REI INK

National Real Estate Insurance Group

Investment Property Insurance That Just Makes Sense By Carole VanSickle Ellis For most people, property insurance is a “given.” After all, homeowners know that failure to insure what is likely their most valuable asset could cost them literally everything, and most renters have been admonished to obtain renters’ insurance upon signing every lease in their renting history. While not every homeowner or renter opts to obtain insurance, it is nearly universally acknowledged that potential losses are very, very serious if a policy is not purchased or is not a fit for the situation. However, for real estate investors who may own multiple properties at a time and implement a vast array of strategies using those properties, the stakes are exponentially higher. Yet, most investors lack a full understanding of the types of insurance they may need based on their investment tactics and how to know if they are even fully covered. “Property insurance is a volatile and sometimes crazy market, and it has changed particularly drastically in the last five years,” said Brooke Beets, COO at National Real Estate Insurance Group. NREIG has been providing custom insurance products for real estate investors since 2008, and prides itself on the ability to provide solutions for nearly every type of residential investment property. “That is all we do,” Beets continued, “whether our clients are using creative acquisition strategies or purchasing properties using individual retirement accounts (IRAs) or trusts. We focus on what our clients need and then tailor our business to suit that.” While most homeowners may achieve a relative level of security simply by obtaining a basic policy with one of thousands of property-insurance providers, real estate investors take on a more complicated and substantial level of risk when acquiring a property for investment purposes. Beets explained real estate investors have nearly boundless creativity and must, of necessity, insure the properties they acquire even when the transactions are unconventional. “We have clients that purchase using retirement accounts and trusts, via subject-to agreements or non-performing notes, using conventional financing methods, and using countless variations and combinations of these strategies,” she explained, noting that the insured assets themselves can have unusual insurance requirements as well. “Clients do not just purchase long-term rentals. They also purchase vacation rentals, corporate rentals, fix-and-flip properties, mobile homes, module homes, and condominiums, to name a few,” Beets said. Naturally, real estate investors also must insure higher volumes of properties than the average homeowner. To address that, NREIG increased its offerings for larger properties from between one and four units up to 20. “The key is to make sure that the right policies are in place for a property, that adequate coverage is in place, and that every party that should be named on the policy is named,” Beets said. “It’s our job to make sure that this happens and that the client knows exactly what they need and how to get it.” Strategies & Processes that “Just Make Sense” When NREIG founder Tim Norris first started out in the insurance industry, he quickly realized there was a gap in the market when it came to the specialized services real estate investors need. As Norris began investing in single-family and commercial properties, his understanding of the unique requirements that go along with real estate investing led him to fill that gap with NREIG. Shawn Woedl, who worked alongside Norris from the beginning and was named CEO of NREIG prior to the founder’s retirement, shares Norris’s passion for innovation and belief in the absolute necessity of this trait when it comes to working with real estate investors. One of his most-often repeated mantras is, “The most dangerous phrase in the language is, ‘We’ve always done it this way.’” The key, according to NREIG, is to do things the way that best serves the investors, and that means making sure that their policies truly make sense for the work they are doing. Part of making sure real estate investors get exactly what they need involves constant monitoring of everything affecting not just the housing market, but the insurance industry as well. That is where Jason Jones, NREIG’s senior vice president (SVP) for Risk Management, comes into the equation along with his team. “One of the most important things we do is monitor trends in claims to see if something has been left on the table,” Jones said. He explained that this data often indicates areas where property owners might need enhanced or more varied coverage before the owners themselves are aware of the issue. When this type of trend emerges, such as in a case where an area is experiencing increased flooding, then NREIG negotiates for more coverage for flooding with its carriers. “We deal with risks and trends on a day-to-day basis just like real estate investors do,” Jones concluded. “We prioritize identifying and making changes that will make us more efficient and sustainable while doing the same for our clients.” Jones added that communication is a crucial part of effectively helping real estate investors insure their properties, noting investors should make a point of opening channels of communication with their insurance providers so that everyone involved in the process is on the same page about the state of the asset and the investment strategy in place. “Just in my position alone, I work with compliance, underwriting, and marketing regularly to communicate about the things we are finding every day,” he said. “These divisions – and others – are tasked with working with clients to make sure they are covered correctly in light of our findings. We love to offer our clients nuanced coverage tailored to their situations.” Woedl recalled how an investor who remains an NREIG client to this day “nearly got destroyed on a property claim” because his insurance agent at the time (not NREIG) failed to explain how his insurance benefits would actually manifest in the event of a significant loss. The client, who had opted for extremely high deductibles, bought multiple policies that would not

