Rhode Island’s red hot real estate market is fertile ground for new housing investments. If you’re new to house flipping, this guide will help you get a firmer grasp on this risky and rewarding investment strategy.
House flipping is a risky investment that can yield great returns and equally profound losses depending on how the flip pans out. The goal of house flipping is similar to other investment strategies in that it starts by finding an undervalued asset, in this case a property. Once a suitable home is purchased, the flipper will perform renovations in hopes of increasing its value and selling at a profit.
While the process sounds simple enough, it takes a truly keen eye and an expansive set of skills to pull off correctly. Even when the renovations themselves go swimmingly, there are a number of pitfalls including, high taxes, holding costs, and difficulty selling the home after the improvements.
That said, for those willing to brave the turbulent waters of the housing market, house flipping can provide enormous profits. For many, the benefits are well worth the risks, but it’s not a decision to take lightly. Here are some of the main points you should consider when thinking about flipping a house in Rhode Island.
2019 Rhode Island Housing Market Analysis
The current median home value in Rhode Island is $282,600, which is a 4.5% increase compared to last year. The upward trend is expected to continue through 2019 with a projected increase of an additional 3.0% within the year.
Home values vary greatly depending on region. In Woonsocket, for example, the median home value is only $168,400, while in Providence it’s $267,900 — close to $100,000 more. It’s important to take regional price variations into account when deciding where to purchase a house in Rhode Island.
The market is hot right now, so sellers are in control. This may not bode well for those looking to flip a house in the state as it’s difficult to find an undervalued property in these market conditions. That said, if you are able to snag a good deal you’ll be able to hike up the price more than you could if buyers were the dominant market force.
If you’re planning on flipping a home, one of the best investments you can make in your project is to partner up with a qualified real estate agent who knows the ins and outs of the market. They’ll be able to use their years of experience to recommend properties, get you on-demand viewings, and guide you through the entire process.
How to Tell if a Rhode Island Property is a Good Investment
The golden rule of investing is to buy low, sell high — that part is obvious enough. But what does that look like in house flipping terms? In general, you’ll want to look for the cheapest possible home in the best possible neighborhood.
While that sounds simple, in reality, it almost never plays out so easily. In a hot market like Rhode Island, it’s basically a pipe dream to hope to find a seriously undervalued home in one of the better neighborhoods. That’s not to say it can never happen, but it’s definitely going to be a challenge.
The type of home you should look for as a beginner is one that isn’t exactly a bargain, but isn’t at its fullest potential yet — basically, homes that could use a quick fix or two. You may find a home that could really use a new paint job, a new kitchen, or something similar to bump its selling price up enough to pull a profit. That said, if you’re a truly talented house flipper, you’ll be able to see value and huge potential in properties no one else can, but don’t bank on having an eye like that as a newbie.
Colonial style homes are particularly popular in Rhode Island, so you should definitely be on the lookout for underpriced houses built in this typical New England fashion. Due to their popularity, you may find that it’ll be easier to sell your newly flipped home if its built in a colonial style.
As a novice, getting expert guidance is tantamount to your success. Before making any purchases, be sure to get in touch with a qualified local realtor.
How to Turn a Profit When Flipping a Rhode Island House
To make a profit projection, investors need to estimate a home’s after repair value, or ARV. In cases where a home is undervalued due to a lack of needed repairs, the ARV will bring the home’s value back up to approximately the median home value for the area.
In order to better manage the risks associated with house flipping, successful flippers follow the 70% rule. According to the rule, investors should not pay more than 70% of the home’s ARV minus the repair cost.
Let’s take a look at how this would pan out in Rhode Island. The median home value in the state, our approximate ARV, is $282,600. If we estimate that the property will need $40,000 in repairs, then an investor should not pay more than $157,820 for the house:
(0.70 x ARV) - Repair Cost = Maximum Purchase Price
(0.70 x $282,600) - $40,000 = $157,820
Be sure to account for the costs associated with owning the home (utilities, loan payments, etc) until it sells. In 2018, homes took on average 180 days to flip. You will be responsible for all homeownership costs for the entirety of this time period.
