Posted by: Richie Bernardo

If you’re among the millions of HGTV viewers who’ve seen an episode of “Flip or Flop,” you’ve probably thought about the thrill of gutting a house and turning a five- or six-figure profit. But before you demo that pink-tiled ’80s kitchen, you need a stern reality check from the Property Brothers. Any experienced home flipper would caution you that transforming a real-estate beast into a bankable beauty is never as easy as it looks on TV.

In other words, don’t get your hands dirty until you’ve learned a thing or two about real estate, construction and how much damage your project could do to your wallet — and to the beam that’s keeping the roof from collapsing. Breathing new life into a low-cost property won’t necessarily return your full investment and allow you to pocket another $62,624, the average gross flipping profit in 2016. While home flipping enjoys its highest rate since 2007, according to RealtyTrac, the current homeownership rate is near the previous half-century low of 62.9 percent, which may translate to fewer potential buyers off the bat, depending on the location of your revamped property.

To help you choose the right market to list your masterpiece, WalletHub’s analysts compared the 150 largest U.S. cities across 22 key indicators of market potential, cost and quality of life. Our data set ranges from median purchase price to average full home remodeling costs to housing-market health index. Read on for the winners, expert home-flipping advice and a full description of our methodology.

1. Main Findings
2. Ask the Experts
3. Methodology

Main Findings

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Overall Rank	City	Total Score	‘House-Flipping Market Potential’ Rank	‘Renovation & Remodeling Costs’ Rank	‘Quality of Life’ Rank
148	Boston, MA	33.50	129	149	60
149	San Francisco, CA	32.81	136	150	20
150	Oakland, CA	31.76	134	144	99

Ask the Experts

Flipping houses can be a tricky business, especially for novices. For insight on the house-flipping market and advice on choosing a good candidate property as well as financing, we asked a panel of housing and real-estate experts to weigh in with their thoughts on the following key questions:

1. What are the most common mistakes people make when trying to flip a house?
2. What is the best way to finance a flip? Should people try to go all cash or borrow?
3. What type of people is typically well suited to house flipping?
4. What factors — financial and otherwise — should go into the decision of whether a house is a good candidate to be flipped?
5. Is house flipping a contributing factor to the overheating of some real-estate markets? Should this type of business be more regulated?

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• Ryan Yeung Assistant Professor of Urban Policy and Planning at Hunter College of the City University of New York
• Ryan B. Dietz Managing Director of the FSU Real Estate Center at Florida State University College of Business
• Robert B. Kent Chair and James H. Ring Professor in the Department of Urban Studies and Planning at California State University, Northridge
• Jeff Schatten Assistant Professor of Business Administration in The Williams School of Commerce, Economics and Politics at Washington & Lee University
• Alana Gates Real Estate Facilitator and Instructor at Santiago Canyon College
• Jacob Sagi Associate Professor of Finance at The University of North Carolina at Chapel Hill

Ryan Yeung Assistant Professor of Urban Policy and Planning at Hunter College of the City University of New York What are the most common mistakes people make when trying to flip a house? Assuming you’re going to get rich quick. Flipping houses requires patience and money. It takes time and skill to renovate a house. It takes time and money to find the right contractor. It takes time and money to get the best price possible for the house. Don’t forget capital gains taxes. What is the best way to finance a flip? Should people try to go all cash or borrowing is the way to go? Hard to answer, depends on the person’s financials, number of homes being flipped, and risk tolerance. But if you’re flipping a single home at a time, you’re probably better off with cash. It will be hard for new flippers to get a loan from a bank, and loans for flips have higher interest rates than mortgages for homes people plan to live in. Flipped houses are on average in worse condition, and you’re using it as an investment, which makes you a bigger credit risk. If you use cash, you can save on interest that will eat into your bottom line. What type of people are typically well suited for engaging in house flipping? If you’re handy and can perform or manage the construction process yourself, you can save a lot of money. Problem is though, your time is valuable too, so you need to weigh the trade-off between your time and getting a contractor. What factors--financial and otherwise--should go into the decision of whether a house is a good candidate to be flipped? Parents care a lot about schools. So a cheap house in a good neighborhood will sell faster than an expensive house in a good neighborhood. There’s more demand for the former than the latter. Is house flipping a contributing factor to the overheating of some real estate markets? Should this type of business be more regulated? I suspect it’s low interest rates and higher incomes, more than anything else. A study by the Fed did indicate though that house flipping was an important component to the last housing crash. Ryan B. Dietz Managing Director of the FSU Real Estate Center at Florida State University College of Business What are the most common mistakes people make when trying to flip a house? The most common mistakes are:

• Not understanding that the purchase price is the most important aspect of real estate investment;

• Not understanding how to make a financial “pro-forma” (a real estate development business plan);

• Overestimating their own abilities -- particularly in construction management;

• Letting the emotional aspect of real estate impact the investment.

