With the real estate market in flux, many investors wonder if flipping houses during a recession is a good idea.

After seven years of flipping houses, I feel confused right now because it’s evident that the market is shifting. I started flipping houses in 2016 when things gradually improved, but they were far from their potential. I made many mistakes with my first flipping project but still made a $20k profit in four months. Although it wasn’t a smashing success, I know that with more experience under my belt, I could have made fifty thousand dollars without batting an eye. I now realize I had more room for error in 2017 than in 2022. Why so? Prices did not decrease in 2017, though they lovely rose. For the past five years, I have not been able to sell just three properties for a significant profit and therefore have had to keep those three houses and rent them out. By the end of 2022, those properties will have doubled in value! Isn’t that wild? I was lucky that lousy luck found me! Flipping houses can be incredibly profitable when the real estate market is on the rise. When prices increase by 30-40% each year, it’s easy to profit. But what does the future hold for house flippers in 2023-2024?

Interest rates rose significantly in 2022. According to Forbs.com, interest rates are going up even more in 2023. Higher interest rates result in reduced mortgage affordability for buyers. Given home prices are projected to decrease during the 2023 recession, can you still make a profit by flipping houses? After delving deep into research and speaking to experienced real estate professionals, flipping houses during a downturn is not wise. I will explain why I believe so in this blog post.

Here are four strong reasons why flipping houses during a recession is not a good idea: 

1. Uncertainty Over Home Prices.

The most significant gamble in flipping homes during an economic downturn is that there’s no telling what will happen shortly with housing prices. Real estate prices for houses have increased in recent years significantly, but there’s no guarantee that prices will always increase. The housing market is unpredictable during a recession, and home prices could remain stagnant or even decrease. For example, the markets I am targeting are Philadelphia and its suburbs. Home prices in the Philadelphia area are currently dramatically declining. Since interest rates have increased by 3-4 percent, builders are selling new construction houses at a 15-20 percent discount. This is also true for recently rehabbed houses. However, Philadelphia suburbs are experiencing record-high demand and low inventory. As a result, homes are selling quickly for asking prices. Even though real estate prices in Philadelphia are dropping, flipping houses is still profitable in the suburbs.

The concept is that high-demand areas may shift within half a year during an economic downturn because too much supply will enter the market. So while some areas may see a decrease of 10 percent, others could experience a drop of 30 percent–it all depends on where you are.

For example, you buy a fixer-upper for $100000, invest in rehab costs of $80000, and put it on the market for $250000 four months later.

1) Prices decreased by 10%

Let’s do the calculations:

$250000(Asking Price) -$25000(10% price cut)-$180000(initial cost plus rehab cost)- $20000(closing costs)=$25000 PROFIT

2)Prices decreased by 30%

Calculations:

$250000(Asking Price) -$75000 (30% price cut)-$180000(initial cost plus rehab cost)- $20000(closing costs)=-$43000 LOSS

This is why it’s essential to know the real estate market and how it can shift during an economic downturn. You could end up owing more money than your house is worth if the market crashes while you’re flipping it. 

2. Demand decreases.

There are usually fewer buyers looking for homes during an economic downturn. So, it may be harder to sell your flipped house at a price that will allow you to make any profit. Recently, mainstream media has reported that large companies such as Amazon, Twitter, and Microsoft are laying off employees. When people with high-paying jobs lose their positions, what often occurs? They have to move back in with family, rent a place for cheaper, or buy a house for much less than they previously could afford. This can decrease the demand for high-end homes and thus make it harder to flip houses at a top price.

In addition, people are losing money in the stock market, and food and gas costs are rising. This can make people more cautious with their money and less likely to invest in a luxurious property, even though you might spend a lot of money on renovations and bring a house to excellent condition. Regardless, buyers could still prefer homes that need some fixtures but cost less during a recession.

Also, because fewer buyers are on the market, competition may increase. This makes the market more favorable for buyers and brings you to offer discounts on your flip.

3. Tightened Lending Standards

Another risk associated with flipping houses during a recession is tightened lending standards. Banks often hesitate to lend money during economic downturns because they want to limit their risk exposure. This means that would-be investors may not be able to secure investment financing and may need help finding buyers who can qualify for loans. Furthermore, banks may be more stringent with the criteria they use to approve mortgages. This could decrease the pool of potential buyers eligible for loans and make it harder for you to find a buyer who can purchase your flip at a high price.

4. Increased overhead costs

Finally, remember that overhead costs can increase during a recession. Prices for material and labor may increase at the recession’s beginning. Businesses may cut back on staff and supplies when the economy slows down, resulting in higher prices for materials and labor. This could reduce your profits or even cause you to lose money if your costs exceed what you can sell the house for.

Remember that while the cost of time, labor, and materials may drop eventually, flipping houses is a strategy to make money quickly. You can’t afford to wait around for prices to stabilize.

If you’re thinking about flipping houses during a recession, there are some things you can do to protect your money.

1. Research your market.

First, ensure you know your market and what prices people are willing to pay.

2. Determine any potential costs.

Be prepared for tighter lending standards and increased overhead costs.

3. Backup plan.

By having a backup plan, you can protect yourself from severe financial damage if the market unexpectedly crashes. First, find properties that will still generate income through renting, even if their value decreases during a recession. Property prices have volatility during recession time, so if you’re not able to sell your house right away, rent it out until the market becomes more stable. By holding on to your property and collecting rental income, you increase the chances of being able to sell later at a better price.