Paying Cash vs. Taking Out a Loan
When it comes to house flipping, cash is king. While it is possible to finance a house flip with HELOCs, HELs, or mortgages, letting the interest accrue every month can lead to some very stressful situations when you see the house isn’t selling and the interest keeps cutting deeper and deeper into your profit margin. While cash-based flippers can simply wait until the house sells, those who financed their investment with a loan may have to eventually lower their desired selling price to avoid going into the red due to rising interest.
Let’s take another look at the numbers from our last example. Imagine you took out a loan of $197,820 (the purchase price plus repairs) to finance your house flip. With a monthly interest rate of 6% per year or 0.5% per month, you’d be racking up $989.10 in interest each month. If you expected the repairs to take three months and they ended up taking six, you’ve just cut into your profits by an extra $2,967.30. If it then takes you another three months to sell the house, that’s another $2,970.30 of profit lost to interest payments.
Now, imagine that the interest keeps accruing and you don’t have any buyers — you may begin to lower your asking price from $282,600 to $267,600 out of desperation to make a sale. After another $15,000 of closing costs, the total numbers for your house flip are:
Sale price: $267,820
- Home loan: $157,820
- Repair loan: $40,000
- Interest over nine months: $8,901.90
- Closing costs: $15,000
Profit: $46,098.10
While this flip may have gone ok, what would have happened if you hadn’t found any buyers for another three months? How about another six? At some point you would likely lowering your listing price while your interest keeps accruing. If you lowered your listing price by another $30,000 after another 12 months, you would end up with only $4,219.80 profit after approximately two years of work.
As you can see, things can get stressful fast when a house isn’t selling as quickly as you’d hoped and you financed it via loans. While it is possible to finance a house flip with loans, you really need to be on top of your finances, know what you’re doing as far as house flipping goes, and make sure you follow the 70% rule to give yourself enough leeway.
5 Best Cities in Rhode Island for House Flippers in 2019
If you’re set on flipping houses in Rhode Island, these are five cities you may want to start your search in:
East Providence
East Providence has seen 3.0% growth in the past year with an expected 3.4% increase in median home values over the coming year. Currently, the median home value is $236,500. The city has a fairly high foreclosure rate, meaning house flippers may be able to swoop in on some good deals.
Woonsocket
With a median home value of $206,000, 9.1% growth over the path year, and a projected 4.9% increase in housing values over the next year, Woonsocket is prime house flipping territory. The median listing price is currently $199,000, but the median selling price is $219,500, so sellers definitely have an edge here.
Richmond
Richmond’s median home value is currently $303,000, a 7.8% increase since last year. The upward trend is expected to continue, growing another 4.0% this year.
Providence
The capital of Rhode Island is a red hot market that’s experienced a 7.2% increase in median home values over the past year. Currently sitting at $213,700, the median home value is expected to increase by another 4.6% over the coming year. Due to a large number of foreclosures in the city, investors may be able to snag a good bargain here.
Pawtucket
The median home value in this city is $218,100, but the median listing price is $220,000, indicating that there is high demand for housing in this area. Combined with a foreclosure rate higher than any of the other cities on this list, investors have a good chance of finding a great bargain in this city.
Next Steps for Rhode Island House Flippers
If you’re a novice house flipper, working with an experienced real estate agent is the best investment you can make in your project. When the flip is finished and you’re ready to sell, a qualified realtor will be able to use their expertise to get you the best possible price and make sure the sale goes smoothly. What’s more: Clever Partner Agents work at a discount rate of only $3,500 or 1.5% of the closing price, meaning you’ll get the best return on your investment and pay only a nominal commission fee.
If you’re thinking of diving into the world of house flipping, fill out our form to find top-notch real estate agents near you.
