Flipping houses in New Mexico can be a lucrative business, if you know what you’re doing. But keep in mind that not all flips make money. If you don’t do your homework first, you could actually lose thousands on the deal! Use this guide to prepare for flipping houses in New Mexico.
If you’re looking to get into real estate investing, house flipping is one of the first options that come to mind. This popular trend in New Mexico requires investors to purchase a house, upgrade it, then sell it for a profit. Many investors make their entire living by flipping houses, and there’s good money in it if you know what you’re doing.
But it can be harder than the experts make it look. If you’re interested in trying your luck with house flipping, read this guide first to know what you’re getting into.
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2019 New Mexico Housing Market Analysis
Before you start searching for properties in New Mexico, it pays to know what the market is doing. Right now, New Mexico is in a seller’s market, which happens when the number of properties for sale can’t keep up with the demand for them. When this happens, listing prices may be higher and competition can be fierce.
The median home value in New Mexico is $195,700, which is less than the national median of $226,000. Keep in mind that values can be higher or lower depending on the area. For example, Santa Fe properties are much more expensive with a median value of $311,400. On the opposite end of the state, Las Cruces is a much more affordable area with a median home value of $140,300.
A variety of factors contribute to these differences between markets, including local unemployment rates, the economy, the time of year, and others.
Would-be flippers would be wise to connect with a local, top-rated real estate agent that knows your specific market inside and out. Your agent is the best resource when it comes to timing the market and finding properties that you can flip for a high profit.
How to Tell if a New Mexico Property is a Good Investment
Some homes are better than others for house flipping. Price isn’t always the bottom line, but rather the potential profit you could make on the deal. But how can you tell when you’ve struck gold?
One of the best indicators is finding a home that’s already priced below its market value. Buying a home for less than what it’s potentially worth gets you closer to making your investment back. Ideally, you can find such homes in good neighborhoods where the rest of homes have more value than the one you bought.
It also helps to look for homes with features that New Mexico homeowners wants. The long, warm summers are prime for pools, good AC units, and outdoor living spaces. The winters are extremely cold in some areas, even though they don’t last long, so buyers will want energy-efficient windows that can keep energy bills low during extreme temperatures. Homes that already have these features mean you don’t have to spend money adding them, bringing you one step closer to making a profit.
The state is quickly becoming a popular retirement destination, so homes that cater to aging adults may be ideal. Wider doorways, handicap accessibility, single level, and homes that aren’t heavy on technology or luxuries could be easy winners for investors. Homes that have mother-in-law suites for families to take in aging parents are also growing in popularity.
Before you extend an offer, it’s important to note the home’s overall condition. If it’s obviously in bad shape, you’ll likely need to put more money into fixing it up, which could delay your ROI. Also, keep in mind that the higher the purchase price, the more expensive the closing costs.
Novice flippers will benefit from expert guidance when comparing and assessing investment properties. Seasoned flippers can also benefit from the support and expertise a real estate agent offers, especially when obtaining a comparative market analysis.
How to Turn a Profit When Flipping a New Mexico House
Here’s the scary part for new investors: flipping a house doesn’t guarantee a profit. Buying a house with the intention of flipping it can be risky, especially if the market shifts while you’re in the middle of your project.
Many experienced investors recommend paying no more than 70% of a home’s after repair value (i.e. what the home will be worth after you upgrade it) minus the repairs. To do this successfully, you’ll need a good idea of what repairs will cost you before you make the offer so you have the best chance of getting your money’s worth. Also, if you’re outsourcing some of the repairs to contractors, it’s a good idea to stick with the same ones so you can better predict your costs.
To calculate repairs, many house flippers use the "$20 per square foot" rule. This means that for every square foot of the home, it will cost about $20 to do a complete flip. Common repairs included in the $20 rule include new cabinets and countertops in the kitchen and bathroom, fresh paint, new flooring, new baseboards, doors, and plumbing fixtures, among others.
Using this method, a 1,500 square-foot home will rack up about $30,000 in repairs and upgrades. Add this cost to the cost of selling a home (e.g. real estate agent commissions, closing fees, real estate transfer tax, MLS listing, marketing, etc.) to find what your flip cost you.
Let’s put this information into perspective on a New Mexico home:
The median home value in New Mexico is $195,700. The median price per square foot is $135. Therefore, we can assume the median home in New Mexico has a square footage of 1,450. Following the 70% and $20 per square foot rules, you would make an offer of no more than $107,990 on this home ($195,700 - $58,710 below value - $29,000 in repairs).