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Kansas City, Missouri

2024 Could be a Great Year for the “City of Kansas” By Carole VanSickle Ellis As early in American history as 1803, Kansas City, Missouri (KCMO), was attracting new residents thanks to its location, which was, as explorers Lewis and Clark put it, “a good place to build a fort.” Not long after this report reached New York state, the city was formed by a group of settlers led by Latter Day Saints founder Joseph Smith. Although Smith and his followers spearheaded early development and built the first school within KCMO’s city limits, they soon left the area to trappers, traders, and ferrymen, who eventually expanded the municipal area to include multiple small ports and attracted other businesses and residents to the area. By 1853, when the “City of Kansas” was created in the state of Missouri, KCMO was well on its way to becoming the vital center of trade, logistics, technology, and manufacturing thatit is today. “Kansas City is now emerging as a growing market for real estate investments,” observed founder and CEO of Norada Real Estate Investments Marco Santarelli in November 2023. He cited the city’s recent downtown revitalization project and relative affordability as key attributes attracting both real estate investors and retail buyers to the area. “More than $6 million has been spent giving the downtown area a facelift and a new makeover, including apartments, offices, and condominiums,” Santarelli said. He continued, “These facelifts have also been done in both indoor and outdoor malls, restaurants, and places for concerts, plays, and other forms of entertainment…making Kansas City properties appealing to investors and homebuyers who are looking for gains or cash flow.” Kansas City, like many other areas of the country, is currently experiencing a housing crunch, which, in combination with its relative affordability compared to other regions, is creating a single-family rental market primed and ready for new residents from out of town. According to the Kansas City Regional Association of Realtors (KCRAR), residential homes are spending just over a month on market (up just over 15% in November 2023 year-over-year) and average sales prices are also still rising, up 9.6% year-over-year. However, more than 9% fewer sales are actually closing, and housing supply is on the rise, albeit still quite low at 2.1 months. This is more than 10% higher than the same time last year, however, and home prices are still rising. Job Growth, Remote Work & Great Expectations Thanks to burgeoning job numbers in the KCMO area, especially in the tech and IT space, many analysts say 2024 could be a strong year for Kansas City real estate and local employers. With fully 20% of Kansas City workers reporting they are full-time and working remotely, the area is full of households seeking residential options that provide enough space for a home office and a family. “The geographic decoupling of worker and workplace is here to stay,” wrote KC Tech Council president and CEO Kara Lowe in the group’s KC Tech Specs report published midway through 2023. She added, “[This is] evident in both the increased share of hybrid or fully remote tech job postings and the increased migratory patterns of college degree holders moving from the largest coastal tech hubs toward mid-sized cities across the United States.” Lowe noted that in 2023, KCMO “hiring is up, tech workforce has grown, and Kansas City is importing more college graduate-level talent than any time in the last couple decades.” In the report, KC Tech Specs predicted the momentum KCMO generated during the COVID-19 pandemic and built in the aftermath would likely result in growth in the digital health, cybersecurity, tech infrastructure, and tech manufacturing industries in the area in the coming years. Evidently, the current presidential administration agreed, naming KCMO one of two Missouri “future technology hubs in the United States” in late October 2023. The designation comes with the opportunity to compete with 29 other tech hubs throughout the country for up to $75 million in “implementation grants” intended to help local businesses and municipal organizations further develop “innovative industries” including semiconductors, clean energy, critical minerals, biotechnology, precision medicine, artificial intelligence, and quantum computing. KCMO’s Kansas City Inclusive Biologics and Biomanufacturing Tech Hub, which is led by BioNexus KC and operates in both the Missouri and Kansas portions of the metro area, was specifically cited as “a global leader in biologics and biomanufacturing, increasing domestic production of life-saving vaccines and other preventative technologies.” With the support and ongoing growth of attractive, well-paying jobs in the area and a housing market that may be a little too tight even for high-earning professionals, KCMO will likely continue to be a strong performer for long-term rental owners in 2024. Missouri has long been considered a “landlord-friendly” state thanks to relatively lenient laws governing rent control and evictions, but KCMO does have stringent regulations in place for short-term rentals like Airbnb and VRBO properties. Short-term rental operators must apply for a license or face penalties, and non-resident short-term rentals cannot be located within 1,000 feet of each other or surpass 25% of the units in a building. Short-term rentals in residential neighborhoods are, in some areas, entirely banned. The regulations are intended to reduce Airbnb issues in neighborhoods and free up housing for long-term residents, both owners and tenants. “When the number of homes are being removed from the marketplace to be used as short-term rentals, it really eliminates housing opportunities for Kansas Citians,” explained local neighborhood association president Laura Burkhalter, who supported the restrictions. Local investors, however, say the restrictions can be difficult to navigate and dislike new taxes and fees imposed on short-term rental properties. With rents projected to rise for long-term residential rentals in KCMO in the coming months, short-term rental owners may elect to make a shift to longer leases rather than exit their investments in the area. As of Q3 2023, rents on single-family residential (SFR) homes had risen 4%, and, while that increase is relatively low compared to adjacent Kansas City, Kansas,