Understanding costs inside and out is the most important overall skill. If you’re not a certified general contractor, you should hire one on a consulting basis before buying a home. They can give good cost estimates for you to plug into your pro-forma. Talk to a lender, an architect, and a real estate sales professional before the purchase as well. Real estate is an emotional asset. No one cares about what other people think of their stocks and bonds, so why do we care so much about our real estate? The answer to that question is complicated, but fact remains that our souls are somehow intrinsically sown to real property. This said, don’t let this get to you when flipping a home. It’s an investment, so you have to keep your wits about you. Simplify the investment by thinking of it as just “sticks and bricks on a plot of dirt.” Keep the emotions with the home you actually live in. What is the best way to finance a flip? Should people try to go all cash or borrowing is the way to go? Borrowing money creates the chance to “lever” returns, but longer-term investment is often better with cash to avoid high holding cost (i.e., loan interest). A general way to answer this is: beginners should use cash so that they have time to recover from mistakes; seasoned professionals can borrow, since mistakes are less likely to happen. As a basic example (ignoring taxes, closing costs, insurance, and commissions): a home purchased for $150,000 that requires $50,000 in renovation takes $200,000 in cash. If you sell the home in a year for $225,000, you’ve made a $25,000 profit. On a percentage basis, you’ve made a 12.5% cash-on-cash return ($25k/$200k). The great thing about using cash is that you are not losing much money if you can’t sell the house in one year. If you sell it in two years, you’d still make (about) the same amount of money. You might even be able to rent it in the meantime. In the same example, you instead put down $40,000, which is 20% of the $200,000 required, and borrow the other $160,000. In a year, you sell it for $225,000; however, you will have paid almost $10,000 in interest on a 6% APR loan over the year, so your profit is down to $15,000. Though this seems worse, on a percentage basis, you have now made a 37.5% cash-on-cash return ($15k/$40k). Why would you ever borrow money? One big reason is leverage. If you have $200,000 in cash, you can theoretically buy and renovate five homes at once ($40,000 down payment for five houses) to create a total profit of $75,000 on your $200,000 investment ($15,000 for five houses). Borrowing could result in 200% more profit than using all cash in the examples above, if done properly. What type of people are typically well suited for engaging in house flipping? Extremely disciplined investors will do very well at flipping houses. The “pro-forma” for flipping a particular property is very important in determining a purchase price. Construction management skills, such as those of a certified general contractor, are crucial for flips with major improvements. A desire to learn new skills is also critical. Three courses that can get someone started quickly are:

• An introduction to real estate financial modeling seminar;

• A survey general contractor course;

• An introduction to project management course.

