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Housing prices have increased more in the last four years than in the previous three decades, surging 47% since 2020, according to a Case-Schiller National Home Price Index report. The consensus among housing experts is that supply shortages are a primary driver of the housing affordability crisis and that the situation is particularly bleak for first-time homebuyers seeking starter homes. Only 17% of renters can afford to purchase the median-priced starter home, according to the National Association of Realtors, compared to 42% in 2019. 

Some housing advocates say real estate investors are to blame for the shortage of affordable homes. The share of investor home purchases skyrocketed during the pandemic homebuying boom, and though the share has leveled off, investors still purchased almost a quarter of low-priced homes in the third quarter of 2024, according to Redfin. Various policymakers and pro-housing groups have proposed legislation to regulate or curb investor home purchases and home flips, including a federal ban on hedge fund purchases of single-family homes and a 65% tax on house flipping gains in New York. 

But analysis of investor demand from Freddie Mac shows that investor purchases were not a main driver of the rise in housing costs. Some house flippers contend their investments have even added to the supply of affordable homes because the homes they purchase often don’t meet housing quality standards for the loan programs first-time homebuyers use. 

The impact of house flippers on housing affordability has been nuanced, and it’s often difficult to distinguish cause from effect, as house flippers often target neighborhoods where demand is already increasing, and prices are expected to rise. But whatever the effect of flips has been in the past, house flippers have an important role to play in the future of housing affordability, argues Joshua Ernst in an article for MarketWatch. Whether investors can meaningfully contribute to a growing supply of affordable homes may depend on future policy initiatives. 

The Need for Investment in Distressed Properties

New construction alone won’t fix the country’s shortage of more than 7 million affordable homes, even if builders were properly motivated and obstacles like strict building codes and zoning ordinances were swiftly removed. In fact, no single housing policy will quell the crisis, argue researchers at the Urban Institute. Investing in the nation’s existing housing supply, which includes a large share of old houses and homes highly vulnerable to natural disasters, could benefit housing affordability as part of a multi-pronged strategy. 

The median owner-occupied home was built 40 years ago, according to recent data from the American Community Survey. About 12% of housing units were built before 1940. In 2021, 9.5 million homes were marred with severe structural issues or lacked basic utilities like plumbing and electricity, according to a report from the Joint Center for Housing Studies at Harvard University. American homes need a collective $149 billion in repairs, the Federal Reserve Bank of Philadelphia estimates—including $57 billion for homes occupied by households with lower incomes. 

“The government invests in rebuilding highways and other infrastructure, so where is the focus on remodeling housing?” Ernst asks in the MarketWatch article. House flippers have the skills and experience to renovate the dilapidated homes that first-time homebuyers don’t have the resources to upgrade on their own. Flippers typically aim to get a great deal on a distressed property in order to sell at a competitive price for the area rather than dressing a home with luxury features in order to sell at an inflated price. 

How Have House Flippers Impacted Housing Affordability?

Jerry O’Reilly, a real estate investor at Cash Home Buyers Crew, said house flippers have had a dual impact on housing affordability in northeast Ohio. “The supply of starter homes has expanded, but the prices for these homes far outstrips qualifying income of potential buyers in this area,” he said in a conversation with BiggerPockets. 

It’s difficult to determine whether the declining affordability of starter homes can be linked to investor participation in the market directly. Analysis of New York City house flipping activity and housing affordability from the Pratt Center for Community Development posits that house flippers target low-income communities of color, increasing eviction rates and reducing the availability of low-priced homes for prospective owner-occupants. 

But house flippers, motivated by profit, are drawn to areas with increasing demand for homes—and whether they cause the gentrification of low-income communities or merely cash in on revitalization already taking place is difficult to pin down, especially since experienced flippers dive into a market early on in the process. “I look for transitional neighborhoods with only one sold rehab or fix,” explained O’Reilly. 

Wealth manager and author Ben Carlson, CFA, argues that house flipping may have impacted first-time homebuyers in a different and unexpected way: Popular house-flipping shows like those seen on HGTV have set unreasonable expectations for what a first home should look like, leading to higher demand for turnkey homes—which flippers are happy to provide. 

In any event, the impact of investor activity on home price growth has likely been minimal, according to a 2022 report from Freddie Mac, which notes that demographic shifts, low mortgage rates, limited supply, and migration away from cities were the bigger culprits. CoreLogic notes the relationship between housing affordability and investor activity from 2019 onward hasn’t been consistent, making it difficult to draw a conclusion about cause and effect. 

