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The Real Estate Question: 2025

Investors Must Leverage the Data at Their Disposal by Andy Bates Not quite the dynamic environment seen in recent years since the pandemic, 2024 has maintained its own brand of tension for those involved in real estate. Throughout the year, uncertainty has been stoked through tight margins, unfavorable rates, and seemingly slow movement in the market. Such an environment has everyone from seasoned industry professionals to fledgling mom-and-pop investors asking, “Will the real estate market ever recover?” For the determined investor, there is much to consider rounding out the corner of the year into 2025. Maintaining an awareness of the climate in the market as well as relying on actionable data-points could mean the difference between those who are successful and those who only break even, or worse, are forced out of the market altogether. The following is a summary of recent trends and developments throughout the real estate industry with the aim of highlighting and interpreting several key factors. With the proper framework, these datapoints can be leveraged to help investors better understand not only what has happened in the space, but what may be to come. A Matter of Interest / Is Anyone Interested? For investors, no discussion of the potential state of the industry into 2025 would be complete without an examination of interest rates. This necessitates a conversation about the Federal Open Market Committee and its decisions. The September decision by the Fed to slash rates by 50 basis points has big implications for the space. Those 50 basis points represent a change to a new target Fed Fund rate of 4.75-5%. This, and other decisions of a seemingly dovish tendency, may herald the ending of a “higher-for-longer” rate environment. Core inflationary numbers have seen a .2 descent in percentage points in 2024 (down to 2.6%) per one assessment by JPMorgan. This is largely expected to taper to a low of 2% flat by 2026. Such movements in the fed fund rate portend for investors the potential for a shift towards a lesser cost to borrow. Lowered borrowing costs would provide investors with a greater opportunity for capital from private and commercial lending sources. The S&P CoreLogic Case-Shiller Home Price Index shows home cost appreciation has increased consistently in the vast majority of US markets throughout 2024. This lowered cost to capital will enable investors seeking non-conventional funding to remain not only active, but competitive in the space with overall greater access to funding and success with private lenders. Activity in the Space / What’s Happening Here? Beyond interest rates, there are several other factors of which investors should take note when attempting to analyze the market. These factors take into account housing market activity and understanding where these figures have been can help determine where they might be going. Housing starts have increased steadily month over month throughout 2024. This means that, whatever the rate comparison year over year, housing inventory is being steadily addressed. There is still not quite enough inventory in the space to sate demand, or stimy competition between primary-buyers and investors, and so home price appreciations remain relatively high. Keeping track of housing starts, and specifically taking note of these figures by location or area market, can help investors predict when inventory will become available and can help to source deals, even getting properties under contract, ahead of the competition. If housing starts can represent anticipated inventory in the space, completed projects are a valuable trend for following new inventory as it becomes readily available. Data provided by the United States Census Bureau released in late October show that completion rates on newly developed residential properties have increased month over month since Q4 of 2023. This represents hundreds of thousands more housing projects seeing their way to completion than even before the onset of the 2020 pandemic. In spite of the high costs of acquisition, housing demand has not slackened. Total home sales are a metric that often directly correlates to, and is representative of, housing demand. One report from Redfin.com shows home sales have increased as recently as Q4 of 2024. The report also highlights that this increase in home sales was likely driven by two primary factors; the first of which are the recent rate cuts issued by the Fed discussed earlier in this article and the second being the expectation of further interest rate cuts as outlined in a plan by the Federal Reserve. The combination of these factors — housing-starts, completions, and home sales — speaks to a trend toward normalcy and health in the housing market. It is worth noting that while prices across the real estate industry could stabilize, it may be a step too far to expect that they should drop to any significant degree. That being said, even with such tight margins between home prices and the power of investment capital, market activity should continue at an even course. Finding the Right Answers Even with the real estate markets’ diverse history fraught with hard years and shifting economies, it is fair to say that this year, in 2024, the real estate market has truly been tested. It is imperative, perhaps now more than ever, that investors leverage the data at their disposal. The question of where the industry is ultimately headed persists. In answer to these challenges one thing remains consistent: real estate investing maintains its status as a lucrative and worthwhile endeavor for those with a keen mind for the market and wherewithal to see their vision through.