Becoming a licensed real estate sales person (e.g., a Realtor), is also a helpful and relatively easy thing to do in most states. What factors--financial and otherwise--should go into the decision of whether a house is a good candidate to be flipped? Everything in real estate, from a tiny house to a massive commercial skyscraper, is a good or bad investment from the moment it is purchased. It is all about the purchase price -- it is well documented in real estate research that this is what matters the most. A normal homebuyer values a home based on comparable sales (similar houses recently sold in the neighborhood). A house flipper is not a normal homebuyer, and must value their purchase like a commercial real estate owner: based on a business plan. If you work your problem backwards and think about how much you should sell the home for when it’s completed, then subtract your % required return (profit), subtract construction costs and holding costs, then subtract other commissions and fees that will be incurred, then you will come up with a safe offer price to buy the home. Always buy an investment this way to avoid “rose colored glasses”. Don’t be afraid to give yourself an extra 15-20% “contingency” (a.k.a. “fluff”), to make sure you’re going into the project safely. If a seller won’t take your price within contingency, move on, because there are many other homes to flip. If you can’t make more than 20% returns, you should do something else with your time and money. Is house flipping a contributing factor to the overheating of some real estate markets? Should this type of business be more regulated? Most of the time it’s a good thing. If house flippers didn’t exist, neighborhoods would never recover for the next generation of owners in the cycle, and homes would have to be torn down completely to be redeveloped as they deteriorated. In this way, flippers stabilize values by raising values, thus making older neighborhoods more sustainable. Most “overheating” comes from speculative buyers who buy, then hold without making improvements in hopes that prices will rise. These are usually amateurs looking to make an easy buck, based on the market cycles. It is not pure investment -- rather it is pure speculation. Bubbles are created by this type of non-systematic speculation. I am of the opinion that house flipping should not be heavily regulated. It is the epitome of entrepreneurship, is mostly comprised of small businesses. Millions of construction, finance, and service jobs depend on real estate investment. Robert B. Kent Chair and James H. Ring Professor in the Department of Urban Studies and Planning at California State University, Northridge What are the most common mistakes people make when trying to flip a house? One of the most frequent mistakes in house flipping is a lack of detailed knowledge of the neighborhood, and the current dynamics of its social environment and housing market. One cannot emphasize enough the importance of the adage -- location, location, location. You can fix the house, but you can't change the neighborhood. Other mistakes include not having dependable and trusted partners to help one navigate the process, whether these are construction contractors, real estate agents or lawyers, undertaking unnecessary or high-end renovations, and over-extending oneself financially. What is the best way to finance a flip? Should people try to go all cash or borrowing is the way to go? Using other people's money is always nice. But, novice house flippers are probably well advised to use their own resources on their first ventures. There are lots of moving parts in the process. Things can go awry, and unanticipated delays often occur. Using your own resources typically causes most folks to be more careful in the process, and allows for more degrees of freedom should things go wrong. Once you have an established track record of successful flipping, commercial financing is easier to obtain, and you are more able to manage it effectively. What type of people are typically well suited for engaging in house flipping? People with experience in residential construction, real estate sales and management, and in-depth local knowledge of the neighborhood are best positioned to make a successful go of it as house flippers. What factors--financial and otherwise--should go into the decision of whether a house is a good candidate to be flipped? At the risk of being repetitive, site location is a critical consideration. Knowing the neighborhood (its situation) is also key. In addition, veteran house flippers refer frequently to adhering religiously to the 70% ARV (after repair value) rule as crucial in the purchase of a property. This means one should first establish the market price the renovated house will likely fetch (research comparable sales), multiply this by 0.7, and then subtract the cost of the projected renovations the property will require. Pay no more than this for any property you would hope to flip. This sum is often referred to as the maximum allowable offer (MAO). Is house flipping a contributing factor to the overheating of some real estate markets? Should this type of business be more regulated? House flipping by and large is a reasonable and legitimate business activity, that is an appropriate response to market demand. Overheated residential property markets occur because demand for housing far exceeds the supply. It is often a problem created first by explosive population growth. This phenomenon has occurred over the last 30 years in much of California, especially in coastal cities. In addition, under these conditions, home buyers believe that purchasing a home is an "investment" rather than a means to satisfying their basic need for shelter. This belief also overheats markets. However, high returns on owning residential housing are an historical anomaly, and not at all the case in most of the United States. Jeff Schatten Assistant Professor of Business Administration in The Williams School of Commerce, Economics and Politics at Washington & Lee University What are the most common mistakes people make when trying to flip a house?

• Underestimating costs. My general rule of thumb is that I make a careful calculation of what renovations will cost, then I add 75% to that number for all the things that I cannot see. I have found that renovations get pretty close to that 75% extra mark.

• Dependence on a single subcontractor. You should have multiple subcontractors in each functional area (i.e., multiple plumbers, multiple electricians), then develop a Rolodex of dependent subcontractors. This will allow you to bid out larger projects and control costs.

• Anchoring too high on the sell. Many flippers believe that the house that they have poured their heart and soul into is “one of a kind,” or “truly spectacular.” This is almost never the case. Even in a rising market with low inventory, your house needs to be priced competitively. If you price appropriately, you can have an open house and hope to get multiple bids, which you can then negotiate against one another.

• Return on investment on renovations. Just because everyone on HGTV tears down walls to create an open concept does not mean this is a good idea. If you are flipping in the lower end of the market, let’s say a $80k house, your renovations should be kept to a minimum, with a focus on cosmetics that are cheap, but effective. Do the neighbors have hardwood floors? If not, there is no need to put them in, as it is unlikely you will get a positive return. It is very easy to overspend on renovations. Trust me, I have done so many times.

• Not considering renting. If you are in an area that is experiencing strong appreciation in property values, let’s say like Boulder, Colorado, at more than 10% a year, you might want to refinance the renovated home, pull some equity out, and lease out the house for two years. It is a lot of work to renovate a house, why not let it appreciate?

What is the best way to finance a flip? Should people try to go all cash or borrowing is the way to go? Of course, this depends on your risk appetite, access to cash and your borrowing costs. Most flipping loans are considered bridge loans, where you pay sky-high rates (around 15%) for a loan that is meant to be short term (6 months or less). The risk with bridge loans is that if the market cools and you can’t unload the property, you can lose your pants with the interest payments. What type of people are typically well suited for engaging in house flipping? I am often approached by people who say they are going to start flipping homes or purchase a bunch of rental properties. Most people are not well suited for this. Here are the questions you should ask.

