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Data & Analytics

Dissecting the Data

What a Year’s Worth of Investor Input Tells Us About the Future by Mitchell Zagrodnik RCN Capital and CJ Patrick Company’s Investor Sentiment Survey, which launched initially in Spring 2023, gauges real estate investors’ views on market conditions. The survey features a static set of questions that allow data to be compared and analyzed for trends over time. Periodically, more topical questions will also be included in the survey. With this being an election year, the Fall 2024 iteration included questions about the presidential candidates, and how investors see the market performing depending on which nominee is victorious. The Fall 2024 Survey results showed that fix-and-flip investors had an overall more positive outlook about market conditions than long-term rental investors. Where 80% of flippers believe that market conditions have improved over the past year, only 47% of rental property investors believe that today’s market is better than last year’s. As we dive into the overall sentiment from the participants in the most recent survey, the contrast between flippers and rental investors is a notable theme throughout this piece. And now with over a year’s worth of data from these reports, we can compare survey responses year-over-year. Overall Investor Sentiment As of Fall 2024, investor optimism was the highest recorded in the six quarters of the survey’s existence. When asked if market conditions are better today than they were a year ago, 68% of participants responded yes, and over 71% believed that conditions would continue to improve in the following months. Declining financing costs, increased inventory, and a gradual slowdown in price appreciation are contributing factors to that optimism. The three biggest challenges facing real estate investors are listed below, and we were able to compare the responses to the same question during the Spring 2023 survey:  »            High Cost of Financing // 62.88% in Fall 2024 compared to 72.70% in Spring 2023  »            Competition from Institutional Investors // 43.56% in Fall 2024 compared to 33.88% in Spring 2023  »            Lack of Inventory // 39.57% in Fall 2024 compared to 47.70% in Spring of 2023 The shift towards a more optimistic outlook for the real estate investment space is increasingly apparent after seeing this year-over-year change in responses. A majority of real estate investors utilize some form of financing in order to secure properties, so the nearly 10% drop in the responses year-over-year is telling. It is also notable that concern over a lack of inventory has dropped by about 8% year-over-year. Low housing inventory has been a consistent obstacle facing homebuyers over the past several years. This issue is being addressed with an increased number of new residential construction projects, specifically single-family homes, hitting the market. According to data provided by the Department of Housing and Urban Development in September 2024, the total recorded house completions in August 2024 was 1,788,000. This is the highest number on record in the month of August within the last five years. These numbers should give people confidence that this problem is being addressed. Insurance Costs Proving to be an Ongoing Issue  Insurance is a crucial factor in the homebuying process, and lately this necessary step has become a consistent deal killer. When asked if rising insurance costs or the inability to insure properties factored into the decision to invest in real estate, 80% of survey participants in the Fall 2024 iteration responded “yes.” For fix-and-flip investors, 82.9% felt that cost and availability of insurance was a deciding factor in their real estate investments, whereas only 69.4% of rental investors felt that way. Based on the responses provided by the survey, insurance issues have caused more flippers to miss out on a deal than rental investors by a difference of 73.3% for flippers versus 45% for rental investors. That stark contrast emphasizes the problems that flippers are facing when it comes to insurance, and these issues appear to be even more apparent in certain areas of the country. The issue of insurance coverage is especially prevalent in states that are susceptible to extreme weather events, with California and Florida garnering the most attention. Florida has recently experienced devastating hurricanes, which in general, are unfortunately common in the southern region of the United States. California has been susceptible to large-scale wildfires. These natural events have caused insurance rates to skyrocket, and even some insurance companies to leave these states entirely. In California, 97% of investors have experienced issues with insurance cost and availability, and in Florida that number is at 93%. The breakdown of each state based on investment strategy is below: California-based Investors’ likelihood of missing out on a deal due to insurance:  »            Fix-and-Flip: 87.5%  »            Rental Investors: 50% Florida-based Investors’ likelihood of missing out on a deal due to insurance:  »            Fix-and-Flip: 60%  »            Rental Investors: 60% The breakdown shows it has been more of an issue for flippers compared to rental investors in California, but in Florida the numbers are relatively similar by investmenttype. It will be fascinating to see if this continues to be a problem over the next 12 months. Presidential Election Factors Of the participants in the Fall 2024 survey, 51.4% are backing Kamala Harris versus 40.5% for Donald Trump. Harris is also seen as the candidate who will lead to a better investment environment. 47.22% believe that, while 39.20% see a Trump presidency as more beneficial to investors. What is interesting is how flippers and rental investors differ in which candidate will lead to a better investing environment. Fix-and-flip investors lean towards Harris with 56.9% believing she will create a better investment market, whereas 32.6% favor Trump in that regard. The opposite is the case for rental investors. 45% of the respondents believe Trump will create a more favorable investing environment, versus 39.6% believing Harris will. Some of the major talking points of the Harris campaign are policies aimed directly at long-term rental investors, like the controversial topic of rent control. Based on that, it makes sense for investors that primarily own rentals to favor Trump.

