2023 – Page 49

For SFR, Adversity Is in Our DNA

by Greg Godderidge
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It’s Far Too Early to Write Eulogies for the Late, Great SFR Market By Greg Godderidge From humble beginnings, the Single-Family Rental (SFR) market has grown into an asset class worth trillions of dollars. Today, institutional investors own approximately 500,000 properties of the 16 million single family rental homes nationally, representing a fraction of all rental units in the United States. But their importance to the national housing industry is unquestionable, as they provide consumer choice, professionally managed properties, and an attractive alternative to the traditional multifamily or apartment rental options. With the housing market going through a period of correction caused by the Fed’s mandate to tame inflation, the industry is enduring its first stress test since the Great Recession. Acquisitions have slowed while warehouse financing and securitization deals have been put on ice after the Fed’s unprecedented interest rate hikes beginning in March of 2022. Will the SFR Asset Class survive the challenge? For those questioning the ability to weather the storm, let’s remind them that the SFR business was born out of adversity and is built to withstand imperfect market conditions. A Look Back at History Let’s take a quick look back at the origins of the SFR industry. The Great Recession and the collapse of the mortgage market led to a surge in foreclosures, which peaked in Sept. 2010, when approximately 120,000 homes were repossessed in a single month. With the sudden inversion of supply and demand, home prices plummeted. In those years, real estate was considered an undesirable investment. Some bold investors were not intimidated by the grim market conditions and began acquiring foreclosed properties to rent out while they waited for the market to recover. We owe thanks to those trailblazers who took a chance on a “risky” investment that many others were shying away from as property repossessions were sweeping the country. Brave investors brought activity back to an otherwise lifeless housing market and ultimately helped stabilize home values and propel the housing market’s recovery. They also provided affordable housing solutions for families recovering from the financial crisis. These investors realized the cash flow, low interest rates, and steady price appreciation were a profitable recipe. The business model’s early success attracted the attention of more capital markets participants and large institutional investors who could aggregate a significant number of rental properties. Thus, from the ashes of the foreclosure crisis, the Single-Family Rental asset class emerged in 2012. For the next ten years, the SFR market enjoyed steady growth, with an entire cottage industry of vendors, management companies and outsourcers sprouting up to support it. Big operators such as Invitation Homes, American Homes 4 Rent (now AMH), Tricon and others established a new standard of living for suburban renters with professionally managed properties and amenities. The COVID-19 pandemic accelerated all the positive housing trends and drove even more demand for maintenance-free single-family living, igniting a boom in the SFR space. The market conditions through the pandemic solidified the SFR industry’s position as the “darling” of the real estate asset classes. The SFR industry continued to outperform expectations with a record number of securitizations, new market entrants, and expanding warehouse banking lines. The picture became a little less rosy in 2022 when the Federal Reserve cranked up interest rates to tame runaway inflation. The Current Market Now that we have entered a slower period for the housing market, the explosive growth of SFRs has slowed with it. Investor activity is down due to the run-up in borrowing costs and cap rate constriction. Rent growth has also softened in recent months. Despite these pressures, the underlying fundamentals of the SFR market remain strong: Cash flow remains steady and valuations have normalized. The major players continue to report strong financial results. AMH’s same-home average realized rent rose by 8% in 2022. At Tricon, same-home rent grew by 7.3% in January of this year with solid growth in new leases and renewals, and same-home occupancy holding steady at 97%. They are proving the SFR asset class is well designed to perform in adverse conditions. There is still plenty of appetite from investors who are waiting patiently on the sidelines for conditions to stabilize. Once the market settles into a clear pattern, we can expect the growth of SFRs to resume. Analysts are currently debating what that sweet spot will be for homebuyers and investors to jump back into the market. A report by John Burns Research & Consulting found that 5.5% is the magic rate to reinvigorate the mortgage market. Even if we never see rates drop down to 3% again, if mortgage rates stabilize in the 5.5% range the market can adapt and begin to build a foundation for future growth. While waiting for the market to establish a new trend, investors should take the opportunity to review their inventory, assess their risk, and make any necessary adjustments. That could mean reviewing and streamlining current in-house capabilities or talking with an experienced outsourcer. Partners who can deliver asset management technology, scalable full-service support, and access to a network of vendors will be valuable in this time to help investors manage their portfolios and potentially mitigate losses. An outsourcer with a nationwide footprint like the homegenius family of companies, and its affiliate Radian Real Estate Management LLC can help investors finetune and execute their SFR strategies in different markets across the country. Overall, this is a moment to be cautiously optimistic. As inflation moderates, interest rates should also decline toward the 5.5% sweet spot. Home prices have fallen from their peak, which means there are new opportunities for investors to grow their portfolios. With affordability still an obstacle for many would-be homebuyers, the rental market will likely remain strong. And behind it are secular trends such as suburban migration and work-from-home arrangements that are relentlessly driving demand for SFR properties across the country. It is far too early to write eulogies for the late great SFR market. The fundamentals of the market are too strong and vigorous.