• Are you okay with losing a lot of money on a bad day? Can you envision making a $10,000 mistake (this will happen on many occasions) and sleeping well at night? How about $20,000?

• Are you okay with high stress situations? If the petty dynamics with your boss or your co-workers stresses you out, house-flipping is probably a bad idea. You should be comfortable with creating a lot of stress for many people. There will often be subcontractors who try to screw you over. There will be jobs that get abandoned. Corners will be cut. At some point, you will end up in court. If the idea of all this makes you uncomfortable, you should stick with a 9-5.

• Are you comfortable dealing with a lot of uncertainty? No matter how experienced you get, there is still constant market forces that can give and take away opportunities.

• Are you a gambler? While you need to be able to take on lots of risk and uncertainty, you will be ill-served if you have a gambling mentality. Real estate investing is much more about calculated risks. All of the best investors I know are obsessed with details, and use a tremendous amount of due diligence.

Is house flipping a contributing factor to the overheating of some real estate markets? Should this type of business be more regulated? More broadly, it does appear that investors are contributing to what appears to be a real estate bubble in some areas. Home ownership, even 7 years after the financial crisis, is still relatively low. We see low levels of housing inventory across the country, and some of this is due to investors who scooped up properties during the mortgage crisis. I am not someone who thinks this should be regulated, as there is a cyclical balance between home prices and rental rates. When home values are too expensive, people rent until prices are rebalanced. Alana Gates Real Estate Facilitator and Instructor at Santiago Canyon College What are the most common mistakes people make when trying to flip a house?

• Budget:

1. Purchase price.

2. Underestimating the costs of the renovation. There is always more to fix than is visible to us.

3. Mandatory compliance with the latest building code.

4. Don’t over-improve the house for the neighborhood (high-end upgrades).

• Timeline: always expect that the job will take longer than planned. If you are using short-term finance, this can add a great deal of pressure to the project. Rushing to finish creates a greater risk of error.

• Organization:

1. Fail to plan, plan to fail.

2. Create an overall plan which is aligned to your budget.

• Contractor:

1. If you are not a licensed contractor and you are hiring one, do your research. Low cost often equates to low quality.

2. Check all insurance and licensing requirements are current and continue to check them during the project.

• Location, location, location.

What is the best way to finance a flip? Should people try to go all cash or borrowing is the way to go? It depends. My personal opinion is to combine both cash and financing. Financing options are very different for every person, from beginners to experienced flippers. What type of people are typically well suited for engaging in house flipping?

• Entrepreneurs – willing to risk their time and money;

• Investors;

• Contractors or others with building experience.

What factors--financial and otherwise--should go into the decision of whether a house is a good candidate to be flipped? Diligent research:

• Licensed inspections -- if in doubt, don’t;

• Multiple sources and opinions of comps and neighborhoods;

• Rehab connections and/or personal experience;

• Expected percentage increase after the rehab;

• How long do you expect to hold the property;

• Consider seasonal effects on the market you are buying in;

• Good bones, in a good location.

Is house flipping a contributing factor to the overheating of some real estate markets? Should this type of business be more regulated?

• The consensus does seem to indicate that an excessive amount of flipping overheats the market;

• Responsible flipping can help the housing market;

• No matter what market we are in, there are always buyers and sellers;

• I believe California is regulated strongly.

