Question: Steve, when flipping houses, how do you approach the need to adapt your real estate investing business to a changing market?
Answer: Markets go up and markets go down. And many people feel you need to make major adjustments to your flipping homes business as markets change. Whether your market is sizzling hot or is very slow, you're still investing in real estate based off the same formula. There's a reason why I use those same formulas. They're there to protect me, to help me manage my risk regardless of market conditions and ensure I'm profitable as often as possible.
I've been through both up and down markets, and my experience has taught me that if you're using the right formulas for flipping houses, your business will most often need only minor (if any) tweaking based on the market. Now at the time I'm writing this, my own market (Baltimore area) has just come off an extreme “up” wave, but is now cooling off a bit. I may be backing off of the formula just a little bit. So it's a slight tweak; but it's nothing major.
When the market was hot, I was reluctant to start paying more for properties like many others did. At one point, I did start paying a little bit more, but it was really very miniscule. I didn't make major adjustments and start paying 5% more for properties just to be able to have a deal. I may have been willing to pay a percent or two more than what my standard flipping homes formula told me I could pay to pick up a deal.
Otherwise I Just Stick To My Formula
Now as I said, even though things are cooling a bit now, in recent years the values in my Baltimore market have gone way up. Rentals have also gone way up. I started out in this market where rentals were averaging about $550 to $600 per month. Well that same rental is now probably $1,200 to $1,500 and up. So you might have to make small adjustments if you're dealing with that dramatic of a change.
My Standard Formula For Buying A House To Fix And Flip Is:
After Repaired Value (ARV), times 70%, minus estimated repairs = the most I can pay. This is a standard formula many investors use. It's not original or magical. It just works more often than not.Now when I'm buying a house to flip wholesale, keep in mind that I will have to back my intended wholesale profit off that number as well. The investor I'm selling to is likely to be using a formula very similar to mine, and he expects and deserves a good deal.
From a real estate flipping point of view, as long as you're sticking to a good formula, you should be buying low enough to be profitable. The formula allows for adjustments in the market to keep you safe. So if you stick to the formulas that work, those that are proven, those that are time tested, then the fluxing market really shouldn't affect you all that much.