, Texas: 0.7% profit
- College Station, Texas: 1% profit
- Longview, Texas: 7% profit
- Daphne-Fairhope, Alabama: 8.5% profit
Compare those areas with the best flipping returns on investment, and you’ll see how important it is to choose a good location:
- Oklahoma City: 196% profit
- Fargo, North Dakota: 185% profit
- Pittsburgh: 154% profit
- Omaha, Nebraska: 135% profit
- Philadelphia: 100% profit
Real Estate With Negative Cash Flow
Another common way to make money owning real estate is by holding the investment and renting it out. The land mine here would be not understanding the market. The wrong way to go about buying rental property is to buy as you would for your primary residence, namely choosing something you like. There’s nothing wrong with liking your investment property, but that should just be icing on the cake. The right way to buy rental property is to study the market, determine what area rents are going for, and then buy accordingly.
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