The Factors Driving Rental Property Insurance Underwriting Decisions

by Scott Phillips
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Creative Solutions are Needed to Serve Real Estate Investors By Scott Phillips It seems you cannot go a day without hearing about the ongoing economic inflation that has been ushered in on the heels of the global pandemic. There seems to be no aspect of life unaffected by inflation, including rental property insurance. But why? What are the factors that are truly driving rental property insurance underwriting decisions? Hopefully, the following will answer those questions in a concise and digestible format. Underwriting a rental property insurance policy can be boiled down to two core factors: The risk exposure of a given property or portfolio of properties and the cost to replace the property(s) in the event of a loss. The risk exposure of a property is the primary driver of both property and liability rates. But first, what is an insurance rate? An insurance rate is a simple metric of cost per $100 of insurance coverage. » Rate x per $100 of building coverage = Premium » $.50 (Rate) x 2,500 ($250,000 (building coverage)/$100) = $1,250 (Premium) Through the lens of an underwriter, determining the condition and inherent risk of insuring a property’s structure and liability exposure is an incredibly complex multi-faceted equation. The risk exposure of a rental property is determined by three factors: »Geographical Location // Exposure to natural disasters, weather, and crime. »Property Condition // Age, construction quality, type, and updates/upgrades. »Property Management // Occupancy, tenant screening, maintenance, etc. With the amount of accessible data these days, it has rendered the exposure to CAT activity, i.e., catastrophic weather events in the area where the property is located, as the biggest variable risk factor to determine. According to a recent report released by AON, after adjusting for inflation, in 2011 the number of CAT events costing $1B+ was 10, in 2021 it had jumped to over 22. In 2022, the total economic impact of natural disasters was estimated to be $313B globally. It is important to note that most of the costs behind these large numbers are NOT for total losses but rather partial losses, such as when a part of a roof blows off during a major weather event and rain destroys a portion of the home but leaves the structure intact. Ultimately, the anticipated frequency, severity, and cost of claims within a given area drives the rate an underwriter needs to obtain to achieve a sustainable loss ratio. Since rental properties exist across the United States, the real estate investor insurance market is frequency driven vs. severity driven. Accordingly, the cost to repair a partially damaged home such as in the above example, is more expensive per square foot than it is to (re)build a new home. The data supporting this is widely accessible but anecdotally anyone who has remodeled their house can attest to this. This calculation is known as Insurance to Value (“ITV”). ITVs are based off either Replacement Cost Valuation (“RCV”) or Actual Cost Valuation (“ACV”). It is very important to distinguish between RCV and ACV. RCV is the cost to replace the damaged part of the home today while ACV is what the current value is less depreciation. For reference, to replace the roof in the above example could cost $10K, but if it was insured as ACV, it may only be worth $1k because it was near the end of its predetermined life expectancy of say 25 years, thus resulting in two very different outcomes for an investor and overall claims experience. Since ACV is more of a calculation determined by depreciation and not the actual cost of labor and materials in today’s prices, we will only focus on RCV factors and drivers. Claims data from the past nine months as of February 2023 from our data partners at Verisk 360Value®, reported a nationwide average replacement cost for a typical rental is $181/ft. The bands of the report were from $155/ft (AR) to $232/ft (AK/HI). Meaning, on average a rental property should be insured at: $181/ft (RCV) x 1,500 Sq Ft home = $271,500 Dwelling coverage (100% ITV) As you can see, pulling back on the RCV per square foot will lead to underinsuring the property. Historically and understandably, the REI industry has been widely underinsured, with estimates below 50% of the recommended ITV. However, the causes of the underinsured estimates are NOT a straight-line to investors trying to control costs and stabilize cashflows, but rather a combination of factors, most notably inflation that has driven up the cost of capital, labor, and materials. In addition, the rapidly increasing frequency and severity of catastrophic weather events throughout the US has profoundly impacted the entire insurance ecosystem – a topic that far exceeds the depth in which this article is intended to cover. The growing challenge of balancing the financial constraints for a rental property to be a viable investment with the need to properly insure the property has become exponentially more difficult. This challenge has forced underwriters and brokers to produce creative solutions to continue to serve their investor clients. Meanwhile, real estate investors of all sizes are feeling as though they need to take a crash course in risk management to better navigate these solutions. Investors navigating their own risk management strategies can look to do the following: » Be sure to work with a broker with expertise in this niche property insurance market, including access to specialty insurance markets solely focused on the REI industry. » Be diligent with the maintenance of the property to prevent avoidable losses in the future. » Consider working with/hiring a property manager that offers: • Preventative maintenance programs – including 24/7 resident incident reporting. • Thorough tenant screening protocols and regular property inspections. • A property insurance program. There is no ‘silver bullet’ for real estate investors to thwart or eliminate the higher cost of property and liability insurance for their investment properties. However, there is some good news. Recent data shows the cost of materials is coming down as supply issues

