Single-family houses

A single-family rental is one house on its own lot. You can rent it to one household, or buy it, fix it up and resell it (a “flip”). It’s the easiest kind of rental to understand and to get a loan for, and tenants often stay longer than they do in apartments. The catch is that all your income comes from one tenant. If that tenant stops paying or moves out, or the house just sits empty, your income drops to zero while the mortgage, taxes, insurance and repairs keep coming.

Flipping is a short, high-stakes bet on three things: the price you pay, the repair budget, and the market while you hold the house. In 2021 and early 2022, Phoenix and Las Vegas were among the hottest markets for investors. Then mortgage rates jumped in 2022, and even the big buyers that set prices by computer (Zillow, Opendoor) lost money on many homes. Local flippers who had bought distressed homes cheaply did better.

You’re also up against large buyers with deep pockets. In late 2021, investors bought about a quarter of U.S. single-family homes sold (CoreLogic), and Phoenix and Las Vegas were among the hot spots. Cash offers often win. Small investors do best when they buy below market (for example, from banks, government agencies or public auctions), budget carefully, and can hold the house for years if the market turns.

Who it suits

People with steady income and cash reserves who can pay the mortgage for several months with no rent coming in.
Hands-on owners (or those who budget for a manager) who can handle repairs, tenant screening and state landlord-tenant rules.
Long-term holders who can wait out a down market instead of being forced to sell.
Flippers with real repair experience and reliable contractors, who are willing to walk away when the numbers don’t work.
Buyers who can act fast with cash or a pre-approved loan when a motivated seller (estate, bank, corporate owner) needs to sell.

Who it doesn’t

Anyone who needs the rent to pay their own bills. One non-paying tenant can wipe out a year of profit.
First-time flippers counting on prices to keep rising. When rates rose in 2022-2023, flip returns fell sharply.
Investors who cannot visit or check on the property. Empty homes attract squatters and damage.
People who are uncomfortable with eviction, court deadlines, or state rules on deposits and fees.

Real stories

Buying cheap made the flips work (2023)

An immigrant began flipping homes in Phoenix and estimated he made about $200,000 buying, fixing and reselling homes during the 2020-2022 boom. His method was to buy low from motivated sellers with quick cash offers, then do much of the repair work himself. When the market cooled, a later flip still came out ahead, but by only about $2,000 after costs. He planned to shift toward renting homes out.

Lesson: Your profit is mostly set by the price you pay, and it shrinks fast when the market turns. This is one person’s result during a boom, not a typical one. Bloomberg (via WealthManagement.com): Wall Street Is Losing Out to Amateur Buyers in the Housing Slump (Jan 30, 2023)

Patient buyers got a deal from a forced seller (2022)

The couple had $20,000 saved. They found a two-bedroom house that Opendoor, a big corporate home flipper, had cut in price seven times, to $346,000. That was below what Opendoor paid. Their lender approved only $340,000, so they offered that. Opendoor accepted and also gave them an $8,000 credit toward closing costs.

Lesson: When a big owner needs to unload homes, buyers with a loan lined up can bargain hard. Bloomberg (via WealthManagement.com): Wall Street Is Losing Out to Amateur Buyers in the Housing Slump (Jan 30, 2023)

A computer-priced flipper lost money on most Phoenix sales (2022)

Opendoor kept buying Phoenix homes at high prices as mortgage rates rose in 2022. In the fourth quarter it lost money on 89% of the Phoenix homes it sold. The average loss was about $58,000 per home before fees and expenses. It also wrote down the value of its homes by $573 million.

Lesson: Paying top dollar on the way up leaves no cushion when prices fall. Bloomberg (via WealthManagement.com): Wall Street Is Losing Out to Amateur Buyers in the Housing Slump (Jan 30, 2023)

Zillow quit flipping after big losses (2021)

Zillow used pricing algorithms to buy homes, make light repairs and resell them. It overpaid during the frothy 2021 market. It lost more than $380 million on the business in one quarter and wrote down more than $500 million of homes. Then it shut the operation and cut about 25% of its workforce.

Lesson: Even big buyers with lots of data can misjudge prices. A flip needs room for error. Bloomberg (via Boston.com): At risk of losing millions, Zillow ends its house-flipping operation and cuts its workforce (Nov 4, 2021)

Squatters sank a pending sale (2017)

The house sat on the market for months with lock boxes. Then squatters moved in, and the owner’s buyer backed out. Police arrested two people, but the squatters broke in again after the locks were changed, leaving the owner facing another bill for a cleanup that had already cost $2,000.

Lesson: Lock up an empty flip or rental and check on it often, or your holding costs can balloon. KTNV 13 Action News Las Vegas: Squatter spotters: Real estate deal falls through because of squatters (Feb 16, 2017)

Costs

Mortgage, property tax and insurance every month, rented or not.
Vacancy and non-payment. During the pandemic, as many as 58% of small landlords (under four units) had tenants behind on rent (National Association of Realtors, via AP).
Repairs and cleaning between tenants. One Las Vegas owner spent $2,000 cleaning up an empty house for sale after squatters, then faced paying for it again when they broke back in.
Flip holding and selling costs: loan interest, utilities and taxes while you hold it, then commission and closing costs when you sell. The flip profits in the news are ‘gross profit’, before repair, holding and selling costs, so the real profit is much smaller and can be close to zero.
Property management (often a percentage of rent) if you don’t manage it yourself.
Legal rules: fees and deposit deductions have to be disclosed and fair. Regulators do act on this; By the numbers below has one settlement.

How people pay

Owner-occupied loans (FHA, VA, conventional) have the lowest down payments, but you have to really live in the home, and FHA’s 3.5% minimum needs a credit score of 580 or more (500–579 needs 10% down). Investment-property loans usually need larger down payments and higher rates.
Cash buyers often win in competitive markets. Investors ‘chase the same affordable properties that first-time buyers dependent on mortgages are also competing for’ (Bloomberg, 2022).
Flips are often paid for with short-term, higher-cost loans, so every extra month you hold the house eats into your profit. Your exit plan (sell or rent) has to work at today’s rates.

Check before you buy

Run the numbers with a cautious rent estimate. Include vacancy, repairs, taxes, insurance and management.
For a flip, work out your top price from a realistic resale value, minus repairs, holding and selling costs, and a profit cushion. Assume prices could fall.
Get a professional inspection and repair bids before you commit.
Check local rent levels, how long homes sit on the market, and recent price cuts in the neighborhood.
Learn your state’s landlord-tenant rules (notices, deposits, evictions) for the county where the house is.
Plan how you will lock up and check on an empty house (locks, visits, neighbors).
Keep cash reserves of several months of all costs.