Funding & Alternative Lending

Understanding New Construction Investments

A Challenge Well Worth its Rewards by Andy Bates Navigating today’s market often requires a sense of dynamism. Working between flipping properties and rental holds has helped many investors maintain and grow their business, but these are not the only kinds of investments available to the savvy investor. New construction is another lucrative investment type but its distinction from an existing property comes with significant process changes for the investor. Understanding additional factors that play into a new construction investment and the best practices for them will illustrate a path to success for investors with this strategy. Building on Purpose As with any investment, before financial commitments are made, it is always advisable to thoroughly understand the undertaking at hand. Newly constructed properties serve a primary function of adding inventory to the markets in which they are built. When acquiring funding to construct new residences as investments, it’s important to consider the structure of those loans. While conventional lending can be used for the building of a new primary residence, investment financing is, by definition, commercial in its structure. The most important distinction here being that commercial loans cannot be used for primary residences. Such a use case would result in default on the loan. Instead, private funding focuses on investments, so any newly constructed residences would need to be sold or held for cashflow. Project Scope Beyond discerning their exit strategy, investors must also be aware of the scope of their upcoming project. It is one thing to build a new, one-unit or even four-unit property where a neighborhood already exists. It is quite another to consider the building of dozens or even hundreds of units. While different lenders will focus on, and provide for, projects of all scales that fit their buy-box, development, at any scale, requires an understanding of horizontals which may or may not already be in place. Horizontals are all installations which “attach” to a property or properties in an area, outside of the structures themselves. Roads, pavement, sidewalks, water and waste lines, gas and power are all examples of infrastructure that is imperative for a new build, even if they are not directly part of the cost and construction of an investment. Some lenders will only provide for new construction projects in which horizontals like these are already established. These can look like undeveloped lots in existing neighborhoods. In urban settings, “in-fill” projects are those that position new builds between existing structures in an established neighborhood. As the establishment of horizontals in areas without such infrastructure demand significantly more time, capital, planning and resources, opting instead to build on a parcel of land where horizontals are already in place can make it easier to acquire plans and permits for the build or even access financing. All in its Proper Place While the notions of obtaining approved plans and keeping up to code are not new to any experienced real estate investor, new construction comes with more groundwork in these areas. While an investor might be able to secure funding for light or even heavy rehab projects with as little as a scope of work or line-item rehab list, for new construction, plans and permits must be in place before funding can be secured and building can begin. Fortunately, even with an increase in paperwork comparative to other investment types, these documents tend to be fairly standardized across all US housing markets. Entitlement letters, zoning verification letters, and compliance reports are all examples of common documents investors can expect to work with on a new construction project. Many lenders servicing new construction investments will want to ensure they are executed by an experienced hand. In this way, it is important for the average investor to work with experienced builders and general contractors not only to secure necessary funding but also to ensure that the structure to be is sound. These professionals have verifiable credentials like references, project history and up-to-date licensing which can indicate to both lenders and municipalities that the project will be completed in accordance with code and compliance. If acquiring plans, permits, and approvals for a standard renovation takes time, then it stands to reason they might take much more time for a fresh build. Keeping on top of documentation is its own skillset and with more moving parts on a new construction comparative to other investments, it is imperative that investors keep on top of, and plan around timelines for approval. If an investor should find themselves without plans and permits in place prior to closing, all is not necessarily lost. Investors can leverage verifications on proposed plans with third party architects working within the local municipality. Additionally, investors may acquire formal confirmation of proposed plans from a state or local council where ordinances allow for these exceptions. Nothing Ventured, Nothing Gained With private lending, it’s common for construction and renovation projects to be funded under a reimbursement structure. This means that builds are planned in phases. Once a phase of work has been completed, it is reported to the lender who then sends out a third-party inspector to verify the work and materials used. With confirmation from the inspection, the lender releases funds to reimburse investors for each phase of work as it is completed. Reimbursements, alongside plans and permits, reinforce the need for investors to have a firm understanding of the scope of work for their construction investments. This includes what may impact timelines and how delays might impact the build overall, including the investors exit strategy. Opportunity for the Tactful In a housing market in need of inventory, a build-to-sell approach may seem like the obvious path for new construction investors. However, investors should be as thorough in their investigation of an exit strategy as they were when developing plans and acquiring permits. Market area indicators like housing starts, homes sales, and employment statistics are all useful metrics when considering the most favorable course of action in a given market.

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