From Business to Carpenter to Real Estate Investor

by admin
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Learn From Others and Drop Your Ego to be Successful Robert Sturrock is an independent business owner with HomeVestors® of America, Inc. in Southeastern Wisconsin, where he buys, rehabs, and sells residential properties. But his professional journey is far from typical. Life Before HomeVestors Sturrock graduated from the University of Wisconsin—Stevens Point in 2001 with a degree in Business Administration. Upon graduation, he began his business life in the restaurant industry holding key management positions. However, it didn’t take long before he realized that was not what he wanted to do. So, he decided to get his hands dirty in the building trades. Sturrock worked for three years in the trades as a carpenter building and remodeling homes, an experience that would prove beneficial down the road; in 2004 he purchased his first rehab and his first rental property. The HomeVestors Journey Begins While still working in the trades, Sturrock saw a HomeVestors billboard featuring “UG,” the company “caveman” mascot. He made an inquiry with a local franchisee, and was attracted by the HomeVestors systems, the lead generation program and the support available from the corporate office. In April of 2005, at the age of 28, he bought his HomeVestors franchise along with a partner. That partner, Sturrock recalled, was a gentleman that he used to cut his grass for as a boy. The gentleman admired his work ethic and told him that if he ever went into business to give him a call… so he did… and the new partnership was formed. As an added benefit, Sturrock met his future wife, Christi, during his initial HomeVestors training. Christi worked as the office manager for another HomeVestors franchisee. Today, she manages all the sales for their company, Riverhouse Investments LLC, in addition to owning her own brokerage. When Sturrock bought his franchise, HomeVestors had not yet developed their Development Agent (DA) program, but he did have a primary mentor, Ernie Hughes. Hughes went to work for HomeVestors of America in July of 2005, but his relationship with the company and its founder, Ken D’Angelo, goes all the way back to 1973 when they were partners in other real estate ventures. Hughes impressed upon Sturrock to follow the HomeVestors proven systems and WASH-RINSE-REPEAT. Present Day In 2010, Sturrock started focusing on building his portfolio with single-family homes. Today, that portfolio includes a duplex and several multifamily properties, with 95% of his portfolio in Milwaukee. In 2016, Sturrock became a DA and today considers his role as a DA the most rewarding part of his business. He supports 32 people in a three-state area and is instrumental in their successes. In 2018, Sturrock bought out his partner of 13 years and is currently focusing on fix-and-flips and buy-and-holds. Advice from an Expert Sturrock is a firm believer in the single-family rental business and has sage advicefor investors just getting started. • Spouses need to support each other and have mutual goals. • Don’t have an ego. • Follow the system and learn from others. • Live below your means so you have more money to invest in real estate. HomeVestors What exactly does it mean to be a HomeVestors® business owner? Owning a real estate business is life changing and naturally comes with risks! When you become a HomeVestors business owner, you get immediate access to motivated seller leads, financing resources for qualifying purchases and repairs, one-on-one coaching with your local Development Agent, proprietary software for analyzing properties and deals, and access to a nationwide network of coaches and peers. Your house-buying business is yours and you run it as your own venture with a focus toward your individual business goals. If you are interested in a franchise, call 866-249-6932, email Sales@homevestorsfranchise.com or visit www.homevestorsfranchise.com. Each franchise office is independently owned and operated.

