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Niche Markets

Private Lending and the Latino Community

The Opportunity for Growth Has Never Been Better By Juan Huerta The rise of private money loans in the USA has changed the landscape of investment opportunities, and investment options have evolved significantly. One demographic harnessing alternative financing methods to access these opportunities is the Latino community. In recent years, there has been a notable surge in the use of private money loans among Latinos as a means to invest and build wealth. CLS Capital is a company founded by four Latinos who have been investing for over 12 years in real estate. Each of the founders has used private financing to build their real estate portfolios. In the last three years of their careers, it became noteworthy that the Latino community has been growing 50% year over year in the real estate investment space. They became aware of this fact by working with the community, educating the community on private lending, and helping interested investors within the community, which is what eventually gave birth to CLS Capital. In the last three months, the amount of traction and interest that has been generated has been much more than originally expected. There is a significant need amongst Latinos to borrow money to build their portfolios and build generational wealth. The private money space has become a great financing alternative for this community. A Change in Investment Patterns In the last few years, many factors have changed within the Latino community; this has caused some of the changes we have seen in the investment patterns of the Latino community. One of those factors is the inflation that has taken place in the United States. It has been a big eye-opener for many Latinos who have been saving up their money in the hopes that they will return to their country someday and retire on those savings. They have now realized that the dollar’s purchasing power has greatly diminished. There are better ways to plan for retirement than holding on to cash, even if they are taking the money back to their countries. The community has realized that they need to utilize those funds to purchase their house and/or use them for investment purposes. Another factor that has pushed this change in the Latino community is the second-generation immigrants who are more aware of investment alternatives in the USA. Freddie Mac and the National Association of Hispanic Real Estate Professionals (NAHREP) have identified the top 25 markets with the most Latinos aged 45 and under who are considered mortgage-ready, ranked by share of those who can afford the median-priced home. Based on this ranking, McAllen, Texas offers the highest opportunity, followed by the Brownsville and El Paso, Texas MSAs. Despite affordability challenges, the rise in interest rates may benefit some first-time homebuyers. While the rise in interest rates compounded affordability issues, it also had a cooling effect on the market, greatly reducing competition. Nearly 50% of the 25 participants in the NAHREP Top Real Estate Practitioners Survey said their first-time buyers had a harder time getting their offers accepted in the first half of the 2022 market than in the second half. In 2022, Latinos formed 628,000 new households, the largest single-year gain in over a decade. Latinos added a net total of 349,000 homeowner households, one of the largest single-year gains for Latinos in the last ten years. This is, in part, important for private money as historical trends show that home ownership is the first step for most Latinos to start building wealth. Due to the barriers that Latino investors and or homeowners have faced, the current interest rates and affordability issues are fine for most of the Latino community. This means that the opportunity for growth for private lending within the Latino community has never been better. Private Lending and the Latino Community For many Latinos, especially those who may face barriers in accessing traditional financing due to credit history or immigration status, private money loans present a viable avenue to participate in real estate and other investment opportunities. This accessibility factor has empowered many within the Latino community to enter the investment sphere, particularly the real estate investment space. Real estate is one of the primary areas where Latinos utilize private money loans. Whether it is flipping properties, purchasing rental units, or investing in commercial real estate, private money loans provide the necessary capital to seize time-sensitive opportunities in a competitive market. Additionally, real estate investment holds significance for many Latinos due to various reasons, such as the following: Cultural Value Homeownership is often highly valued in Latino culture. It symbolizes stability, security, and a tangible achievement of success. Many families prioritize owning a home as a means of building generational wealth and providing a foundation for future generations. Investment in the Future For many Latinos, real estate represents a long-term investment that can be passed down to children and grandchildren. It is seen as a way to secure the financial future of their families and create a legacy. Community and Family Orientation Strong ties to family and community influence real estate decisions. Buying properties in areas where there is a sense of community or is close to family members is often a priority. Entrepreneurial Spirit Many Latinos have an entrepreneurial mindset and see real estate investment as a way to create income streams beyond traditional employment. It offers opportunities for entrepreneurship through property management, rental income, or property flipping. Historical Perspective Some Latino families have experienced challenges in accessing financial services or have experienced discrimination in the housing market. Consequently, owning property can be seen as a way to overcome these historical barriers and create financial stability. Diverse Investment Options Real estate offers a range of investment options beyond primary residence, including rental properties, commercial real estate, or investing in real estate investment trusts (REITs), providing multiple avenues for wealth accumulation. Market Dynamics In some cases, the real estate market may present investment opportunities that align with financial goals, especially when considering factors like property appreciation, rental

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Four- and Five-Bedroom Single Family Rental Homes – THE NEW NORMAL

