FHA Loans Are More Popular – Why You Should Rent a Flip Before Selling It
The popularity of property flipping has grown substantially among real estate professionals both full and part-time. The potential for big profit is the primary reason for this, helped out by the abundance of television that focuses on the topic. But buyers relying on FHA financing to purchase flipped real estate could see some restrictions headed their way. Some of these restrictions include timeline limitations and appraisal requirements.
These restrictions will create an added challenge for buyers to secure an FHA loan. If you are reading this and are interested in flipping properties, consider renting them out instead. When you rent a property, it provides a different path that allows people to profitably manage timelines, or provide a totally different alternative to the traditional flip model.
FHA Financing “Flipped Property” Restrictions
The Federal Housing Administration (FHA) is imposing certain restrictions on flipped properties to protect buyers from purchasing properties with an inflated value. Primarily, the restrictions involve appraisal requirements and timeline limitations. The following describes each of these new restrictions:
Appraisal Requirements
The FHA requires a “second appraisal” for flipped properties. This is vital when the resale price within a certain period of time goes beyond a set threshold. The reason for this is simply to ensure that the property is accurately priced, and is intended to prevent buyers from overpaying.
Timeline Limitations
Requirements on timelines are also being implemented by the FHA. If a property is being sold within 90 days of the seller’s acquisition, there is added documentation and evaluation required to justify the higher resale price. It is in place to prevent fraudulent activity that artificially inflates prices.
Why it Makes Sense to Rent Out Flipped Properties
- Time Management: This is strategic, as it can allow an individual to manage the required timeline in a profitable manner. Income can be generated while waiting for the timeline to expire, ensuring that the property is not vacant during the time period, and the value of the property can actually increase over time.
- Cash Flow: When renting out a flipped property, the investor can create a stable monthly rental income. This can be helpful to cover debt service on mortgage payments or other operation costs. With the service of debt against the property, the investor can potentially profit from the appreciation of the value over time as well.
- Rid Yourself of Flipping Restrictions: Renting the property out also bypasses these FHA financing restrictions, since you are taking an alternative route to the traditional flip model. You avoid the additional appraisal requirement and timeline limitations and focus on long-term wealth through property ownership. It provides flexibility in your investment strategy and allows for more control when the time comes to sell.
- Value Appreciation: When you rent out a property, you get an opportunity for the property to appreciate in value over time. With fluctuations in the real estate market, investors holding onto flipped properties support the rental inventory for their communities, while also benefiting from potential appreciation of the investment. Generating the rental income while waiting for the right time to sell increases the overall return on investment.
Flipping property continues to be a worthwhile investment opportunity, but it is important to consider the strict FHA financing requirements that potential buyers face. A willingness to consider an alternate path of renting an investment property can be a profitable alternative that allows the investor to bypass these restrictions. It allows for a stable cash flow and property appreciation opportunities instead of just sitting vacant. Weighing these options before jumping into the traditional flip model can save a lot of stress, and provide an even better return on investment.