Still Worth it to Flip in California?

Editorial|&utm_term=|Website-Editorial-NAT(Website)|">Auction.com released a report this week that revealed even with low vacancy and soaring rents, more investors are banking on a fix-and-flip strategy over a hold-and-rent one—and high-priced markets like California are no exception.

The firm's February 2015 Real Estate Investor Activity Report, a nationwide survey of real estate investors bidding on properties offered for auction during the period, revealed that investors bidding on property online and at live events across the country in February showed a growing preference for flipping over a hold-to-rent strategy, even as rental rates climb in many markets. As in the past, investor intent varies considerably by the type of auction (live event vs. online) and investor profile. Those bidding at live events appear to be more likely to flip the properties they purchase than those bidding in online events—even in the West and Northeast, regions most likely to buck the renting trend due to higher purchase prices negatively impacting rental property returns. And those who were making a one-time purchase preferred a hold-to-rent strategy, while respondents identifying themselves as full-time real estate investors and those indicating they were working on behalf of another investor favored flipping, Auction.com reports.

Flipping was the clear preference among investors who purchase multiple properties per year. Less-active investors (those indicating they purchase one or fewer properties per year) continued to favor a hold-to-rent strategy, though not as strongly as in recent months.

According to Rick Sharga, EVP of Auction.com, “It's interesting that so many investors continue to focus on flipping as opposed to buying properties to meet rental demand, even as rents continue to increase and homeownership levels are at their lowest point in over a decade. Flipping is especially strong in states like California, where home prices are too high for most investors to easily rent out a home at a profit. And there's an immediate opportunity for flippers to profit in states where there's simply not enough inventory of new and existing homes for sale to meet market demand.”

Sharga tells GlobeSt.com, “The combination of higher prices and extraordinarily low inventories of new and existing homes for sale makes California an ideal market for investors looking to fix and flip homes. In some of the more attractive markets, there's simply not enough supply to meet demand. Investors who can find and repair properties in those areas have the opportunity to generate very attractive returns today. Conversely, property values have risen to the point where it's often difficult to buy a property and rent it out at a profit. There's simply not a very large pool of potential tenants willing or able to pay the monthly rent that would be required for an investor to get the necessary ROI.”

Flipping may also be preferable to renting if the pendulum of renting vs. homeownership begins to swing in the other direction. Sharga says that as employment improves, which it has been, “it's likely that the increasing cost of renting will incentivize more Millennials to consider buying their first homes, which is good news for investors who are able to buy, rehab and sell properties efficiently in markets where inventory for entry-level buyers is tight. But the demand might not be immediate. While increasing rents should be a stimulus to buy, the irony is that these rent hikes are also making it more difficult for potential buyers to set aside the money they need for down payments and making it harder for recent graduates to pay down student loans, which impacts their ability to qualify for a mortgage.”

In February, Brad Rust and Joe Gigliello, co-presidents of Pivotal Capital Group, told GlobeSt.com exclusively that there will be more heavy rehab transactions in the market as investors try to create more value to generate attractive property margins. We spoke with the principals, who are hard-money lenders on fix-and-flip properties, about the trends they are seeing in this arena as well as the opportunities they are seeing in ground-up construction financing.