The Leap from Corporate America to Real Estate

by REI Podcast - RCN Capital
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Chas Carrier is a real estate entrepreneur with decades of experience in the business under his belt. Through the years, Chas has built a successful real estate investing business and a portfolio with thousands of properties, and he is with us today to tell us how he was able to do that. ‌ Listen now to learn more about Chas, his journey in real estate, and how you can grow your business and portfolio the way he did! Quotables “The best thing was to build a team from the very beginning and then again to leverage the system that I had become a part of and learn from that.” “Every time credit tightens, you can be pretty sure that prices are going to adjust.” “Whenever rates go up, prices go down.” “I think probably that’s one of the biggest problems a pure entrepreneur has is management” Links Website: RCN Capital https://www.rcncapital.com/podcast Website: REI INK https://rei-ink.com/ Website: C&C Residential Properties https://ccresidentialproperties.prope…

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Profit Margins on Typical Home Sales Nationwide Drop to Two-Year Low as Home Prices Remain Flat; Investment Returns Decline Quarterly by Five Points; Median Home Values Down Again in Most Markets ATTOM, a leading curator of land, property, and real estate data, released its first-quarter 2023 U.S. Home Sales Report, which shows that profit margins on median-priced single-family home and condo sales across the United States decreased to 44.2 percent as home prices stayed flat or kept declining around most of the nation. The drop-off in typical profit margins, from 48.7 percent in the fourth quarter of 2022, marked the third straight quarterly decrease nationwide and resulted in the lowest investment return since mid-2021. It came as the national median home price rose just 1 percent quarterly, to $321,135, and values commonly went down in almost three-quarters of major housing markets around the country. The typical investment return nationwide did remain high in the first quarter – almost double where it stood four years ago. But the margin was off by 12 points from the peak of 56.1 percent hit in the second quarter of last year. “Homeowners are starting to take a significant hit in the form of lost profits from the recent market slowdown. Nine months of varying price declines around the country have carved away almost a quarter of the profit margin sellers were enjoying in early 2022. That’s a striking reversal of what we saw for a decade,” said Rob Barber, chief executive officer for ATTOM. “It is possible that the upcoming peak buying season of 2023 could lead to increased profits, owing to favorable mortgage rates and other factors. Over the next few months, we can expect to gain more clarity regarding whether the current market stagnation is a short-term aberration or a more significant trend.” The latest round of faltering profits and prices around the U.S. reflects a housing market that has been stalled since the middle of last year following a decade of almost continuous gains. The nationwide median home price fell 7 percent from the record hit in the second quarter of last year, taking profit margins with it. That happened as home mortgage rates doubled to more than 6 percent for a 30-year fixed-rate loan, consumer price inflation soared to 40-year highs and the stock market fell back from all-time records. Those forces cut into what prospective home buyers could afford, helping to tamp down demand and lower prices despite short supplies of properties for sale. As the 2023 home-buying season kicks into gear, the forecast for the market remains murky. Small declines in mortgage and inflation rates over the past few months have come amid predictions among economists of more interest rate hikes and a possible recession. Profit margins stay the same or decrease in two-thirds of U.S.Typical profit margins – the percent difference between median purchase and resale price – stayed the same or went down from the fourth quarter of 2022 to the first quarter of 2023 in 93 (68 percent) of the 137 metropolitan statistical areas around the U.S. with sufficient data to analyze. They were flat or down in 123, or 90 percent, of those metros compared to the second quarter of last year, when returns hit a high point nationwide. Metro areas were included if they had a population greater than 200,000 and at least 1,000 single-family home and condo sales in the first quarter of 2023. The biggest quarterly decreases in typical profit margins came in the metro areas of Akron, OH (margin down from 66.7 percent in the fourth quarter of 2022 to 47.8 percent in the first quarter of 2023); Stockton, CA (down from 76.7 percent to 59.4 percent); Louisville, KY (down from 48.6 percent to 32 percent); Prescott, AZ (down from 73.3 percent to 58.1 percent) and Buffalo, NY (down from 66.2 percent to 51.5 percent). Aside from Louisville and Buffalo, the biggest quarterly profit-margin decreases in metro areas with a population of at least 1 million in the first quarter of 2023 were in St. Louis, MO (return down from 33.7 percent to 23.6 percent); San Francisco, CA (down from 58.9 percent to 49.1 percent) and Salt Lake City, UT (down from 53.6 percent to 44.5 percent). Typical profit margins increased quarterly in just 44 of the 137 metro areas analyzed (32 percent). The biggest quarterly increases were in Trenton, NJ (margin up from 43.6 percent in the fourth quarter of 2022 to 78.6 percent in the first quarter of 2023); Scranton, PA (up from 63.3 percent to 87.5 percent); Lake Havasu City, AZ (up from 63.6 percent to 82.8 percent); Atlantic City, NJ (up from 33.2 percent to 48.5 percent) and Reading, PA (up from 53.9 percent to 68.8 percent). The largest quarterly increases in profit margins among metro areas with a population of at least 1 million came in Pittsburgh, PA (up from 47.8 percent to 53.1 percent); Memphis, TN (up from 46.3 percent to 51.1 percent); Richmond, VA (up from 52.1 percent to 55.6 percent); Indianapolis, IN (up from 46.7 percent to 50 percent) and Grand Rapids, MI (up from 64.4 percent to 67.1 percent). Raw profits flat or down in three-quarters of nationProfits on median-priced home sales, measured in raw dollars, stayed the same or decreased from the fourth quarter of 2022 to the first quarter of 2023 in 100, or 73 percent, of the metro areas analyzed for this report. The biggest quarterly raw-profit decreases in areas with a population of at least 1 million were in St. Louis, MO (down 30 percent); Louisville, KY (down 29 percent); Birmingham, AL (down 28 percent); New Orleans, LA (down 24 percent) and Buffalo, NY (down 22 percent). The largest raw profits on median-priced sales in the first quarter of 2023 were in San Jose, CA (profit of $475,000); San Francisco, CA ($316,000); Naples, FL ($255,750); San Diego, CA ($242,750) and Seattle, WA ($236,000). Prices even or down in three-quarters of metro areas around the U.S.Median home prices in the first quarter of 2023 decreased or remained the same compared to the prior quarter in 104 (75 percent) of the 139 metro areas around the country with enough data to analyze, although they were still up annually in 102 of those metros (73 percent). Nationally, the median first-quarter price of $321,135 was up 1 percent from $318,000 in the fourth quarter of 2022 and up 1.6 percent from $316,000 in the