Is House Flipping Still Profitable for Investors?

If house flipping does have a role to play in increasing the supply of starter homes, is it profitable enough to motivate investor flipping activity? O’Reilly said it’s not, at least in relative terms, explaining: “I’m now moving to buying and then reselling after two years to qualify for federal tax protection on capital gains. Current margins are much lower than 2008, dramatically so.”

ATTOM data show the gross profit margin for the typical flip is trending downward. In the third quarter of 2024, the median investor purchase price was $245,000 and generated $70,250 in gross profit, meaning only a 28.7% gross profit margin before expenses. That’s down from a 48.8% gross profit margin as recently as 2020. Returns were particularly low in Austin, Texas; Honolulu; Houston; and San Antonio. 

But flippers are still earning a worthwhile profit in affordable cities poised for growth. Gross returns were high in Pittsburgh and Cleveland, for example. And raw profits remain high in notoriously pricey markets like San Francisco and New York. 

For newbie investors, however, financing is a challenge in today’s high-interest rate environment. In the third quarter of 2024, almost two-thirds of flips were cash-only purchases, according to ATTOM. 

Doug Perry, strategic financing advisor at Real Estate Bees, told BiggerPockets there are financing options for investors who can’t pay in cash, but they shouldn’t expect any flip to be easy. “House flipping remains a popular and profitable real estate investment, although it isn’t as simple or quick as the TV shows make it appear,” he added. 

Perry said investors can acquire a property with only a 10% down payment and finance 100% of the rehab budget if they can show the lender the project is likely to be profitable, adding: “These loans don’t use the typical means of income qualifying. The loan is based on the projected profitability of the project itself and the borrower’s capacity to complete the project, including a credit check and a background check.” 

These loans also typically have 12-month terms and require a personal guarantee, so it’s key to have a good plan and move quickly and efficiently. 

What Policies Would Encourage House Flippers to Add to the Affordable Housing Stock?

Ernst outlines a few policies that would encourage investors to revitalize the existing housing stock. He said such policies should encourage:

• House flipping in opportunity zones by categorizing investor profits for local flips as capital gains for the purpose of taxation.
• Government-sponsored enterprises (Fannie Mae, Freddie Mac) to include house-flipping loan products in their portfolios
• The Small Business Administration (SBA) to design a small business loan product for house flipping

Tax abatements and exemptions can also be effective. Several cities offer tax incentives for the redevelopment of multifamily properties that meet certain affordability standards, and similar programs for single-family homes could encourage house flippers to meet the needs of local residents. 

O’Reilly has seen firsthand the effects of such a policy in Akron, Ohio: “Former abandoned homes are now either rentals or single-family dwellings. The major impetus for this was the change in the local tax code that allowed a 15-year property tax moratorium on new builds on vacant lots and structural improvements on current homes. This tax break can be passed on to new buyers.”

How Investors Can Find Affordable and Profitable Flips

O’Reilly starts by selecting a neighborhood and getting to know the area and its residents. Then, he selects an individual property with certain desirable features to maximize profits. “I target homes adjacent to well-kept houses, places within walking distance to quality retail, and homes with easy access to public transportation and commuter routes,” he told BiggerPockets. 

Keeping an eye on migration trends and corporate relocations may help you identify areas where housing demand is increasing. Check for signs of economic growth, like a declining unemployment rate, rising median income, increasing number of real estate transactions, and few foreclosures. Instead of buying in the hottest markets, check out markets that might attract residents priced out of nearby cities with a declining supply of affordable homes. 

Finding the right market is only the first of many hurdles when completing a flip. According to Perry, “Borrowers need to source properties they can acquire under market value and keep renovations modest and done properly, all while keeping the project on schedule and on budget.” That means you’ll need to ensure the numbers work before making an offer, and do your due diligence and line up contractors prior to closing. 

A fix-and-flip is not something you can accomplish flying by the seat of your pants. “The key to a profitable flip is to have a good plan and stick to that plan,” Perry said. “If you don’t, completing the project becomes a moving target, and the investor significantly increases the risk of a failed project that never sees completion, causing a financial loss, often significant, to the borrower.”

The BiggerPockets beginner’s guide to flipping houses is a great place to start.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.