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Navigating Financial Distress in Real Estate

The Power of Rescue Capital Loans By Ruben Izgelov After a prolonged period of elevated interest rates, many investors are experiencing higher-than-budgeted interest obligations. Many investors are unable to refinance maturing debt because their properties do not cover the debt servicing requirements used by most lenders. An emerging solution for what we forecast will continue to be a tremendous hurdle impacting investors in 2024: rescue capital loans. Rescue capital providers stand out for their ability to offer a lifeline to real estate investors in distress. A nationwide Private Lender and member of the National Private Lenders Association (NPLA), We Lend, offers a Rescue Capital Program as an innovative solution for property owners facing foreclosure. The program is specifically designed to offer a timely and efficient financial buffer. In the current economic landscape marked by uncertainty and fluctuating market dynamics, the role of rescue capital has become increasingly pronounced. With the Federal Reserve’s interest rate hikes as a response to inflation, the cost of borrowing has significantly increased. This shift has particularly affected real estate investors, who now face the challenge of refinancing their debts amidst a tightened lending environment. Rescue capital loans, often a lifeline in such scenarios, are becoming a go-to solution for many investors. These loans are particularly crucial in bridging the gap during times when traditional funding sources become inaccessible or too costly. The Rising Need for Rescue Capital in Real Estate The rise in foreclosure rates stemming from an inability to refinance COVID-era bridge loans has thrust the need for a prominent rescue capital program to the forefront of investors’ minds. We Lend’s program, and those like it, have become an essential cog in sustaining a healthy real estate ecosystem. The recent increase in foreclosure rates is a direct consequence of the economic aftershocks of the pandemic and subsequent inflationary pressures. Many real estate investors, particularly those who had leveraged their investments based on pre-pandemic market conditions, now find themselves in a precarious position. This is especially true in areas where the real estate market has not rebounded as expected or where rental incomes have decreased. As a result, the demand for rescue capital has surged, offering a critical financial lifeline to these investors. This type of financing is particularly crucial in areas where property values remain high, but cash flow has been disrupted, such as in many urban centers. Understanding Rescue Capital Loans Rescue capital loans are designed to provide swift financial assistance to real estate investors facing foreclosure or other financial distress. They offer a means to quickly access capital, often with less stringent underwriting requirements than traditional financing options. We Lend’s Rescue/Foreclosure Bailout Program caters to a wide range of property types and can offer up to 65% LTV (Loan to Value) on commercial properties and a loan term of up to 36 months. The NPLA defines LTV as: “The ratio of the principal amount on a mortgage to the appraised value of the collateral property. The ratio is commonly expressed to a potential borrower as the percentage of value a lending institution is willing to finance. The ratio is not fixed and varies by lending institution, the borrower’s credit history, the property type, geographic location, size, and other variables. The ratio will change over time as the loan balance and valuation change and is used as a measure of risk on a secured loan (higher LTV ratios are reflective of higher risk).” We Lend and private lending programs like it, stand out for their ability to close deals within days, not weeks or months, which is often the critical difference in preventing foreclosure. In a market where traditional lenders are increasingly risk-averse, rescue capital loans are characterized by their flexibility and speed. They typically have more lenient underwriting standards, focusing more on the value of the property rather than the owner’s creditworthiness. This approach is particularly advantageous for investors who may have sound assets but are temporarily cash-strapped. For example, an investor owning a multi-family property in a gentrifying neighborhood may find traditional refinancing options unavailable due to the transitional nature of the area. In such cases, rescue capital loans can provide the necessary funding to bridge the gap until the property’s income stabilizes or the area’s market dynamics improve. The Economic Context and Market Trends The demand for rescue capital is also influenced by broader economic trends, including fluctuations in the job market, changes in consumer behavior, and shifts in housing demands. For example, the rise of remote work has led to a decline in demand for office spaces in urban centers, impacting investors in commercial real estate. The changing landscape of commercial real estate, particularly in the context of the pandemic and the shift towards remote work, has had a profound impact. Traditional office spaces, once considered prime real estate assets, are now facing reduced demand. This shift has left many investors with properties that are not generating the expected revenues, thus increasing their need for alternative financing solutions like rescue capital. Moreover, the retail sector is also experiencing a transformation, with an increase in e-commerce leading to a decreased demand for brick-and-mortar store spaces. Investors in these sectors are finding rescue capital to be a viable option to reposition their assets, whether it is converting retail spaces into distribution centers or transforming office buildings into residential or mixed-use properties. Success Stories and Case Studies The true impact of rescue capital loans is best understood through success stories. One such case involved a commercial property owner facing imminent foreclosure. Through the Rescue/Foreclosure Bailout Program, the client was able to secure $2.5 million within a week, saving the property and allowing for a strategic repositioning. Stories like these underscore the program’s value in giving property owners not just financial aid, but also peace of mind and stability. Another example is a residential developer who, facing delays and increased construction costs due to supply chain disruptions, utilized rescue capital to complete the project without sacrificing quality or missing key market opportunities.

