Fix and What?
Buy-to-Rent is Here to Stay…At Least Until the Next New Normal
By Glenn Brooks
It is no secret that property acquisition and disposition are tough subjects right now. Until recently, residential real estate investors were able to keep buying, remodeling, and selling single-family homes with great returns and not a worry in sight. But then 2020 happened and this once-reliable investment model got turned on its head. The landscape of this business has been remade with new challenges and new opportunities. The way forward lies in understanding what led to this point and in examining best practices that will help you navigate this new ‘new normal.’
The first sign came with the emergence of COVID-19 and the accompanying geographic shifts and lifestyle trends across the country. Those involved with property acquisition and disposition on a large scale began to struggle to get contractors to take bids and stick to bids. This significantly cut into margins and was not the only looming trouble spot. Due to the rising costs of raw materials, skyrocketing housing prices, and the tripling of construction expenses, many in this field ended up having to sell assets as-is. Suddenly the fix-and-flip template that had worked so well for so long was not exactly working anymore.
The Move to Buy-to-Rent
During periods of economic uncertainty, investors trend toward the safest bet. Which, starting in the middle of 2020, meant moving from fix-and-flip to buy-to-rent. This switch to buy-to-rent was made more enticing by the fact that the national average for monthly rents have soared 13% since last year. Additionally, single-family rental properties require a lot less cash upfront for repairs than homes that are flipped for sale. Just two years ago the average costs to renovate a single-family home were around $120,000- $150,000, while the average costs to renovate a rental were significantly less, ranging from $30,000-$40,000. And these fixes were largely cosmetic rather than high-end. Think new flooring and bathroom repairs rather than big structural changes.
One recent real world example is from an individual with a traditional fix-and-flip project that could not be completed due to increasing prices of construction. When an institutional investor took a look at the deal, they too determined that it would be much cheaper to complete basic repairs and more profitable to rent the home rather than putting it up for sale. A few years ago it would be largely unheard of for investor clients to opt for rental income over income from a sale but that has surprisingly become the more reliable move as 2021 draws to a close.
As mundane as it may seem, the permitting process has also been a factor that has led to an increase in investors buying to rent. Two years ago permits for major home renovations before sale were taking upwards of six months. But for rentals that time is much shorter – 30 to 45 days, and in some cases, permits are not needed at all or can be obtained before even starting construction. Beyond that, a lot of time can be saved by ordering things like appliances, windows, and cabinets while waiting on permits.
Investors Need to be Reactive
When it comes down to it you need to be able to react to what you are seeing in the market. There is increased competition for distressed properties since REO and foreclosures have mostly been put off due to pandemic-related moratoriums. And anyone who is aware of interest rates knows that money is cheap right now, so to speak. There are so many players in fix-and-flip lending and all different sources of financing available that local investors are snatching up properties before national investors can get wind of opportunities. This all has made it even more difficult to acquire properties and led some to buy directly from homeowners. As a result of all these realities there is more stock in the rental market than from old stalwarts in the form of distressed fix-and flip-subjects and this has become yet again another ‘new normal’ for our industry.
Fortunately, things are beginning to normalize and acquisition models for both single-family rentals and single-family fix-and-flip will play well throughout 2022-2023. Homes are staying on the market a little longer and there has been some slight reduction in overall home prices. Moreover, we are beginning to see normalized pricing of construction materials, which are more readily available. There have still been some supply chain issues surrounding home appliances but if you are smart and order things in advance, it is generally not a problem.
In some ways things feel a bit like 2007 again, except this time homeowners have equity and that is a very good thing. There is more inventory coming online and there are not as many bidding wars as there were even a few months ago. Plus, investors and buyers have the time to conduct the proper due diligence before going under contract. And there is profit availability on the horizon in 2022. As long as houses do not start depreciating, things in the broader market should remain stable and buy-to-rent is here to stay. At least until the next new normal.
