Ramsey went on to describe how the house he purchased needed far more labor, capital and time than he’d anticipated. He also shared how he miscalculated the value of his own labor as he repaired the property. When it sold four years later, Ramsey had lost more than $14,000 on the unit, which he initially purchased for just $7,000.
Unfortunately, his experience isn’t all that unusual. Investors bought, repaired and sold more than 407,000 single-family homes and condos in 2021, pocketing just $67,900 on average — the lowest level gross profit margins on home flips since 2008, according to property data firm ATTOM. Meanwhile, Zillow’s chief economist expects profits to be squeezed further in 2023 as mortgage rates and home renovation costs accelerate.
Simply put, house flipping isn’t as easy or lucrative as it once was. In fact, the probability of losing money like Dave Ramsey did is relatively high. Instead, property investors could focus on more long-term approaches, like the ones described below.
Buy and hold
On his blog, Ramsey recommends a long-term, buy-and-hold approach to real estate. This means purchasing a property at a fair price and waiting for it to gradually appreciate in value over time. It parallels how billionaire Warren Buffett invests in stock.
Historical evidence backs up this strategy. On average, U.S. real estate has appreciated at an annual rate of 4.4% since 1991. Some years have proven more volatile than others, with double-digit gains or losses. But over time, this volatility tends to even out. That’s why a buy-and-hold approach to real estate is often recommended.
This strategy is also easier than flipping. Investors simply need to value the property appropriately and make sure they pay a fair price — in part by reviewing comparable sales prices in a neighborhood and taking into account how much it may cost to repair and renovate it.
After that, all they need to do is maintain the property, pay taxes and insurance, and pay down the mortgage.
Buy and rent
Real estate investors can also rent a property out to tenants. This creates cash flow and enhances property value.
Being a landlord is lucrative in some parts of the country. The capitalization rate (that is, net operating income (NOI) divided by property value) can run as high as 10.18% in Greenwood, Miss,i, according to Mashvisor. That city ranks tops on its 2021 list of traditional cap rates by city in 2021.
Apartments in Ohio and Michigan can deliver comparable rates that range from 9% to 9.5%, according to Dataspot Analytics LLC.
