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Acquisitions & Dispositions

Opportunities in Real Estate in 2023

Rentals Will Still Reign Supreme in 2023 By Erica LaCentra Investors probably wish they had a crystal ball to easily predict what the new year will hold for real estate and more importantly, where the biggest opportunities in the market will be. However, even without a crystal ball, predictions are in for what 2023 has in store for the real estate industry. Investors will need to be shrewder and savvier to be able to thrive as the market continues to slump. However, 2023 does not have to be a year of investors waiting on the sidelines in hopes of brighter horizons. There are plenty of opportunities in the real estate market that investors can jump on now. It is just all a matter of knowing where to look. A Year for Buying While 2021 and early 2022 were challenging times to try to buy a property, whether as a homeowner or an investor due to incredibly low interest rates, low inventory, rising home prices and unprecedented demand, 2023 may be a bright spot especially for investors to finally be able to snag properties due to the downturn. Home sales have already fallen quite dramatically at the tail end of 2022 with the National Association of REALTORs reporting that pending home sales “slid for the fifth consecutive month in October, down 4.6% from September 2022’s reported findings” and “year-over-year, pending transactions slipped by 37%.” This drop comes as no surprise due to buyers facing 20-year high mortgage rates with many folks taking a wait-and-see approach to the market in hopes rates will come down or the market will show signs of stabilizing before they make a move on purchasing a property. And this trend is predicted to continue through 2023. In a recent Redfin report, Economist Taylor Marr predicted “existing home sales will fall 16% on an annual basis next year to about 4.3 million—their lowest level since the aftermath of the Great Recession in 2011.” From an investor perspective, this could be the ideal time to find an investment property. As interest rates have risen, and buyer demand has lessened, home prices have also started dropping and are projected to continue to drop below their summer peaks. However, these price drops are expected to be modest over the course of the year but can still be impactful for investors looking to buy. Plus, for the first time in a very long time, there are increases in inventory, something buyers across the board have been clamoring for for years. Realtor.com has predicted that in 2023, buyers should be looking at “an increase in existing home sales, up 22.8% year-over-year, as the inventory refresh that began in the summer of 2022 accelerates.” This perfect storm of less competition in the marketplace, upticks in inventory, and dropping home prices means that investors will have great opportunities to swoop in and purchase their next investment property. Especially if they are not concerned about higher interest rates, as most investors are not, and as long as the numbers make sense, there will be increased opportunities to find properties that can offer significant returns whether in the rental market or in the flip market. Rentals Are Still a Safe Bet Since investors will have greater opportunities to buy in 2023, it is important to also consider what investment strategies are going to pay the biggest dividends based on how the real estate market will fare in the coming year. It appears, even with higher interest rates, investors’ best bets will be buying properties to hold as long-term rentals. For the same reasons the market will be good for investors looking to buy, it will make it more challenging for homeowners that are finally looking to purchase. High mortgage rates with slowly declining home prices plus stagnant wage growth will continue to cause affordability issues for first-time home buyers. Plus, as rents continue to climb and are projected to continue to reach new highs, this will leave even less ability for many to save for a down payment for a home. Many people who may have been waiting to buy a home will have to continue to wait and be forced into renting for another year. Investors that are looking to put their properties to work will have ample opportunities to do so if they set them up as long-term rentals. Also, with predictions that many major companies will continue to push to have employees in office more frequently than in past years following the pandemic, this will cause increased rental demand in major markets where buying a home is completely unaffordable for most. Plus, with travel restrictions being a thing of the past and with most people no longer concerned about COVID, this could also be a great opportunity for investors to consider purchasing and operating short-term rentals in major cities to diversify their portfolios. So, whether investors choose to do long-term or short-term rentals, it seems like rentals will still reign supreme in 2023. Optimism in the New Year While there has been tremendous concern about what rate hikes from the Fed would spell for the real estate industry and threats of a recession looming, 2023 does not appear to be all doom and gloom. There will still be tremendous opportunities available in real estate for investors. It will just be a matter of adjusting strategy, making sure the numbers work, and knowing where to look.