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Evaluating the 2024 Real Estate Landscape

A SWOT Analysis By Erica LaCentra The real estate market is a dynamic, ever-changing industry. As we get into 2024, it is important to understand the current state of the real estate market to identify where the greatest opportunities exist. To better analyze the real estate market, it can be useful to utilize a SWOT analysis. As a tried-and-true strategic planning tool, it can provide insights into the strengths, weaknesses, opportunities, and threats that exist within the space. This information can help investors and real estate professionals better plan out their strategy for the upcoming year and help them determine where to focus their attention to be more successful in their endeavors. Strengths Although 2023 was a challenging year due to rising interest rates and overall rising costs, the outlook for 2024 is proving to be more optimistic. One of the biggest strengths that the real estate industry has going for it is there continues to be stable demand. Property listings in 2023 hit record lows which exacerbated supply problems throughout the year. This pent-up demand will extend into the coming year, and with homeowners finally accepting that mortgage rates will not be dropping any time soon, there are predictions that more homes will likely hit the market in 2024. This signals good news for homebuyers and a positive outlook for the real estate market overall. Another strength for the industry in 2024 is predicted stability regarding rates and home prices. While opinions may differ on whether the Fed will raise interest rates or cut them, there is a general consensus that whatever the Fed decides to do, it will likely not make any major increases or decreases to the federal funds rate. Because there are no predicted major fluctuations, the real estate industry can finally start to enjoy a bit of stability rather than weathering the volatility that it experienced in 2023 due to the Fed repeatedly raising rates over the year. With stable rates or minimal adjustments, there are sentiments that home prices should mostly stay steady in 2024 with the prediction of prices falling only around 1%. This bodes particularly well for the industry as we do not expect to see any major price drops which could shake up the space. Weaknesses Although overall sentiments continue to be optimistic for the upcoming year, the real estate industry still has several weaknesses that professionals should be aware of that could throw a wrench in their planning. First and foremost, affordability issues will continue to be one of the greatest weaknesses that the industry will have to face. Even with rates stabilizing, increased home prices plus higher rates still put many homebuyers in a place where homeownership is out of reach. Especially for first-time buyers, as property values have outpaced income growth and overall expenses continue to rise, there is a significant barrier to entry for this group. Even in the rental market, concerns of increasing costs such as insurance and taxes, can put a burden on landlords as expenses could potentially outpace rental income. Another weakness for the real estate industry is general economic uncertainty. Any economic volatility, such as the ongoing geopolitical tensions we are seeing, can impact investor confidence. Also, general uncertainty in current economic conditions can lead to hesitancy by individuals making any major investing or purchasing decisions which could have a large effect on the real estate industry. Opportunities For upcoming opportunities in the real estate space, professionals should focus on leaning into the strengths that have been identified. Specifically, capitalizing on the pent-up demand that has existed for well over the past year. A favorable shift has been predicted for buyers in 2024 due to small decreases in home prices paired with predictions of increases in new listings, which means there will be no shortage of individuals finally looking and hopefully able to buy a home. Also, in places where home prices have soared, there are predictions of homeowners looking to cash out on their equity to move to more affordable areas of the country. Another area of opportunity that real estate professionals can capitalize on due to lack of inventory is tapping into new construction. With demand for housing in most areas of the country, new construction in any form, whether it be building large-scale developments or scatter site developments will be one of the top solutions that professionals can lean into, and this area of the industry is predicted to have a boom in the coming year. As inventory still struggles to catch up to demand, the best suggestion would be to create your own. Threats In a space like the real estate industry, there will always be threats that professionals should be aware of and factor into any planning they are doing for the coming year. One of the biggest threats in the coming year is likely the threat of a global economic downturn. The real estate market especially can be detrimentally affected by a broader economic downturn as it affects both demand and financing in the space. As we continue to see problems with inflation and reduced consumer spending, there are concerns about a slowdown in the real estate market despite factors that seem to position the space for a most positive upcoming year. Another major threat in the real estate industry is concerns of regulatory changes. Rumblings of regulatory changes such as zoning laws, rent control discussions to ensure affordable housing, and even commission structures for agents, may create a challenging environment across the industry that could severely hinder any potential progress that could be made in the coming year. Beyond the SWOT Analysis While there are challenges and uncertainties in the real estate market for the coming year, this analysis can help provide a general framework that can be used by real estate professionals to better navigate the complexities of the space. Real estate professionals should view this tool as a way that they can leverage strengths, address weaknesses, capitalize on opportunities, and mitigate threats to

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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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