What’s Behind High and Low Flip Returns?

December 23, 2021

Flip returns vary from city to city. Understanding local trends can help you build a strong, successful real estate business in any market.

Sundae’s Q3 2021 report offers real estate investors deep insights into flip returns. This new data takes a look at how investors are flipping properties across the country. In this article, we demystify low and high return percentages. Use this data to make better decisions in your own flipping business.

Markets with the lowest flip return percentages

According to Sundae’s Q3 data, the metro areas with the lowest flipping returns include cities in Western states such as California, Colorado, and Arizona. These real estate markets are hot and come with a price tag. In general, homes in these locations have high median prices, so the fact that they offer a lower rate of return may not surprise you. That doesn’t mean investors stopped buying in these areas, though. Taking a look at the “why” offers some helpful data for how to flip and succeed in these markets. It also considers why you might want to look elsewhere for the moment. The choice is up to you.

Reasons for lower flip returns

Lower rates of return take a number of factors into consideration:

  • Fierce competition between home buyers flocking to these areas and investors. Although big cities such as Los Angeles did see an exodus of people during the pandemic, people are coming back. Now, the city’s housing supply far outpaces demand. The same is true in Phoenix, where the supply of active listings is at an all-time low. That coupled with competition from iBuyers like Zillow in Phoenix looking for cosmetic flips increased the prevalence of bidding wars and higher prices.
  • Higher priced homes are a bigger risk to investors because when the market turns or appreciation slows, it impacts their bottom line. Places such as Denver, Los Angeles, and Seattle have high price points. They offer less inventory in the lower price ranges (below $300,000). Flippers tend to target the lower price point to benefit from higher upside, but it’s proven hard to come by in these markets. In Los Angeles County, for instance, the median home price rose 12% to tie a record of $795,000. However, it’s important to remember that this price point varies greatly by neighborhood and value can still be found. A flip in L.A.’s pricey Bel-Air neighborhood requires investing millions of dollars up front and even more in high-end renovations. While the median home value in the Rancho Cucamonga neighborhood is $601,171, which is near the area’s average home value.
  • The margin for error is small in these cities right now. To make this strategy work, investors need to ensure that they’re buying into a neighborhood that will continue to appreciate while also not overpaying due to high demand. It’s easier said than done. Thanks to the aforementioned historically high prices and fierce competition for limited inventory, some investors are looking elsewhere.

Don’t mistake a lower return percentage for not profitable

Just because a market presents challenges doesn’t mean it’s without upside. In fact, sometimes a market that appears to be tapped out is a big opportunity.

  • Millennials want turnkey homes and are willing to pay for them, especially in amenity-laden cities where they want to live. Features in flipped homes such as an updated kitchen and bathroom, low-maintenance due to recent upgrades, smart home features, and energy efficiency all play well with this growing segment of home buyers.
  • Rapidly appreciating areas offer high upside for the same amount of work as a flip in any other geographic area. While the overall percentage return might be lower in an area such as Phoenix, the amount of money returned will be higher than other low-priced markets. It’s about finding the right deal.
  • All of these areas still turned a profit and investors have responded. In Denver, for instance, investors purchased a record share of homes over the third quarter. And nationally, investors are still very much in the real estate game, having purchased 18.2% of homes sold in the U.S. in the third quarter. There’s clearly money to be made as more people move to these regions and demand continues to outstrip supply.

Markets with the highest return percentages

According to Sundae’s Q3 data, the metro areas with the highest flipping returns ranged from Fresno to Baltimore. These smaller, potentially undervalued cities, have plenty of room for economic growth and overall low median home prices. Statistics that show a higher rate of return probably makes sense to most seasoned real estate investors.

A peek at “why” the rates are so high provides detailed information for how to successfully flip in the market. There are also arguments to be made for staying away despite high returns. It all depends on what’s right for you and your exit strategy.

Reasons for high flip returns

These higher rates of returns can be attributed to a number of factors, including:

  • A generally lower price point for homes is a common denominator among these cities. Places such as Detroit ($63,834), Fresno ($343,982) and Memphis ($131,987) present a low barrier of entry for flipping houses. They also require a smaller investment and leave lots of room for high ROIs.
  • Smaller cities such as Cleveland are getting attention for a low cost of living, low home prices ($98,093), and a diverse economy. As prices continue to rise in coastal markets such as San Francisco and New York, Midwestern and select southern cities offer investors opportunity.
  • Successful investing involves finding areas with less overall competition for properties and more opportunities for creative deals. Identifying these cities before they reach their full potential can have big returns for today’s real estate investors.

The Flip side of high return markets

Markets with high returns don’t come without risks.

  • Markets such as Baltimore may not continue to appreciate in value the way other markets do as their economic centers are defined as distressed or less historically robust.
  • Cities with high flipping returns are generally less desirable cities to live in than the ones on the previous list. Issues such as crime and urban decay play into the level of desirability. Cleveland, for instance, has one of the highest crime rates in the country and urban decay Baltimore has long struggled with blight from abandoned homes. They also often lack capital investment, like in Memphis, that can help to grow a city.
  • High returns may mean higher risks. In Detroit, houses are incredibly cheap (often less than $100,000), but your flip will only be successful if people who live there can afford your flip or if people from outside the area with the ability to pay more are attracted to the area enough to move. Flipping in these markets can be a gamble, especially if you over-improve or pick an area that hasn’t yet become desirable.

The largest marketplace for off-market deals at your fingertips

In this article, we discussed the pros and cons of markets with low flipping returns like Oxnard and high return markets like Cleveland. Each side of the spectrum offers a chance to turn a profit as long as you’re aware of the key considerations. Sundae CEO, Josh Stech, summarized this by saying “make no mistake about it, even in markets with low flip return percentages, investors who understand how to add value are still making high returns.”Now that you have a sense of why you might want to invest, you’re going to want to find exclusive off-market deals. That’s the value of joining Sundae’s Marketplace where you can make offers on homes you’d have otherwise missed — backed by data — and grow your investment property business.

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Erin B

Erin Behan is a writer and editor covering real estate investor strategy for Sundae. She's lived in L.A., New York, and Atlanta and currently resides in Portland, Oregon, where she writes and edits for a number of outlets, including WebMD, Farmers Insurance, and Vox Creative. She spends her free time hiking with her two boys, snuggling with her cat, and enjoying the best of the Pacific Northwest.