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Maximizing a Challenging 2023 Housing Market

Technology Can Help Those Who are Still Looking to Find Opportunities By Tim Reilly The real estate market has changed dramatically over the last year. With home price appreciation softening market-to-market and inflation running wild, something had to give. Successive increases in mortgage interest rates beginning in the second half 2022 put the brakes on the previous year’s unprecedented homebuying activity as the housing market shifted into a new ‘price discovery phase.’ Consequently, the single-family rental (SFR) and fix/flip investor activity which represented 4-5% of the total purchase market began to slow down as well. According to CoreLogic data, SFR growth has decelerated in the second half of 2022. A Redfin report also confirmed investors are retreating from the purchase market. According to the report, real estate investor purchase activity fell 30% in the third quarter. Rental growth is beginning to soften as well. Based on an analysis of the CoreLogic Single-Family Rent Index, Hunter Housing Economics is forecasting rent prices will decrease slightly across the country in the first half of 2023. It will require investors to fine-tune and consider the drivers of their portfolios more carefully. Looking back on 2021, investor participants enjoyed the macro-benefits of a booming market like all boats rising during the high tide. Now, as a result of the cooling housing market, cap rate and ROI pressure is impacting purchases unevenly throughout differing geographic markets. Persistent inflation coupled with more expensive capital repair costs, have suddenly made acquiring, rehabbing, and pricing a rental or flip property a more challenging puzzle for even the most experienced investor to solve. Welcome to the “new normal.” However, analysts are still favoring the SFR market as demand for rentals is expected to grow. The shortage of affordable homes combined with mortgage rates trending above 7% continues to make purchasing a property difficult for many would-be buyers. According to Realtor.com, the gap between single-family home constructions and household formations grew from 3.84 million homes at the beginning of 2019 to 5.8 million homes as of September 2022. It is a factor driving growth in the SFR market, as well as a shift in sentiment towards renting. A new suburban renter who values the flexibility and ease of renting has emerged from the pandemic and is here to stay. Renting well managed properties can offer a high standard of living without the commitment and expense of owning a home. And the growing trend appears to be transgenerational—from Gen-Z to Millennials and even Baby Boomers opting for the no-maintenance living offered by SFRs. As history teaches, where there is demand there is opportunity. Investors who continue to find opportunities amid the turbulence are more likely to thrive through this slowdown. One thing SFR investors, owners and developers can do to position themselves for success and prepare for the road ahead is put technology and property data to use. The right tech stack and data resources can help stabilize portfolios, maximize a variable operating cost structure while enhancing operational efficiencies, and refine acquisition and/or disposition strategies. Below are some methods for investors to do just that. Finding Acquisition Opportunities As home prices begin to fall in certain metros but continue to appreciate in others, investors have the more difficult task of identifying which opportunities will yield a good return. The latest proptech embedded with artificial intelligence (AI) may be able to help in a number of ways: »          Pinpoint desirable SFR market locations where property values are stable or appreciating. »          Create a personalized buy box with intelligent search functionality to quickly sort through available investments based on specific property characteristics. »          Use computer vision AI to instantly estimate the condition of properties. »          Estimate the cost of repairs and property value after improvements are made to quickly establish potential ROI. Property Maintenance  Single-family renters have higher expectations for the quality of finishings and responsiveness to property issues. To help you get top dollar for your rentals and retain tenants, a platform that includes automated workflow, assignments, and access to a network of qualified contractors can help you streamline your property management operations: »          Scope renovations and repairs to allocate budget and timelines appropriately. »          Access a network of vetted contractors to quickly dispatch a qualified professionalto complete repairs. »          Use AI to compare the condition of your properties to comparables in the same market. Portfolio Management As the market fluctuates, asset managers need flexible technology that allows them to focus on strategy rather than executing the thousands of repetitive tasks required to effectively manage their portfolios. The best asset management technologies leverage automation and task-driven workflows to simplify complex processes, track progress and proactively manage portfolios. This helps users more easily execute and manage their strategies, from acquisition through renovation, listing, management, and disposition in the following ways: »          Customized rental management workflows can help manage specific scenarios for property maintenance. »          Track KPIs to monitor property performance and manage expectations. »          Execute your disposition strategy for properties that are underperforming or in higher risk markets. Onboarding and learning new technology can understandably feel like a daunting exercise. However, adopting a new technology solution may provide the competitive advantage savvy SFR investors are looking for as the market becomes more complex. Working with a provider like homegenius Real Estate that has invested in the latest advancements in automation, machine learning, and data science can help you take a proactive approach based on real-time micro-market data. While others are choosing to “wait and see” how the market performs, you can get ahead of them by optimizing your strategy now. Ultimately, nimble technology is a critical investment for SFR investors and asset managers to successfully navigate the market slowdown.

