The 2023 Real Estate Retrospective
Once Again, Real Estate Investors Prove Absolutely Anything is Possible
By Carole VanSickle Ellis
In January of this year, things were, in some ways, very different than they are today. Interest rates on a 30-year, fixed-rate mortgage were hovering just under 6.5%; the national median sales price for a single-family home had fallen slightly to $385,000, and Moody Analytics was predicting rental rates would rise by 2.5% over the next 12 months.
Today, 30-year, fixed-rate mortgage interest rates are just under 8%; the national median sales price is up $30,000, and Moody’s is warning it would be “premature to celebrate the end of the housing correction.” Real estate investors, however, are hard at work at business-as-usual and, as usual, that means very different things for different investors in different markets.
“Adaptability is always the key to success in the evolving real estate market,” noted Gary Harper, CEO of Sharper Business Solutions and longtime real estate investor and educator based in the Midwest. Harper said he is seeing investor focus in his area shifting toward new builds as existing-home inventory remains tight. “This is the only way to keep up with demand,” he said.
Bruce McNeilage, CEO of southeastern build-to-rent (BTR) development company Kinloch Partners, agreed. “We just follow growth where it leads us,” McNeilage said. His company has focused on the BTR space for years, but has recently expanded outward from its former focus on urban-core areas by about 30 minutes.
The developer also has begun focusing almost exclusively on five-bedroom SFR properties. He explained, “This gives us access to the largest pool of qualified residents from which to draw and enables us to provide them with the innovation and technology they want in their homes. By going 30 minutes from the urban core, our lots and materials cost the same as they would nearer to the city center but we (and they) get much more square footage.”
Build-to-Rent is Bigger Than Ever
McNeilage is just one BTR investor taking advantage of the desirability of larger SFR assets. Richard Ross, CEO at Quinn Residences, joined the company at its inception in early 2020. The privately held real estate operating company focuses exclusively on acquiring, developing, and operating newly built, SFR communities primarily in the southeastern United States and has grown its portfolio to nearly 5,000 homes in just under three years.
To Ross, the Quinn Residences strategy of partnering with local builders and developers to create purpose-built, dedicated rental communities and then retain control of maintenance, upkeep, and management is the way forward in the industry because it creates a product that helps “dismantle the negative perceptions of the build-to-rent industry,” he said. “We provide more supply to an industry in need through newly built, reasonably priced homes,” Ross concluded.
Although some experts predicted that 2023 would show a decline in BTR activity due to a projected housing downturn, any slowdown in the sector was largely “momentary,” Fixr.com analyst Adam Graham wrote in July of this year. In fact, most construction professionals and developers interviewed for the home-improvement resource platform reported receiving “more requests” for BTR projects, “further highlighting the ongoing increase in popularity of this real estate arena,” Graham wrote.
As with most real estate-related assets, BTR performance is highly regional in nature and, in many cases, increased BTR activity is closely associated with overvalued housing markets or increasing unaffordability. Phoenix, Arizona, for example, posted a 280% increase in BTR completions in the last five years, followed by Dallas, Texas (+102%), and Detroit, Michigan (+96%).
Interestingly, although these percentages translated to the highest increases in volume of BTR properties being built in these areas, they did not directly correspond to the cities with the most BTR growth. Charlotte, North Carolina, led that charge with a 621% increase in BTR completions over the last five years, followed by Atlanta, Georgia (+380%) and Jacksonville, Florida (+353%).
“Atlanta is on fire because of job growth, and it is expanding outward as far as Savannah [Georgia],” observed Robert Lee during a recent National Rental Home Council (NRHC) chapter meeting in Atlanta, Georgia. Lee, who serves as president of Sylvan Road Capital and recently installed solar panels in an entire neighborhood developed and managed by his company, said that BTR investors will be well-served to look at secondary and tertiary markets for better opportunities in the coming year.
“We make acquisitions based on job growth and new industry growth when the market conditions are right,” Lee said. “We are very bullish about the whole southeast.”