Fix and Flip

Maximizing Returns on Fix-and-Flip Investments

Using All Available Data to Your Advantage By Mitchell Zagrodnik The real estate market has been in a state of flux in recent years. Since the middle of 2022, the higher rate environment combined with an overall lack of inventory throughout the U.S. has left many prospective buyers and sellers to navigate an extremely challenging real estate market. One of the most popular investment strategies utilized today is fix-and-flip investing. What makes this strategy so attractive is the ability to make quick returns, and, at the end of the day, what makes an investment worth your time and money is the overall return on investment. In an ever-changing housing market, savvy investors are always looking for advantages to stay ahead of the curve and find the best possible scenarios for their portfolio. In order to ensure a profitable fix-and-flip investment, it is crucial to understand that being selective in your property choices is necessary, as not all projects are good fits for these types of scenarios. Location is an immense factor. Doing the research to understand the current market, where it is headed in the future, and what areas throughout the U.S. are profitable and which to avoid, can give you a huge advantage in the space when it comes to maximizing your returns. The Current Landscape of the Fix-and-Flip Market Rehabbing homes for sale has only continued to grow in popularity over the years, with more and more people looking for financial independence wanting to capitalize on these opportunities. That said, it is important to recognize that along with the overall housing market, the fix-and-flip industry has had its fair share of challenges in recent memory. According to recent data provided by ATTOM, in 2023 there were 308,922 single family homes and condos flipped, making up 8.1% of all home sales. Meanwhile, 2022 was record-setting, with roughly 437,000 houses flipped, making up 8.4% of all home sales. Another point to make note of is that since 2016, gross profit on flips has been consistently between $60,000 and $70,000. But in that same timeframe, the average return on investment has been consistently dropping as well, from upwards of 51% returns in 2017 to nearly half that in 2023 at an average of 27.5%. What has been a great sign of optimism as well, is that as of June 2024, house flipping activity has increased nationwide for two consecutive quarters, with that average ROI jumping back up to 30% for the first time in a year (ATTOM). This is a positive sign for the flipping industry, but it is also important to recognize that there is still difficulty hitting higher profit margins in a majority of areas throughout the U.S., after expenses, when flipping a property. Keep in mind, a 25-30% return on investment is still a great return, so this data should not sway you away from pursuing these deals. But the reasons for these dwindling returns can be attributed to several factors. Rising median home prices, rising material costs, and a higher rate environment leading to less interest from potential buyers are all valid claims to that notion. However, there are some measures you can take to make the most on your investments. Maximizing your Returns The ideal scenario for a fix-and-flip is to finish the rehab quickly and efficiently, and then sell the property as soon as possible. Most investors will go the avenue of securing financing through a lender, and these loans are often structured with no prepayment penalty. For example, this means that on a short-term fix-and-flip loan with a 12-month term, if the project is completed three months into the term and the property sells, then the borrower can pay off the loan without any penalty and maximize their ROI. A great way to make sure your property sells quickly is to not wait until the rehab is complete before finding a prospective buyer. Investors can give themselves an advantage by networking with buyers or even utilizing a realtor to search for buyers while the property is being renovated. It is not a difficult sell for those searching for a home when they have the opportunity to live in a newly renovated home, and on top of that you can secure a quick sell upon completion. Hot and Cold Areas for Flipping in the U.S Market The rise in popularity of fix-and-flips as well as an ever-expansive array of data grants you access to ample amounts of tools and information at your disposal to make the most of the opportunities throughout the country. It is no secret that many investors nowadays are investing in states outside of where they live thanks to this availability of information. So where in the United States are flippers making the most bang for their buck? Data provided by ATTOM from Q1 of 2024 shows the areas with the highest returns on investment as of 2024 are:  »         Buffalo, NY at 127.8% ROI  »         Reading, PA at 124.9%  »         Pittsburgh, PA at 120.6% ROI  »         Scranton, PA with an average return of 115.7%  »         Harrisburg, PA with 113.6% ROI It is clear that there is a major concentration in the Northeast region of the U.S., with Pennsylvania seeming to be the most noticeable. The reason for the higher returns can most likely be attributed to these locations having home values that are relatively lower in desirable areas where there are a plentiful number of buyers. Metro areas where we are seeing the lowest ROI are led by:  »         Austin, TX at 0.3% ROI  »         Honolulu, HI at 1.7% ROI  »         San Antonio, TX at 2% ROI  »         Dallas, TX  at 5.3% ROI  »         Houston, TX at 8.4% ROI The trend to notice here is that these are cities that have experienced immense growth within the past five years, and four out of the five metro areas listed are in Texas. Even though these are desirable areas that people are moving to, the home values in these areas have skyrocketed.

