Funding & Alternative Lending

WHY Fix-and-Flip Investments?

• by Dalton Elliott
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Bottom Line: Profits Will Be Easier to Claim By Dalton Elliott One of the biggest surprise movie hits of the year has been “Everything EverywhereAll at Once.” That phrase does not just make a compelling movie title, but it describes how the economy and housing market is changing now. What’s changed? Interest rates. Rent rates. Available inventory. Customer demand. Home price appreciation. And more. A lot more. So, what has changed? Basically, it’s everything, everywhere, all at once. We are in the midst of a radically different housing market than we saw just 9-12 months ago. But that does not mean that real estate investors should panic. Opportunities still abound in the markets as it stands today. These opportunities are just different than they have been the past two years, and savvy investors will adjust their strategies to ensure profits amidst the change. From mid-2020 through 2021 to the first quarter of 2022, investors experienced a market almost perfectly designed for rental portfolio accumulation. Interest rates were at all-time lows and customer demand shifted from apartment living in high-density areas toward single-family living in suburban areas. So, it is no wonder that real estate investors—from mom-and-pop types to Wall Street investment firms—tried to pile up as many properties as they could through purchases as well as build-to-rent developments. But starting with the Fed’s move on interest rates in March 2022, the real estate market started moving quickly. Now that we are six months or so past that initial interest rate shock, there is more clarity about how these changes are shaking out. Here are three takeaways that show why pivoting to a fix-and-flip investment focus can help investors succeed in today’s market. 1. Increasing Interest Rates Will Soon Outpace Rental Rate Growth We do not yet know when the Fed will decide enough is enough with interest rates, but it is clear that it will be a while before the Fed cuts rates. This means that building rental portfolios will be more expensive. Continuing to build portfolios has been sustainable for investors so far in 2022 because rent rates have also grown (as stats from John Burns and Zumper indicate). But we are now seeing rents start to peak in some major markets, which means future interest rate hikes will make cash-flow margins much tighter for SFR landlords. Investors who have portfolio financing locked in at low rates will see profits continue to flow. However, in the short term, it is going to be much more difficult to leverage equity in a portfolio to buy more properties that will cash flow. Consequently, investors need to be rock-solid on their numbers and have a trusted financing partner if they want to add rental properties with confidence. One option to mention is bridge financing. Interest-only short-term loans can allow investors to purchase properties quickly while pushing off long-term rate locks for a year or two. In an increasing rate environment, this is one way to add to rental portfolios while maintaining cash flow in the moment. 2. Demand Still Outpaces Inventory The current housing market still features a significant inventory shortage, which means that demand outpaces supply. Median days on market (measured by St. Louis FRED) still lies at about a month and a half, well below the pre-COVID norms of 70-80 days. This inventory gap is one reason behind the significant increase in home prices over the past two years (17.7% YOY appreciation two years running, as measured by the FHFA). While prices have peaked in most markets, demand still exists for homes and rentals. Real estate investors can be confident that demand is there for properties they put up for sale. While investors may not get the market max prices that early 2022 boasted, they will still be able to recoup cash far above home values even two years ago. Investors can complete fix-and-flips or new builds with confidence, knowing that properties are not likely to sit on the market unsold for a long period of time. 3. Distressed Investment Properties Should (Slowly) Become Easier to Find While inventory is tight, some of the artificial constructs that have kept properties from becoming distressed are disappearing. Eviction and foreclosure moratoria instituted during COVID have now expired just about everywhere. And with interest rates rising, some homeowners who are in adjustable-rate mortgages may find it hard to find long-term financing that fits their budgets. As a result, more distressed properties should be available for real estate investors looking to do fix-and- flip projects. This may look different than it has in the past. The massive HPA of the past two years means that most homeowners, even those who desperately need to sell, have enough equity in their properties to avoid foreclosure. But investors should be able to find motivated sellers willing to take cash offers for quick turnarounds—leaving room for profit after property upgrades. The Bottom Line: Fix-and-Flip Profits Will Be Easier to Claim in This Market These three takeaways indicate why many investors will pivot toward fix-and-flip projects in this housing market.  » Fix-and-flip-eligible properties should be easier to find than they have been the past two years  » Sale values for these properties remain stable and secure  » Interest-only bridge financing makes it easier to profit on a short-term project leading to sale than on a long-term hold dependent on cash flow By learning from these takeaways, investors can design a real estate investment strategy that works in today’s market while making the most of their personal experience and skills. As you design that strategy, consider joining many other real estate investors who have shifted their focus to fix-and-flips to profit in the real estate market that has changed so dramatically in the past few months.