Some thoughts on high-end home flipping

Have spoken with a bunch of people over the past few days who are involved in high-end home flipping.

This isn’t the kind of stuff that was going on in 2009-2012, where you could buy a foreclosed single family in say, Highland Park, for $400k, dump $50k into it, and sell for $550k.

Those deals are long gone.

What people are doing now is buying higher-end properties in the range of $1-2MM and then either tearing down and re-building or else doing a total re-model / expansion, and aiming to sell for $2-3MM.

There appear to be decent returns to this business. However, the risk is considerable, because:

  1. A lot of this stuff is going on, so the supply of homes in this price range is likely to expand rapidly; and
  2. In this price range, there is no way to get an acceptable rental yield if you are forced, for whatever reason, to hold the home

There’s one other reason I dislike this business: taxes. The IRS treats home flip profits as ordinary income. So your 20% return becomes 10% after tax. Not sure I love that risk-reward profile as an investor.