Single-Family

Opportunities in Single-Family New Construction

Be Picky and Find an Ideal Project in an Ideal Area By Mitchell Zagrodnik In the ever-changing real estate investment space, investors are always on the lookout for potential deals that can help them take advantage of the market and get them the best returns on their investments. Throughout the first half of 2024, the market outlook has been persistently stagnant. Rates do not appear to be dropping anytime soon, home prices are rising, and low inventory continues to be a hurdle as demand is outpacing supply. When rates experienced that first big jump back in mid-2022, it was quite a jolt. Eighteen months later, the mindset has adjusted to acknowledge this current environment as the new norm. There is optimism in the market for homebuyers and investors, as new home construction has been more robust than expected at the start of 2024. Housing starts and permits are also headed in the right direction. Overall housing starts are down, but if you look deeper, that is mainly due to multi-family starts being down significantly. The single-family market, however, has been showing consistent signs of improvement. The most recent data from the Department of Housing and Urban Development shows that new single-family building permits have continued to climb for the 13th consecutive month. This shows that builders are actively addressing market need, with an emphasis on building affordable, entry level homes for prospective buyers. Granted, this isn’t going to solve the supply issue overnight, but the takeaway is that single family new construction has been stepping up to help address this ongoing issue. The general consensus is that rates are not likely to drop until late 2024, and increased demand should raise prices on new builds that are starting in the next 3-6 months. Those new builds should then experience rapid appreciation in late 2024 and early 2025 by the time these finished builds hit market. Planning and Experience are Key The recent uptick in building permits over consecutive months showcases that builders are acknowledging the inventory issues for single family homes. This rise also shows an increase in entry-level starter homes, where there has been a significant need, as opposed to the recent trends of new construction projects being more geared towards the non-starter home market. Builders are tackling the need for entry-level homes, with the ultimate goal being to add affordable housing for a target audience of first-time homebuyers and investors with lower capital. With a great game plan and experienced builders onboard, ground up construction projects can offer great returns for investors as well, while addressing the inventory issue we have been experiencing in recent years. It is important to note that new construction builds can not only be difficult ventures for newer investors, but it will also be more difficult to get your loan approved. Most lenders in the investment space are going to require some form of experience when taking on these projects. Any previous rehab project or ground up experience is going to be a focal point when it comes to approval. The more experienced you are the more appealing the terms will be. It can also speed up the process if the plans and permits are already in place by the time you speak to your lender about the project. It is crucial that the lender gets a clear understanding of the scope of the project, and that the builder has completed projects of a similar scale prior. For single family homes, lenders are going to want to see these projects in established neighborhoods and be sure the newly built project will conform to that neighborhood. For example, if the median home value in the neighborhood is $350,000, but the finished product is expected to appraise for $600,0000, that is going to be a difficult deal to get approved. The value heavily exceeds the average for the area, making it less attractive to buyers and therefore riskier for lenders to want to fund. Setting Expectations and Doing Research Experienced fix-and-flip investors know that purchasing an existing property can come with surprises. Existing issues with properties will require repairs and potentially hidden issues like water and structural damage that might not be noticeable upon the purchase. With a brand-new build those issues should not come into play which can be a major selling point when the property is listed for sale. Whether the plan is to sell the property or hold onto it as a rental, the allure of being the first to live in a brand-new home is very attractive to prospective homebuyers. The builder gets a sense of accomplishment for executing their building plan and providing a new, stable home for the buyer as well as the financial benefits since new construction homes tend to sell for more. Especially if you have a great building plan that incorporates cost effective features into the property that can add significant value. It is important to know that even though the reward is often worthy of the time put in, these projects are not to be taken lightly and it is imperative that you can financially afford to take on such an endeavor. As opposed to typical rehab projects on existing properties, upfront costs are higher due to permits, fees, materials and labor. Just like with fix-and-flips and ready to rent properties, not every property is a good investment property. Be picky and find an ideal project in an ideal area that can pay huge dividends. The recent single-family construction trends highlighted here are signs of optimism that the lack of inventory is being addressed and there are existing opportunities. If you are a builder and have a resume of flip projects, maybe it’s time to talk to your lender about new construction deals. If you are someone that has a portfolio of rental properties but have never taken on a rehab project, look to connect with contractors and experienced builders that are working on construction projects and let them know that you are interested

