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Navigating the Fix and Flip Landscape in 2025

Written by Matt Lavinder Posted On Tuesday, 26 November 2024 13:16
Navigating the Fix and Flip Landscape in 2025 Photo by Milivoj Kuhar on Unsplash

Despite stubbornly high mortgage interest rates and home values that have leveled off since the pandemic, investing in “fix and flip” real estate prospecting remains robust, at least according to a Burns + Sundae + Kiavi Fix and Flip Market Index score of 63 (anything above 50 is considered an expanding market). Residential renovations have been credited with helping the U.S. housing market rebound following the Great Recession and, more recently, have played an increasingly important role in helping to reinvigorate the country’s depleted housing stock while gentrifying older neighborhoods.

But what does this outlook foretell for navigating the flix and flip landscape in 2025? At the very least, it’s going to take a much savvier and more nuanced approach.

Bypassing the 70% Rule

Historically, commercial real estate investors have had an easier time quantifying risk than their residential counterparts. In commercial real estate, the typical risk factors such as location, parking, local demographics, tenant quality, and market rates significantly affect the required cap rate for particular projects. Conversely, residential investors tend to bypass such risk factors in favor of applying the universally accepted 70% rule for all properties - which calls for limiting the total budget to no more than 70% of the home’s after-repair value, minus the spend required to renovate the property. But this simplistic approach often incentivizes residential investors to acquire lower-quality properties with higher risks. And, in today’s diminished pool of qualified home buyers, that further compounds the overall investment risk.

Additional Risks to Consider

Aside from the aforementioned risks, there are a couple of additional factors to consider for residential real estate prospectors. Below, two in particular are summarized: volatile interest rates and rapidly shifting demographics:

Interest Rate Woes

Higher interest rates have caused buyers to be much more cost-sensitive than they have been in recent years, making affordability a bigger factor than amenities. A premium countertop replacement may have added value to a home back in 2021, but in today’s marketplace, it’s viewed as an unnecessary luxury that only increases monthly mortgage payments. Popular upgrades such as updated electrical and plumbing upgrades may still be valued by borrowers but fix and flippers need to be cautious about pricing buyers out of affordable opportunities. 

Changing Demographics

As homes have become more expensive, the average age of home buyers has increased in kind. According to a recent report from the National Association of Realtors (NAR), the median age of home buyers has reached an all-time high of 56. According to the same report, 73% of home buyers did not have a child living in their home. Historically, starter home buyers have been younger and only expected to reside there for a few years. But because today’s home buyers are older, they must invest more of their savings in order to purchase. As a result, more and more starter homes are becoming forever homes. And this older target market may be more discerning of an odd layout, steps, or a driveway that’s too steep.

Calculating these risks and trends can easily become tough decisions for investors.

Housing Stock and Construction Costs: An Inverse Relationship

The age of the nation’s housing stock continues to age out, while the cost of construction materials and labor continues to climb. This inverse relationship means a typical rehab project is larger in scope and more expensive. And just because a project’s numbers look good on a spreadsheet doesn’t mean the project can be executed accordingly. To this end, fix and flippers need to be honest about their own capacity. Professional fix and flippers with proven systems, strong relationships with vendors, and special access to capital can create significant competitive advantages in this market, whereas rehab projects tend to be larger in scope. 

Quantifying a Path to Success

In presenting a balanced case for residential real estate investors, there are some clear advantages in the current market. The inventory of desirable homes remains historically low, meaning houses that are flipped well are still in high demand. But to take full advantage of this outlook, fix and flippers need to be savvier than ever in quantifying the actual risks of investing in a particular project. Start simply by noting that the inherent risks in residential real estate are always tied to local market demand. And remember - highly desirable homes priced to appeal to the largest pool of qualified buyers isn’t nearly as risky as the other way around.

A property that is desirable to the most potential buyers is the least risky, and properties that only attract the fewest potential buyers are the riskiest. Here are the basic market-driven factors to consider:

•  State of the local housing market
•  How desirable the location is
•  Price compared to the local market’s median average
•  A balanced number of bedrooms/bathrooms
•  The level of renovation required

Then, you have the intangible factors to consider...

The Intangibles

Intangible factors are of utmost importance to qualified home buyers competing for purchases in the median price range. But, as one might expect, these can vary widely market-to-market. Intangibles can include factors like garage capacity and add-on amenities such as swimming pools, to more universal considerations such as yard space, general floor plans, elevation, and good old fashioned curb appeal. The more positivity found in a specific property the better, as it equates to much less risk. To account for the overall risk of intangibles, fix and flip investors must identify the market-specific factors. Next, develop a process that takes these factors into account with quantifiable measurements built into the calculations. This DIY assessment can be accomplished by identifying primary risk factors, each of which is assigned a quantifiable value, then applied to analyze the project’s comprehensive potential. No matter what calculation method you apply, always add a buffer to make sure you arrive at a conservative estimate. Much like an intricate military operation, nothing in a fix and flip rehab project goes according to plan. And, to coin an old adage, a little leeway…goes a long way.

 

About the Author

Matt Lavinder

 
Matt Lavinder is the Founder and President of New Again Houses®, a real estate redevelopment and technology franchise with over 50 franchise locations across the country. He’s a member of the National Home Builders Association and a regular contributor to the Forbes Real Estate Council. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

 

 

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