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Are High Prices and Low Inventory Changing the SFR Market?

by Rebecca Smith It is fair to say that never has a New Year been so anticipated or so welcomed. 2020 was unprecedented and challenging for almost everyone. The coronavirus threatened the health of millions of people and economies around the world. In our industry, the market for single family rentals (SFR) was buffeted by changing preferences and grim market realities. That did not put a halt on activity. On the contrary, low rates and available liquidity meant a very active year in SFRs for owners and lenders alike. Not only did the market see a record-breaking number of securitizations completed during the year, but it also saw the largest securitization ever to come to market—more than 14,000 assets—successfully close in 2020. REIT Performance SFR Real Estate Investment Trusts (REITs) have been one of the top-performing real estate sectors throughout the pandemic. This was due to several merging factors and secular trends, including the migration of the millennial generation, the largest age cohort in American history, out of cities. These factors are putting enormous pressure on the market and changing the way some industry players are pursuing acquisitions in what looks to be a period of dwindling opportunities. Across the country, inventories are low, and prices are high, as existing homeowners stay put to ride out the pandemic and urban renters move to the suburbs to rent or purchase homes themselves. Adding to the pressure, U.S. private equity real estate funds are sitting on more than $150 billion of unspent cash according to Green Street, a real estate advisory firm, as reported in The Wall Street Journal. With core holdings such as hotels and office buildings having uncertain prospects, fund managers are increasingly looking to single-family homes for growth. The Operators So, how are these pressures affecting operators? Some are changing up their buy boxes and exploring new markets.  The challenge of acquiring in the current market remains in terms of increased prices and low inventory. However, “self-made” challenges to growth strategies are adding to the pressure. With the eagerness to securitize at the current rates, many of the larger aggregators have exhausted their current inventory which has also led to a scramble to acquire new inventory in bulk through M&A activity.  With so much money chasing limited SFR opportunities, something needs to give.  We are seeing that play out among mid-sized operators. Because of a severe lack of inventory, these industry players are turning to each other for growth to increase acquisitions, grow portfolios, and eventually securitize. In October, for example, real estate manager Pretium Partners LLC and Ares Management announced a $2.4 billion investment to acquire and take private Front Yard Residential Corp. In other cases, mid-size operators are leaning heavily on portfolio acquisitions from smaller operators and competitors to achieve their growth targets. Some of the larger institutional players are overcoming the inventory shortage by creating it themselves. In the Las Vegas area, one of the biggest landlords, American Homes 4 Rent, built two rental projects totaling more than 65 houses in 2020 and is planning more this year. And that follows a similar pattern of build to rent properties across the country. The industry is watching closely to see what happens to available inventories when COVID-related foreclosure and eviction moratoriums are lifted as expected early this year. However, with more homeowners having greater equity after a year of explosive appreciation and the sheer volume of forbearances in effect, the potential for further market gyrations is unknown. Regardless of what happens this year, 2020 marked the maturation of single-family rentals into a recognized and highly valued asset class. That may be the one constant in a highly dynamic market. 

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You Can’t Buy What’s Not for Sale