Capital Markets

Understanding Capital Markets Can Lead to Consistent Success

The Effect the Markets Have on Investor Activity By Mitchell Zagrodnik It is no secret that the real estate investment space has been growing consistently over the past few decades. Whether someone is looking to purchase a property, renovate it, and then flip it for a profit, or they just want to purchase a nice cash-flowing rental property for passive income, there are multiple avenues investors can take to lead to a prosperous career in real estate investing. But as the second half of 2022 led to swings in the market due to rate increases, 2023 has started off with a more conservative outlook in the space, with most people wondering how the market is going to play out. Experienced investors who have been in the industry for decades have seen the worst of the worst, with the 2008 housing market crash. Newer investors are seeing their first volatile market after a few years of a very favorable market and low rates, and may be wondering how to navigate this new playing field. Looking at capital markets data and being able to identify trends in the market are a great way to stay ahead of the game and prepare for the future. What are Capital Markets? The definition of capital markets as described by Oxford Languages is “the part of the financial system concerned with raising capital by dealing in shares, bonds, and other long-term investments.” In real estate, the industry has its own particular capital markets, which are designed to accommodate the needs of investors and developers. Through this structure, businesses can gain capital by issuing securities to investors, who with these purchases, hope to earn solid returns on their investments. Overall, these markets are meant to act as a framework for how assets are valued, financed, and transacted from businesses to investors. And as investors, it is beneficial to have an overall understanding of how not only to invest in the real estate market, but to put in the time and research to better comprehend how your purchases fit into the grand scheme of the market. Real estate capital markets consist of both primary and secondary markets, and both are key factors of the financial system. The primary market is where the loans are originated, and then once they are created they can then be traded with investors either as securities or as some other type of financial instrument. The secondary market acts as a channel for the funds to get in the hands of investors in order to fuel investment activity and lead to a stable and functioning economy. Since mid-2022, the economy has been fluctuating and the Fed has taken steps to try and stabilize it through constant rate hikes that have a ripple effect on the real estate investment space. The Effect the Markets Have on Investor Activity Since the second half of 2022, interest rates have been on the rise and because of this, they have a heavy impact on real estate transactions. When interest rates increase, the cost of capital increases making real estate investments less profitable and lowers the demand for these assets. This is a prime example of what we have seen happening in the market since the middle of 2022. The consistent and frequent increases in interest rates led to overall lower valuations of assets, having ramifications throughout the market. When interest rates are lower it is the opposite, costs are lower and real estate investments are more attractive. It all comes down to returns on the investments. With higher rates that have continued to rise, projected returns are lower, and the uncertainty on where price points will land on these acquisitions is leading some investors to steer clear. Where will the property value appraise at? How much longer is the Fed going to continue to raise rates? These are questions that many investors are asking, but there are also those investors that can read the market and current trends, and because of that they are looking past the short-term volatility and focusing on the opportunities in the long run. The Trends You Should Look For Whether you are new to the real estate investment space or a long-time veteran, it is important to always have a student mindset. Even in times of consistency in the market, it is imperative to always be prepared for when the market gets more fluid and unpredictable. There are trends and data in the market that investors should always keep an eye on. A good place to start is by keeping an eye on housing supply and demand. In real estate for every action, there is always a reaction, so when supply is lower, demand is usually driven up. The same is said for the inverse, when supply is there then the prices are likely to lower. Looking at housing starts and building permits as well is a great way to stay ahead of the curve. If there is an increase, then that could potentially lead to a rise in housing prices. Also, keeping an eye on migration patterns throughout the United States can be a good indication of market conditions to come. Housing is expensive, especially in big metropolitan areas, and that trend seems likely to continue as prices and rents continue to soar to record levels. Even with the recent efforts to slow down appreciation, there has been little impact to help with affordability. Factors like low inventory and difficulties with new builds contribute to this as well, among other issues. Regardless, people are leaving the expensive areas and moving to smaller, more affordable areas. These are just some of the patterns and trends to be aware of as investors in a changing market. Getting Ahead in a Changing Market Real estate capital markets are the engine that makes that industry run. They provide investors with the opportunity to receive capital in order to help fund their real estate projects, whether that be rehabbing and selling a property or looking to