4. Study housing market history.

Studying the market crash of 2008, you can learn from past mistakes and be better prepared for future economic recessions. Even though the market situation is entirely different from 2008-2009, understanding the housing market history can help you know what to expect and how to adjust your strategies accordingly. Keep an eye on which areas declined in value the most and the least. Understanding why some regions were impacted harshly but others barely changed is crucial. Learning about past market trends can prepare you for what might happen and allow you to change your plans proactively.

5. Make sure you have enough capital available.

Before investing in a property, ensure you have enough capital to cover any potential risks or losses you may incur while flipping a house. Extra funds can give you more options when negotiating with potential buyers. Moreover, additional capital makes it easier to cover any unexpected costs that may arise. Additionally, having extra money can help you purchase properties in competitive markets. This allows you to gain a competitive edge over other investors who may not have the same resources.

6. Be prepared to wait for your return on investment.

Flipping houses during a recession can be long and tedious, as it may take longer to find the right buyer and close the deal. Be prepared to wait for your return on investment, and take your time with decisions. Take your time and negotiate wisely to secure the best deals possible.

7. Adapt your strategies to market conditions.

Finally, be prepared to adjust your strategies to fit current market conditions. This could mean reducing prices or offering more incentives to attract potential buyers looking for bargains during a recession. Think outside the box and consider alternative ways to make money off property during a downturn. You may be surprised by the opportunities when you’re willing to adapt your strategies.

Flipping houses can still be profitable during an economic downturn but requires more planning and preparation. By researching the market, having enough capital on hand, and adjusting your strategy according to current conditions, you

Safer real estate investment strategies than flipping houses during a recession include:

1. Long-term rental investments

In a recession, property values are often depressed, making it an excellent time to buy. However, it is also essential to consider the state of the housing market in your area. If there are few buyers, selling your property at a profit may be difficult. In that case, you may be better off holding onto the property and renting it out until the market improves. Long-term rental investments can provide a steadier return on investment than flipping houses, but they also require more patience.

The article you may find helpful:

Flipping Houses VS. Rental Properties | What’s the Best Investment Strategy?

2. Real estate wholesaling

Real estate wholesaling may be a wiser strategy during an economic recession than flipping houses. When you wholesale a property, you find a buyer before you even own a property. Real estate wholesaling allows you to profit without owning the property. So, you don’t need to invest your money. You then work with the seller to negotiate a price below market value. This allows you to make a quick profit without worrying about finding a buyer in a down market. Real estate wholesaling is also a great way to get started in real estate investing. It requires less capital than flipping houses, and it’s an excellent way to learn the ropes without putting your entire investment portfolio at risk. If you’re considering dipping your toes in the real estate market, don’t rule out wholesaling as an investment strategy—especially during a recession. It may be just what you’re looking for.

Related articles you may find helpful:

WHOLESALING REAL ESTATE: THE COMPLETE GUIDE FOR BEGINNERS

HOW TO GET STARTED FLIPPING HOUSES: A BEGINNER’S GUIDE

3. Real Estate Investing with Self-Directed IRAs

Another way to invest in real estate without taking on too much risk is using a self-directed IRA. A self-directed IRA allows you to use your retirement savings to invest in real estate. This can be a great way to build wealth while protecting your savings from potential losses. The key here is researching and understanding the rules and regulations governing self-directed IRAs. It is also important to consider possible tax implications when investing in real estate through an IRA.

Investing in real estate during a recession can be risky. Still, proper research and planning can also yield great rewards. For example, suppose you’re considering flipping houses or other real estate investments during an economic downturn. In that case, it is essential to do your due diligence and understand the market before making any big decisions.

4. Private Lending

Private lending to real estate investors is another way to benefit from the current market without taking too much risk. As a private lender, you’ll loan money to property owners or developers at an agreed-upon interest rate, and your return on investment will come in the form of regular payments plus interest. Private lending can be a great way to make money in a down market with minimal risk, as long as you research and understand the loan terms.

5. Crowdfunding a Real Estate Investment Project

Crowdfunding is a great way to invest in real estate without worrying about the hassle of managing a property. With crowdfunding, you can pool your money with other investors, and they take care of all the details, like finding and managing the investment. This allows you to diversify your portfolio and access potential generally returns unavailable to individual investors. Just be sure to research and look for a reputable crowdfunding platform before investing any of your money.

6. Commercial Real Estate Investing

Commercial properties tend to hold their value better than residential properties so they may be less affected by an economic downturn. You can also expect higher returns on your investments, as commercial leases are usually longer and more lucrative than residential leases. As a result, investing in commercial real estate can be a great way to diversify your portfolio and take advantage of opportunities in the current market.

7. Real estate investment trusts (REITs)

Real estate investment trusts (REITs) own and operate income-producing real estate. REITs allow you to invest in the real estate market without becoming a landlord. You can purchase shares of a REIT, which gives you exposure to the underlying properties without any hassle associated with managing them. REITs are a great way to diversify your portfolio and hedge against potential losses.

These strategies involve less risk than flipping houses. They can be a great way to start real estate investing during a recession. Just make sure you do your research and understand the risks before you dive in head first.

Conclusion:

This article explains why flipping houses during a recession might be wrong. Of course, flipping houses can be profitable in certain circumstances. Still, investors need to understand the risks involved with this type of investment – especially during recessions! While opportunities may still be available in some markets, investors should carefully weigh these risks against potential rewards. By considering these factors and doing thorough research before investing, investors can minimize their chances of experiencing significant losses while potentially turning profits from their investments in real estate.