Will Investors Find Inventory in 2021? by Rick Sharga One of the biggest challenges facing real estate investors is the lack of available inventory. According to the National Association of Realtors® (NAR), the number of homes for sale at the end of October 2020 was 1.42 million units, down 2.7% from September and down almost 20% from October 2019. The NAR report notes that unsold inventory is at an all-time low of 2.5 months’ supply, down from 3.9 months a year ago, and almost 70% below the 6 months of inventory available for sale in a normal, healthy housing market. Investors also find themselves in intense competition with homebuyers, who have returned to the market with a vengeance after staying on the sidelines due to the shelter-in-place orders issued after the COVID-19 pandemic was declared in March. Homebuyer demand is being driven in part by demographics, as Millennials reach prime homebuying age, and in part, ironically, by the pandemic itself. Searching for more space to accommodate the need for home offices and healthier environments for growing families, renters are abandoning high-cost, high-density urban markets to become homeowners in the suburbs. All of this demand increases competition for the limited number of properties for sale, driving prices to all-time highs – a daunting challenge for investors, whose profits depend on their ability to buy cost-effectively. The NAR report notes that the median price of a home rose to $313,000 in October, up 15.5% from the prior year. The California Association of Realtors® (CAR) reported sales results that were equally challenging for investors. Median home prices in November “dipped below $700,000 for the first time in four months.” But at $699,000, prices were still more than 18% higher than in November 2019. CAR also reported that inventory, at less than one month’s supply, was the lowest it’s been in over 16 years, and properties listed for sale were typically purchased within 9 days. For homebuyers, the record high home prices have been offset by historically low mortgage rates—Freddie Mac reported rates as low as 2.67% on a 30-year fixed rate mortgage and 2.21% on a 15-year fixed rate loan. These rates, however, have also increased demand, which ultimately will raise prices beyond affordability for many owner-occupants, and dramatically reduce margins for investor buyers. Low inventory, high demand from consumer homebuyers and escalating prices combine to make a fairly toxic environment for real estate investors. Will 2021 be any better? Is Help on the Way from Homebuilders? Homebuilders are benefitting from the surge in demand from buyers, with new home sales well above 2020 forecasts. New home construction has lagged behind historic levels ever since the Great Recession, with many economists suggesting that there was a housing deficit of between 300,000-400,000 per year for the last few years. In recent months, however, single family housing starts and building permits have both been heading in the right direction. According to Census Bureau data, there were almost 1.2 million single family housing starts in November—a 27% increase from the prior year, and the highest number of single family starts since 2007.Housing permits were up 8.5% year-over-year, with 1.1 million of those permits issued for single family homes. Most new home inventory will go to owner-occupants rather than investors; but adding a million or more new homes to the housing stock in 2021 will free up existing homes from “move up” buyers, which should make at least some properties available for investor purchases. Will Sheltering-in-Place Result in a Surge of Homes for Sale? Why is the inventory of existing homes for sale at record lows? Many industry analysts believe that COVID-19 has been a major reason. Research suggests that many homeowners are reluctant to put their properties on the market during the pandemic, as they’re uncomfortable with strangers traipsing through their homes. Similarly, homeowners who might be inclined to sell their homes aren’t excited about the prospect of visiting other properties, owned by people they don’t know. And finally, many people are concerned about the stability of their jobs due to the pandemic-induced recession and have decided to stay put rather than buy a new home and take on a larger financial commitment. It’s reasonable to assume that at least some of the homeowners who have been sheltering-in-place will decide to sell their homes in 2021, once it seems like the pandemic is under control. While the inventory of homes for sale has hovered around 4 months’ supply since 2016, even a return to that level would bring many thousands of properties onto the market, providing much-needed relief to the severe supply/demand imbalance that exists today. Will Distressed Properties Flood the Market? There will definitely be an increase in mortgage defaults—to suggest otherwise in an economy that shed 20 million jobs would be ridiculous. But investors shouldn’t count on another foreclosure tsunami in 2021, or an over-abundance of deeply discounted properties to choose from. First, the CARES Act virtually eliminates foreclosure activity (specifically on the 65% of mortgages that are backed by the government) through the end of 2020, with a high probability of this moratorium being extended for at least a few months. Separately, the mortgage forbearance program included in the Act has probably spared several million financially-impacted borrowers from facing default by allowing them to defer mortgage payments forup to 360 days. What happens when these programs unwind? Well, according to the Mortgage Bankers Association, more than 87% of the borrowers who exited from the forbearance program between July and early December did so successfully – having their loan reinstated or having a repayment plan in place. If those numbers hold through March 2021, when the majority of borrowers in the program are scheduled to have exited, it means that approximately 325,000 borrowers will leave forbearance at risk of default—a large number, but nothing like the millions of loans that were foreclosed on during the Great Recession. There were about 250,000 loans in foreclosure prior to the pandemic, before the various moratoria were

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The Importance of Including HOAs in Your Due Diligence