Fix and Flip

The Fix & Flip Boom

Popularity and Opportunity By Mitchell Zagrodnik In the real estate investment space, there are a variety of avenues one can take to turn a profit on a deal. At the end of the day, what makes an investment worth your time, as well as your money, is the overall return on investment. The ultimate goal is to come out of the deal with more money than you put in. Today, one of the more attractive endeavors investors are taking in order to turn a profit is to purchase an undervalued or run-down property, fix and repair it, then sell the newly renovated property for a higher price. This method is known throughout the industry as the fix-and-flip method. Popularized by HGTV reality shows like “Property Brothers” and “Flip or Flop,” fix-and-flips have become the captivating trend in the real estate world, and a great launchpad for aspiring entrepreneurs looking to break into real estate investing. While fix-and-flip is not a new real estate investing strategy, the current marketplace offers increased opportunities for investors.  If you have not yet considered flipping, it is certainly a good time to look at it from a fresh perspective. The Entrepreneurial Angle The entrepreneurial angle to fix-and-flips is one of the more attractive aspects of the idea. People view the flip business as an exciting opportunity to start their own business and be their own boss. Working for yourself and on your schedule is enticing to individuals in today’s working climate, and anyone with a strong work ethic and networking ability can ultimately pursue and succeed in starting a fix-and-flip business. Even in a space that is growing in popularity and becoming more and more competitive, there are always opportunities for investors to make a splash. Fix-and-flips are so popular now because when done well, they offer high profit margins and can be done in a short amount of time. Speed is the key, both in how you, the investor, get paid but also because the faster the property is sold, the less you pay in interest, and because of that the profit is higher and you can get started on the next deal. The market is there for investors to take advantage of because there will always be buyers, and often, these buyers want to move into a home that does not require them to do any renovation themselves. Know What You Are Getting Into Fixing up a property is not an easy task. There are many factors to consider. The goal is to make renovations that are going to increase that property’s value, whether that is spending money on a new plumbing system or adding a backyard patio using pavers. Having a plan and crunching the numbers is an integral part of turning a profit on a fix-and-flip. When watching the process of these flips on TV, it is easy to sit there as a viewer and say “Hey, that doesn’t look so hard, I can do that,” without fully realizing everything that goes into it. At the end of the day these shows are for your entertainment, so they tend not to show the challenges of the market. Finding the right house, paying for it, and finding the right customer to sell to are a few of the issues these investors can face. With the massive increase in flips going on throughout the country, the opportunity is there for people looking to break into the business and begin their fix- and-flip journey. It is important not to bring a sense of naivety to these projects, so even though they look like quick and fun projects that can lead to massive profits on TV, there is much more that goes into the process. Growing Popularity = More Competition As exciting of a venture fixing and flipping properties can be, the growing popularity and competitive nature of the business can also have its downswings too. You get into something just before it becomes popular, and then after a certain amount of time, everybody is doing it. There are always opportunities for investors that are willing to look, but as the old saying goes, “Timing is everything.” An article written by Diana Olick from CNBC in late December of 2021 directly mentions that the house-flipping market is getting more competitive, while profits are also going down on these deals. Olick states that in late 2021, return on investment on fix-and-flips fell to 32%. Surely, a sharp drop from 2020, where the average return was nearly 44%. Getting into this business pre-pandemic allotted investors various property options, as well as low interest rates, so they can buy these properties, fix them up quick, and then sell them for a nice profit. Now what exactly is factoring into there being less profit? The answer can be attributed to rising interest rates, increased material costs, and frequent supply chain delays. Because of these factors in the market, the investors are having to hold these properties for longer. However, even though the popularity has grown, and the space has become more competitive, there is still profit being made on these deals. It is no secret that 2022 rates are high, and it is fair to say the buyer’s market will potentially shrink again. For investors, the opportunities are out there, and they can make their mark in the industry in times like this while others are backing off. Despite the challenges in recent months, a 30%+ return on investment is still strong. Ample Opportunities Fix-and-flip investing continues to be incredibly attractive in today’s market. When considering the changes in the market, this can still be considered an exciting time to get into fix-and-flip investing. Even with rates rising, these fix-and-flip deals may take anywhere between three and six months, meaning you might only be paying interest on the property within that period anyway. Markets like these come around every so often, and there are buyers who are understandably cautious to dip their toes in. However, there are also

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