As many who have been following the news in the past few weeks probably understand the reality that house prices are dropping and interest prices are increasing. For some, this does not change your decision making as you are happy living where you are and plan to hold your real estate for many years to come. For others, you may be trying to decide what the right course of action is to take. This blog is going to focus on the people who are planning to use this decrease in housing prices to their advantage, which we call house flippers.
House Flipping has been around for decades. People come in and find a good value on a house, fix it up and renovate it and flip it for a higher value. The risk here is that house flippers are borrowing lots of money at a time and if things do not go to plan then they may be at a net loss instead of a net gain.
Why is now a great time to enter the house flipping market?
We are not suggesting house flipping unless you have experience in it, but here are a few reasons why house flipping will be become more popular in the near future:
Lower Housing Prices:
With housing prices coming down, now is a great time to find great value in a home, renovate it, and wait out the market a little bit to get a decent sized net gain on the property.
How Does That Work?
House Flippers will use short term financing. The goal is to source private lending mortgage loans. From there, that private lending loan allows the investors to get from where they are today to where they want or need to be – acquiring and then selling the property.
Private lending loans will allow investors access to additional capital to complete the project – even to finance. Just 6 months ago, some private lenders were still lending up to an 85% LTV – and those loans are still happening.
Those loans allowed for two valuable outcomes for investors;
- The ability to pay off any maturing loans
- The ability to use funds to complete the project. That is bridging the gap.
Another Option? Renting!
Another option instead of house flipping is finding a good price on a home, repairing it and then renting it out. Rental prices are higher in Canada than ever before and they are not likely to drop alongside the housing price decrease, meaning the value of renting has gone up even more. Once a person has successfully gotten a property ready to rent, they will explore long term financing at a lower rate and start seeing rental income. Most house flippers understand that now is a great time to enter a renting opportunity.
Cash flow is, and always will be, superior. Cash flow has never been more important in these trying economic conditions. It is important to note, just because your cash is tied up on one property should not mean that you should miss out on other opportunities.
Tapping into any available equity in the existing project through blanket mortgages/cross-collateralization and accessing additional capital to acquire a property at a reduced cost allows your clients to continue to expand their investment portfolio.
We hope this blog serves up some possibilities or helps answer your questions if you are looking at re-developing into house flippers or just starting out (although we recommend starting off with someone experienced or doing a lot of research first). Please do reach out if you have any questions about how we can help!