Your real estate due diligence checklist isn’t complete if it doesn’t include homeowners’ associations. The need for due diligence in real estate transactions should go without saying, but many buyers fast-track through some important areas of the process. Whether you’re a first-time homebuyer or an investment institution, ensuring your due diligence stage is thorough and complete is nonnegotiable. Most, if not all, real estate transactions have similar pathways to closing day. General due diligence items include inspections, appraisals, insurance verification and title searches. These items are essential to making appropriate homebuying decisions, and they often must be carried out within 10-17 days from acceptance of the offer. Homeowner Association Due Diligence For most transactions, the process can seem straightforward, but for the more than 53% of properties belonging to a homeowner association, the task list can grow long quickly. According to HOA USA, there are more than 351,000 homeowner associations governing homes across America. Buyers purchasing in a condominium, cooperative or planned community must look at several aspects of that association before signing on the dotted line. Homeowner associations can affect several aspects of your investment, including your resale value, rental cash flow and overall marketability. So, what must you do during the due diligence stage to make a sound investment? Homeowner associations are governing bodies, controlled by a homeowner-elected board of directors, to carry out the daily business of the community. Whether for a townhome, condominium or single-family home, homeowner associations are in place to create a standard, maintain communities and enforce rules. Directors can use their governing documents to carry out those functions and establish the standard each new member must abide by. These documents are referred to as CC&Rs—covenants, conditions and restrictions. Covenants, Conditions and Restrictions Requesting the governing documents and reviewing them is vital in the due diligence efforts, particularly for investors evaluating a property’s ROI. The CC&Rs will dictate whether a property has: 1)  Rental restrictions 2)  Pet restrictions 3)  Resident Behavior standards Visitor hours Community access Common area manners Vehicle registration Exterior storage Noise-level compliance Holiday decoration Architectural modification requirements While most of the information needed will be in the governing documents, it is not the only set of documents that should be evaluated. Other documents that can provide a better sense of how the association is run, what repairs or projects are upcoming and an overall sense of the community are the board meeting minutes and community newsletter. Financial Statements and Budgets Homeowner associations run like businesses. As such, they have financial components that need to be reviewed to ensure financial stability. Assess-ment of the association’s financial statements and budgets can provide better insight as to how effective the association is running the community and the impact it could have on the property’s value. Items represented as bad debts and misallocation of capital expenses should be of utmost interest. These are indications of the association’s financial distress or mismanagement. Ensure the association has sufficient reserves. A reserve study provides insight into the association’s ability to use assessment funds for both operating expenses and long-term repairs. Insufficient assessment dues collection and lean budgets can often lead to HOA-imposed special assessments, leaving owners to cover a portion of large repairs. According to an article in Investopedia, “a good standing association will have 25% gross income in reserves for emergencies and repairs.” Insurance Master Policy It is important that the association’s master policy has coverage that can extend to the individual unit or home. Review the policy carefully, noting what is or is not covered and whether additional insurance for the property is required. It is important to understand what insurance coverage is available and provided through your assessment dues. Statement of Account Known throughout the U.S. as a demand letter, paid assessment letter, resale document, etc., the statement of account gives you the breakdown of all the association’s fees and charges to the homeowner. Additionally, it will provide you with an overview of where the account currently stands and an opportunity to review any violations that should be corrected before closing. This includes potential fees for nonpayment and violations. Board Litigation History Homeowner associations can find themselves in various litigation matters. These matters can affect both the seller and the buyer. While disclosure laws exist for each state, requesting information regarding any litigation issues is important when determining if a property is a good investment. Some common litigation issues for associations can be tax issues, contractor liens and owner unpaid dues. An article on Investopedia states that “some condo and homeowner associations have been forcedinto bankruptcy for unpaid HOA dues.” This can have implications on the property’s earning potential, resale value and rental property return. Purchasing Property Within an HOA Regardless of where the property you may purchase is located or how the property is governed (homeowner association or not), due diligence is a key component in real estate transactions. When purchasing a property, it is important to ask yourself questions that will shape your decision. For investors, it is important to ask: 1)  How can the HOA’s rules be modified or amended? 2)  How is the HOA board elected (or removed)? 3)  What ownership does the HOA board hold? 4)  How are HOA meetings called? 5)  What are the consequences of any violations of the HOA’s rules? 6)  What is the renter’s application and approval process? Buying a home is a major decision, and due diligence should always be part of the equation. For those purchasing to live in a property, you want to know your property is free of any major issues or damages and that there will not be any surprises. If you are purchasing as an investment, ensuring it will make money even before buying it is crucial. And, while due diligence may look different for individual homebuyers and investors, ensuring proper time and effort is allocated remains the same.