Any investors who own or are considering owning rental properties at this point in time should remember, however, that the increased demand for single-family homes, in particular, opens up residents and property owners to fraud and scams. Jay Byce, president of private BTR neighborhood developer ResiBuilt Homes, said that although rent growth has been positive and the BTR space is booming, providers are noticing a substantial uptick in fraudulent activity taking advantage of residents and owners in the space.
“This fraud is consistent and recurring in nature,” Byce said. He described scenarios in which scammers “scrape” listings and present them on social media marketplace platforms as their own, conning would-be tenants into shelling out money for security deposits and background checks, and situations where a tenant will actually gain access to a home and begin paying rent only to discover that they have been paying rent to someone who changed the locks on the property and has no ownership of it at all.
“It’s expensive and difficult for everyone involved when this happens,” Byce said. He added that for ResiBuilt, the key to catching issues like this early and keeping residents satisfied lies in having “real people” in customer service who understand the real estate industry and are able and motivated to help promptly when called to do so. “That is absolutely the key to having happy tenants,” Byce said.
In the “Right” Markets, Flipping Still is Going Strong
Despite increasingly intense competition for every single-family property to hit the market in 2023, the year closed with fix-and-flip investors reporting little change to their operating procedures from acquisitions to sales other than, in some cases, slightly longer times on market than they experienced in 2022.
Adam Whitney, a partner in Florida-based 7-Figure Flipping, says he has experienced few problems selling his finished products to retail buyers at competitive prices in the 2023 market. “Our pricing has not changed significantly, although we adjust seasonally,” he said. “2023 did not bring the level of difficulty flipping in our market that some analysts projected.”
Kenny Rushing, a Tampa-based investor known for his “House Hustling Movement” in the early 2000s and CEO of Kenny Rushing Homes, elected to focus solely on Tampa, Florida, in 2023.
“We are actively flipping every day here,” he said, noting that although 2023 did see the end of Tampa’s widespread “flipping frenzy” as overall volume fell 13% during the first quarter of the year, median profits remained high. In fact, according to ATTOM Data, certain ZIP codes yielded metrics indicating fix-and-flip investors generated median profits of as much as $120,000.
“The key is having a strategy that enables you to keep acquiring deals for relatively low amounts,” Rushing said. However, even in higher-priced areas, intense demand for single-family properties is keeping flippers actively engaged in acquisitions and rehabs.
Dana Nutt, an investor and author based in northern Michigan, said his area is showing some signs of slowing both for new construction and for the “mid-range” market priced between $250,000 and $750,000. Because this area of the country has highly concentrated pockets of luxury homes often surrounded by very rural areas, second-tier homes, often called “bread-and-butter properties” by investors, have a particularly wide range of prices. However, Nutt said, the biggest factor across the board affecting retail buyers is how interest rates have changed since 2022.
“We are seeing lower-end and high-end homes still going quickly because payments are manageable even with higher interest rates for these buyers,” he said. He noted that many investors who purchased lakefront or lake-proximal properties during the pandemic-era boom are now struggling to make their short-term rental strategies work because that market has slowed dramatically in the Great Lakes area.
“We are seeing Airbnb’s switching back to monthly rentals because people are not traveling like they were,” Nutt concluded. “Investors should start looking at either lower-end homes to flip or at ‘million-dollar’ flips.”
2023 Confirmed It: Anything and Everything is Possible in Real Estate
As the year draws to a close and last year’s real estate naysayers begin predicting job losses for 2024 and associated forced home sales, the real estate investing sector steadily continues innovating, problem-solving, and generating wealth for its participants.
“I’m still rehabbing all the time,” said Glenn Williams, owner at RehabbingU and K&G Investments in the Twin Cities metro area of Minnesota.
“Flagstaff, Arizona, is still going strong,” chimed in OPF Group co-founder Brandon Richards, who specializes in passive income investments, fix-and-flips, and vacant land. Probably the most perilous markets out there today are those in California, where inventory has fallen along with home values (although median home prices in the state still exceed $830,000).
“Residential construction is due to increase [in California], and soon,” wrote First Tuesday Journal editor Carrie Reyes in August of this year. If she is right about that, then even the tricky Golden State market will prove once again that there is opportunity everywhere in real estate as long as you are flexible and creative no matter the circumstances.