Jacob Sagi Associate Professor of Finance at The University of North Carolina at Chapel Hill What is the best way to finance a flip? Should people try to go all cash or borrowing is the way to go? It depends on the investment/borrowing opportunities at hand and personal preferences. The word “should” simply does not belong here. If one has access to non-recourse low-rate loans, and has several potentially attractive investment opportunities, then borrowing permits taking advantage of more attractive opportunities, while non-recourse loans limit liability if things don’t go well. Still, leverage creates risk. If one doesn’t have many great alternative investment opportunities, has no access to non-recourse debt, and/or is quite risk-averse (or can ill-afford a credit setback), then using more cash may be more prudent. What factors--financial and otherwise--should go into the decision of whether a house is a good candidate to be flipped? What are the most common mistakes people make when trying to flip a house? What type of people are typically well suited for engaging in house flipping? House flipping is an extreme form of active investment. Luck helps. Beyond that, to minimize the downside while maximizing opportunities, long-term success requires capital, access to credit, a reliable and trustworthy support team of professionals, skill, specialized knowledge, and patience. Scoring poorly on any of these dimensions invites greater risk. What makes a house a good candidate for flipping is generic to any business undertaking: the more one can control/minimize the risks and costs, while driving profits, the more attractive the investment. So-called mistakes in this, and in any business, can come from at least two directions: failing to eliminate or mitigate risk, whenever this can be done easily or at relatively little cost (this includes taking on too much debt), and not having a plan (or enough experience) to deal with problems if and when they occur. Correspondingly, successful real estate professionals are those who understand the risk factors, have the know-how to efficiently eliminate or mitigate them, and can muster the necessary resources (human and financial) to handle rough times. Is house flipping a contributing factor to the overheating of some real estate markets? Should this type of business be more regulated? There is evidence that flipping is associated with “overheated” real estate markets. Though not everyone would agree that the link is causal, there is some academic research that claims exactly that. In my view: I doubt anyone would be surprised if a causal link were to be definitively established. Still, the important question is not “whether” flipping contributes to temporary run-ups in real estate markets, but “how much.” I highly doubt that it is “the most important” or “key” factor in so-called overheated markets. Flipping is extremely risky. It also involves built-in costs, like brokerage fees, legal fees, inspection fees, financing fees, taxes, and cost of carry while property sits unoccupied -- and this doesn’t even include the intangible sweat equity of the flipper and her/his team, or additional investment in terms of repairs/renovations. In other words, there are already a lot of barriers to entering into this type of activity, that limit participation. This suggests to me that the involvement of professional flippers in heating markets is largely reactive -- at least initially. I see no clear reason or evidence to advocate for more regulation of professional flippers. What about those inexperienced folks who are inspired to become flippers just because markets seem to be rising? Even if those folks do contribute to overheated real estate markets, I wonder whether attempting to regulate their activities fails to get at a more fundamental problem. To this I would respond with a related, but much broader, question: why would a bank supply credit to an inexperienced entrepreneur if (s)he had a terrible business idea?

Methodology

In order to determine the best and worst cities to flip houses, WalletHub’s analysts compared the 150 most populated cities across three key dimensions: 1) Market Potential, 2) Renovation & Remodeling Costs and 3) Quality of Life.

We evaluated those dimensions using 22 relevant metrics, which are listed below with their corresponding weights. Each metric was graded on a 100-point scale, with a score of 100 representing the most favorable conditions for house flipping.

Finally, we determined each city’s weighted average across all metrics to calculate its total score and used the resulting scores to rank-order our sample. Our sample considers only the city proper in each case and excludes cities in the surrounding metro area.

For context, “home flipping” is a real-estate term for buying a property with the purpose of reselling it for a profit, which is generated through appreciation of the home’s value or repairs and renovations.

Market Potential – Total Points: 35

• Average Gross Return on Investment (ROI): Triple Weight (~8.75 Points)
• Median Purchase Price: Full Weight (~2.92 Points)
• Share of Home Flips: Full Weight (~2.92 Points)
• Average Days to Flip: Full Weight (~2.92 Points)
• Home Turnover Rate (2015 vs. 2014): Full Weight (~2.92 Points)
• Housing-Market Health Index: Full Weight (~2.92 Points)
• Average Ratio of Sale Price to List Price: Full Weight (~2.92 Points)
• Real-Estate Agents per Capita: Full Weight (~2.92 Points)
• Foreclosed Homes per 10,000 Homes: Full Weight (~2.92 Points)
• Real-Estate Tax Rate: Full Weight (~2.92 Points)

Renovation & Remodeling Costs – Total Points: 35

• Average Kitchen Remodeling Costs: Full Weight (~8.75 Points)
• Average Bathroom Remodeling Costs: Full Weight (~8.75 Points)
• Average Full Home Remodeling Costs: Full Weight (~8.75 Points)
• Average Construction-Worker Salary: Full Weight (~8.75 Points)

Quality of Life – Total Points: 30

• Crime Rate: Full Weight (~3.75 Points)
• GreatSchools City Score: Full Weight (~3.75 Points)
• Share of Population with Walkable Park Access: Full Weight (~3.75 Points)
• Family-Friendliness: Full Weight (~3.75 Points)
• Annual Job-Growth Rate: Full Weight (~3.75 Points)
• Unemployment Rate: Full Weight (~3.75 Points)
• Median Salary: Full Weight (~3.75 Points)
• Pace of Economic Growth: Full Weight (~3.75 Points)

 

Sources: Data used to create this ranking were collected from the U.S. Census Bureau, Bureau of Labor Statistics, Renwood RealtyTrac, Zillow, Houzz, Federal Bureau of Investigation, GreatSchools.org, The Trust for Public Land, Council for Community and Economic Research and WalletHub research.

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