Meeting the Needs of Consumers, Developers and Investors By Bruce McNeilage In early 2022 I made a prediction. The three-bedroom house would die a slow death. What was once a staple of American construction and homeownership has become as outdated as ‘70s floral couches and wood-paneled living rooms. Consumer demand is pushing builders to create more four- and five-bedroom homes. In addition, existing business conditions make four- and five-bedroom homes the best option for developers and investors. As 2022 played out, my prediction came to fruition. Of the more than 1 million homes constructed in 2022, more than half were four bedrooms or more. That is up from just 25% in 1973. Given current demographics, mortgage rates and work-from-home trends, we expect this trend to continue in the foreseeable future. Older Renters, Work from Home, Drives Need for More Spacious SFR Homes From the consumer standpoint, more bedrooms in a Single-Family Rental (SFR) home makes sense. Most families are clamoring for more space. Millennials, the largest demographic cohort, are entering peak child-rearing years and more space is a necessity. Of course, the global pandemic has played a role in shaping housing trends, as well. More people are working from home and need extra space for one, even two, home offices. More than one-third (35%) of workers with jobs that can be done remotely are working from home all the time, according to a new Pew Research Center survey. This is down from 43% in January 2022 and 55% in October 2020 — but up from only 7% before the pandemic. That’s a five-fold increase in people who need – or likely want – more home office space. While many companies are still hoping to bring workers back to the office, the trend seems to have leveled out. Work from home, in one form or another, is now an entrenched part of the working world and it will continue to impact housing decisions for consumers, builders and investors, alike. Even for a family with only two children, a three-bedroom home no longer has the utility needed for the typical family. Many families are caregivers for an aging parent. In fact, according to Pew Research, 23% of US adults are now part of the sandwich generation — people taking care of an aging parent and a child under the age of 18. These people simply want – and need — more bedrooms, whether they are owners or renters. More families are opting to rent today, as well. The typical age to buy a first home has jumped from 33 years old in 2021 to 36 years old today. It is the oldest ever on record for first time buyers, according to the National Association of Realtors. The rising age is a sign that high housing costs and mortgage rates are pushing homeownership out of reach for younger Americans. Mortgage rates have shot up so rapidly that the average monthly payment on a 30-year fixed-rate loan rose by more than $600 in one year, according to the Consumer Financial Protection Bureau. The CFPB says the average payment for a home purchase loan surged more than 46% — from $1,400 per month to $2,045 — over the 12 months ending December 2022. Likewise, the median total of costs and fees for such mortgages spiked almost 22% to nearly $6,000 in the same period. And with mortgage rates rising to decades-old highs this week, the average monthly payment has almost certainly grown in 2023. This is pushing more people to rentals. Additional Bedrooms Drive up Rental Income, Profits for Builders, Institutional Investors From a business perspective, there is almost no reason for a builder or investor to construct or invest in new three-bedroom homes. If a builder has invested in a lot for $100,000, that is a fixed cost. It is not going to change no matter what they build. A 2,200-square-foot house can be configured with three-, four- or five-bedroom options, so why not go for the configuration that brings a higher profit margin? Won’t an extra bedroom cost more, you ask? Not really. In a 2,200-square-foot house, adding an extra bedroom is a minimal investment up front (approximately $1,000) and will continue to pay for itself over time. Each bedroom can bring an additional $150 per month in rent. That means opting for a four- or five-bedroom house adds $150 to $300 in rent per house per month directly to the bottom line. For builders putting together a Build-to-Rent subdivision, those numbers multiply quickly. A 30-home rental development with five-bedroom homes will yield an additional $100,000 in rent per year. It is as simple as creating a layout that includes five bedrooms. Four- and Five-Bedroom SFR Homes Yield High Occupancy, Positive Cash Flow I have seen this strategy work first-hand. In two of our most recent Build-to-Rent subdivisions, we have opted exclusively for four- and five-bedroom 2,200-square-foot homes in up-and-coming communities. The confluence of demographics (older renters with young families) along with higher home and mortgage costs are pushing more people into high-end rental homes. One key to success is finding cities with growing populations and desirable amenities. Like any real estate transaction, good schools, youth programs, restaurants and entertainment options are important factors. Once you check those boxes, occupancy falls into place. Our occupancy rates are close to 100%, creating positive cash flow, from a demographic of affluent renters with high credit scores. Finally, we anticipate our five-bedroom rentals will add value significantly faster than three-bedroom homes. Whether we hold these assets for one, five or 10 years, the return on our initial investment will be significantly higher with a five-bedroom SFR rental strategy. While no real estate investment strategy is fool-proof, four- and five-bedroom homes show great promise over the next several years. As for the three-bedroom home: You are more likely to see one in the Smithsonian someday.

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