Between the sale price of the home and repairs, you’ll be paying $136,990 out of pocket. You will also need to account for real estate commission fees when you sell the home, which is usually 6% of the home’s final selling price, and potential closing costs when you’re buying and selling it.
If you want to resell the home at market value, which is $195,700, your real estate agent commissions will be $11,742. Closing costs average about 3% of the home’s final selling price (though they can be as high as 5% in some cases).
Both buyer and seller will be responsible for some of the closing costs. It’s not uncommon for buyers to ask the seller to pay their share of these costs, which can help you when you’re buying the property. But keep in mind that when it’s time to sell, your buyer may make this request of you to secure the deal. In the worst case scenario, you’ll be paying about $5,871 in closing costs (~3% of the home’s value).
Using only these costs, your estimated profit at this point is roughly $41,097.
However, this figure doesn’t take into account how long it takes you to fix up the home and find a buyer. In hot markets like New Mexico, this might not be a problem as homes are selling in 86 days on average. But in New Mexico’s cooler markets, like South Valley and Alamogordo, it may take a little longer to find the right buyer, and even then you’re not guaranteed to get the full asking price.
Paying Cash vs. Taking Out a Loan
One of the biggest mistakes that novice house flippers make is not financing their project correctly. The method you use matters since it impacts your overall profits.
Ideally, you’ll use your own cash for your flip so that you don’t have to pay interest. This way, you’re not in anyone’s debt except your own and can wait for the right buyer rather than taking a lowball offer because you’re desperate to sell.
But because house flipping can be expensive, the only way to invest in real estate with no money is to get a loan.
A loan can be as risky and challenging as the flip itself. When you include a lender, you absolutely need to make a profit in order to repay them. And, as you already know, profits aren’t guaranteed when you flip a house. If you end up losing money on the deal, you’ll still need to find a way to pay back the lender.
In addition, loans can be expensive. You’re paying interest every month until the loan is paid off in full, which can chip away at your profits. Using our earlier example, let’s say you take out a loan for the $136,990 out-of-pocket costs.
It takes you four months to make the repairs, three months to get a contract, and another month to close. That’s eight months’ worth of interest you’re paying on top of your other expenses. And at the current mortgage interest rate of about 4.5% for a 30-year mortgage, you’ll be giving about $4,104 back to the bank. That’s a big piece of your potential profits!
A desirable alternative to a traditional mortgage is a Home Equity Loan (HEL) or a Home Equity Line of Credit (HELOC). These loans can be used to finance your house flips, usually at better interest rates or payment terms. Once you’ve flipped several homes and made a good profit, you may be in a position to finance each one yourself.
The most important thing to remember is that you need enough funds to do the project correctly. Many investors will skimp on materials and labor to save money and make a higher profit, but doing so puts your entire project’s integrity at risk.
Your best bet is to explore all the financing options available to you, as well as their associated risks and costs. Figure out how their costs will affect your profits so that you don’t wind up paying more for a flip than you’re prepared to.
5 Best Cities in New Mexico for House Flippers in 2019
If you’re still interested in flipping knowing what you know now, we’ve identified five of the best cities in New Mexico to start your search for investment properties:
Alamogordo’s neutral market could work in favor of the buyer. Since there’s not as much competition, you may be able to negotiate a favorable price on investment homes.
Albuquerque’s market health has gotten stronger with each passing year, and its growth is still going. Homes are projected to increase by 2.4% within the next year.
Bosque Farms shows some of the most promise in New Mexico real estate. Home values surged 11.1% in the last year alone and are projected to rise by 6% within the coming year.
Rio Rancho’s future outlook looks healthy. Home values have gone up nearly 5% within the past year and will rise nearly 3% in the coming year.
The real estate market in Las Cruces remains hot, even though home values have slowed their appreciation rate. Still, experts predict a 2.7% increase within the next year.
Next Steps for New Mexico House Flippers
House flipping gives you a lot of food for thought as you weigh your options and consider whether or not you have what it takes to be successful. It’s essential that you work with an experienced local real estate agent that can help guide you through the process of finding and acquiring investment homes.
And when you’re ready to sell, Clever can help with that, too! Our Partner Agents work for a fraction of the typical commission rate, which helps you to maintain the highest possible margin on your house flip while also getting expert negotiation and guidance on the sale.
Connect with Clever today for a no-obligation consultation and see how our Partner Agents can help you on your journey to becoming a successful house flipper.
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