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Purchases increased by 49% in the Midwest and 24% in the West Q/Q from New Western’s 150,000+ investors New Western, the largest national private real estate investment marketplace, announced its continued momentum from 2022 into Q1 2023, including a double digit surge in growth over the last quarter. Powered by New Western, local independent investors found opportunities in the midst of a tumultuous housing market. While iBuyers and institutional buyers have been struggling and exiting the market, down 80 percent from Q4 2021 to Q4 2022, New Western has seen steady growth and a rise in activity among its 150,000+ investors. From Q4 2022 to Q1 2023, New Western saw significant increases in over a dozen markets, including: On average, investor-bought homes in these markets sold for 36% below median home prices in the same market based on February 2023 data from Redfin and New Western. Other notable markets that grew from both Q4 2022 to Q1 2023 and Q1 2022 to Q1 2023 include Houston, Chicago and Dallas, Texas. “Our non-traditional approach to residential real estate investing allows us to roll with the same punches that have knocked out bigger players,” says Kurt Carlton, co-founder and president of New Western. “The U.S. housing market is experiencing a supply shortage. In fact, the gap between family formation and single family homes totals as high as six-and-a-half million by some accounts from 2012 to 2022. As our investor purchases rise, independent flippers are not only making a profit but also putting a much needed category of homes back into inventory. The Midwest and West are attractive growth markets and we’re excited to see this momentum continue throughout the year. “ New Western operates a marketplace that supplies properties to the largest segment of independent investors in the nation, who own 82% of the investment market share, and have the local expertise needed to flourish. The two regions that grew the most in Q1 2023 from Q4 2022 were the Midwest with an increase of 49 percent in investor purchases and the West with 24 percent growth. New Western has also identified the Southeast and Midwest regions as areas for expansion and opportunity for residential real estate investors in 2023, especially as both saw an increase in investor purchases in Q1 2023, the South grew by 16% from Q4 2022 to Q1 2023. Earlier this year, New Western opened two new offices, one in Virginia Beach, Va. and another in St. Louis, Mo. bringing the company up to 52 offices nationwide. This has compounded on New Western’s 2022 growth when it launched 15 new offices, and hired 60 additional people per month, leading to a 64 percent growth in corporate employee hires. For more information about New Western, please visit https://www.newwestern.com. About New Western New Western is a real estate investment marketplace that makes investing more accessible for more people. Operating in most major cities, our marketplace connects more than 150,000 local investors looking to rehab houses with sellers. As the largest private source of investment properties in the nation, we buy a home every 13 minutes. New Western delivers new opportunity for all—a fresh start for sellers, exclusive inventory for investors, and in doing so, creates housing that is more affordable for buyers. For more information, visit www.newwestern.com. SOURCE New Western