Investors Must Factor in Rising Prices When Calculating ROI
by Rick Sharga
It’s been a rough year for residential real estate investors.
Rentometer reported that asking rental rates for single-family homes across the country rose by just 1.7% — more than a point below the rate of inflation — in the company’s Mid-Year 2025 Report. Vacancies also rose to 6.3%, the highest total since 2016, in part because of an unusually large number of rental properties coming to market in the past year.
In its second quarter 2025 U.S. Home Flipping Report, ATTOM noted that the number of flips declined for the third consecutive quarter, and that fix-and-flip sales accounted for only 7.4% of home sales, down from 8.3% the prior quarter. A likely contributing factor to these declining sales numbers is profitability — or the lack thereof. Gross profits and return on investment (ROI) both declined for the fifth consecutive quarter.
According to the report, gross profits, the difference between what a flipper paid for a property and what they sold it for, were down by almost 14% annually at $65,300. This represented an ROI of 25.1%, the lowest return ATTOM has recorded since the second quarter of 2008, and the continuation of declining profit margins for flippers since they peaked at just under 63% in the Fall of 2012.
The actual numbers might be even worse.
Repair and Remodel Costs Eat into Profitability
The ATTOM data covers gross profits and profit margins, but doesn’t address the costs of making repairs to the property, insurance, financing, or other expenses that erode profitability, meaning that actual ROI is probably even lower.
Repair and remodeling costs, a major expense factor in calculating profitability on either a fix-and-flip or rental property investment, have soared over the last decade. In its Q2 2025 Repair and Remodel Index Report, global data and technology company Verisk noted the cost of home repairs and remodeling in the second quarter of 2025 rose by 3.43% from the second quarter of 2024. These costs set new highs for the past decade, rising almost 62% from the second quarter of 2015 and by more than 73% since the inception of the index in the first quarter of 2013.
While a 3.4% annual increase in repair costs might not seem significant, it’s higher than the rate of inflation, and almost 70% higher than the 2% annual increase in home prices reported in August by the National Association of Realtors. Furthermore, it’s twice as high as the annual asking rent increase noted above.
The bottom line is that in today’s margin-compressed sales and rental environment, real estate investors need to pay more attention than ever to this sort of data, or risk seeing a seemingly profitable investment suddenly go sideways.
Many investors are aware of these challenges to profitability. RCN Capital’s Summer 2025 Investor Sentiment Survey reported that among the most frequently cited challenges by investors, 50% of the respondents mentioned the high cost of financing, 34% mentioned rising home prices, and 25% mentioned the rising costs of materials and labor. All of these — loans with higher interest rates, higher home prices, and higher repair and remodeling costs — reduce gross profits and need to be factored into every investor’s planning prior to purchasing a property.
Insurance Costs Also Soaring
The RCN Capital report also noted that investors were growing more and more concerned about rapidly increasing insurance costs: 73% of the respondents said insurance costs and limited availability were important considerations in their investment decision-making, and 56% claimed that insurance problems had caused them to miss out on a deal. Insurance is getting more expensive, especially in high risk areas: Verisk reports that homeowners insurance premiums across the country rose by 9% in 2024 after rising by 12% annually in both of the prior years.
These rising premiums are due to catastrophic losses caused by extreme weather and other catastrophic events. Hurricanes Helene and Milton resulted in billions of dollars of losses in the third and fourth quarters of 2024, devastating a number of Southeastern states from the Carolinas through Florida. Losses reported by Verisk from the wildfires in the Los Angeles metro in the first quarter of 2025 were 550% higher than during the same quarter the prior year. And these massive insurance losses aren’t limited to destruction caused by hurricanes and wildfires: over the five-year period from 2020-2024 hail was responsible for 17% of all losses affecting homeowners policies.
So far, 2025 has had a below-average number of extreme weather events, but insurance costs continue to rise — ICE Mortgage Technology reported in its September Mortgage Monitor that premiums were up by more than 11% over the past 12 months.
Using Data to Factor Rising Costs into Future Results
The main point of all of this isn’t to discourage anyone from investing in real estate — investors play a key role in today’s housing market, and hopefully will continue to do so in the future. The message is simply that successful investors need to factor in rising prices in a variety of different categories — materials and labor for repairs, finance costs, insurance premiums, and property taxes — when calculating their ROI on a flip or their cashflow on a rental property.
For rental property investors, factoring in future insurance and property taxes is more important today than ever, since these account for roughly a third of monthly mortgage payments. Underestimating those future costs can turn monthly rent payments unprofitable in a hurry. Fix-and-flip investors need to factor these costs into their calculations about the purchase price and subsequent sales price of properties they’re interested in, since whoever might buy their flip will have to be able to afford these increased costs – and the trade-off is very often that buyers will need to look for a lower-priced property to keep monthly mortgage payments down.
Insurance premium increases rise most quickly in areas prone to extreme weather events, so investors should keep that in mind when analyzing properties in flood zones, or areas prone to wildfires or severe hailstorms. Insurance costs in those areas escalate even more quickly if the properties are expensive (and those properties will also have the highest property taxes in the region), so be sure to check home price trends, which are available for free on websites like Zillow or Realtor.com.
Underestimating repair costs is one of the most common mistakes investors make — especially inexperienced investors. Fortunately, there are numerous resources available to help make estimating these costs easier. The Verisk Repair and Remodel Index mentioned earlier tracks over 10,000 items in 31 home repair categories in 430 markets across the country, and updates the numbers monthly. The company uses that data to power online tools like EstimateOn that provide low, average, and high project estimates — including labor and materials — on a local market basis.
The bottom line, as someone once said, is the bottom line. And in today’s housing market, with ever-shifting dynamics — price appreciation slowing and asking rents declining while ancillary costs are rapidly rising — it’s critical that investors take advantage of all the data available and the online tools to make the data easier to use and analyze, to ensure that their flips deliver the margins they need, and their rental properties generate consistently positive cashflow.