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Tapping into Trillions

Using self-directed IRAs for private funding Whether you are a first-time homebuyer, an experienced fix-and-flipper or an expert in rentals, there is always a need for funds. Investors will always need money for deals, and sometimes traditional bank loans aren’t available to everyone. Or others just prefer the flexibility of setting their own terms on a deal. Although there are plenty of options available for private financing, many investors prefer self-directed IRAs (SDIRAs) to fund their deals time and time again. Did you know you can easily create your own private financing source when you establish a relationship with a private money lender that utilizes an SDIRA? The potential to have the funding within days is just one of the many exciting possibilities afforded by the money-borrowing aspect of self-directed IRAs. Best of all, SDIRA loaning allows the SDIRA lender and the borrower to decide on the terms of the investment together. According to a recent study from Investment Company Institute, $28 trillion are in retirement assets. Of that, $9.2 trillion was reported to be in IRAs alone. With that much money available for use in IRAs, it’s nearly impossible not to be curious about how to use those funds for private funding. For lenders and borrowers alike, private loans with SDIRAs have provided opportunities for successful deals and have given investors options outside traditional bank loans. So, whether you’re looking to borrow private funds or loan out your own, here is everything you need to consider. Why Use a Self-Directed IRA for Private Funding? As mentioned, sometimes a traditional loan from a bank or hard money lender just doesn’t work for unique funding situations. Especially in a market like real estate, in which investors seek creative strategies, having a private financing option is almost necessary. With a self-directed IRA, investors can loan out their retirement funds on their terms, as decided and agreed upon with the borrower. These agreements are usually more customizable than regulated bank loans, and typically the interest rate works out in favor of both parties, making it a great investment for a lender and their SDIRA. Decisions about everything from the principal amount, interest rate, time period, collateral and frequency can be made together, between the lender and the borrower. Flexibility is a huge benefit when using private funding from an SDIRA. The time frame to have a private loan funded is one of the many advantages that draws investors to this outlet of private financing. Whereas applying for a traditional loan can be a lengthy process, getting funds from an SDIRA lender can take less than a week, depending on the IRA custodian. Another advantage is being able to pool IRAs and individuals together for a loan if one party does not have sufficient funds to meet the loan amount. The flexibility of a private agreement makes it possible for two or more IRAs or people to come together to supply the total amount to loan out. A benefit for lenders is they get a tax benefit and possibly higher returns than traditional investments when loaning with their SDIRAs. Due to the simplicity and ease of private loans, they have become one of the most common SDIRA investments. This means private funding is not projected to ever be in short supply. Considerations When Private Lending and Borrowing With Self-Directed IRAs Just as banks have a certain set of criteria when vetting someone for a loan, private lenders typically will as well, although the requirements are usually different and fewer. Factors a private lender may consider are the borrower’s credit scores, the investment loan to value ratios, the amount of time the investment may last and, in the event the money is not paid back, whether the investment is something the lender would want to own. These are just a few considerations a lender may have. As a borrower, it is wise to have a success book (if applicable) and be able to properly present your investment. Usually there is a higher approval rate for borrowers seeking a private loan versus a traditional loan. How to Get Private Funding From a Self-Directed IRA The first step is to find a lender that has an SDIRA established or is willing to go through the steps to establish a retirement account with an SDIRA custodian. Once the lender and borrower have agreed upon the terms of the investments, investment documents such as the promissory note are drafted and submitted to the IRA custodian. Custodians will differ on their steps to fund the loan, but generally once the investment documents are reviewed and signed, the custodian will issue the funds to the borrower from the IRA. The borrower will then make payments, according to the frequency and amounts agreed upon in the loan, back to the IRA. It is important to remember that an SDIRA is its own legal financial entity, which makes the SDIRA the lender, not the account holder. All the income goes back into the SDIRA. Borrowing from a bank can be time-consuming and stressful, but private lending doesn’t have to be. Private loans with an SDIRA are great investments proven to benefit all parties, from those seeking private funds for their deals to the SDIRA lenders themselves. If you have questions about how SDIRAs can be a source of private financing, be sure to give an IRA specialist a call at an SDIRA custodian you trust.  

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