3 Trends for Real Estate Investors to Consider in 2020
Real estate investors are successful because they’ve learned to be opportunistic and shift strategies to align with market opportunity. In years past, this meant capitalizing on the vast availability of properties that only required light rehab to stabilize and quickly re-sell for a profit. In current times, this means learning to grow into new markets and broader-scope projects.
Today’s housing market remains hot in most locations around the country, and interest rates remain near historic lows. Buyers want to capitalize on the low-interest-rate environment, but with demand outpacing supply, competition for good deals remains stiff. Real estate investors are forced into competition not only among their direct peers, but against owner occupants, large iBuyers like Open Door and Zillow, and institutional investors like Invitation Homes.
How are investors evolving? Here are a handful of ideas and lessons we’ve learned, that will hopefully help you refine your real estate investing strategy for 2020 and beyond.
1. Diversify your investment strategy and broaden your scope
Foreclosure activity nationwide has hit historic lows, according to LegalShield’s Foreclosure Index, hitting a 35-year low for foreclosure starts in the third quarter of 2019. As a result, fewer homes are sitting vacant compared to previous years. Sellers are reluctant to take anything less than top-of-the-market price and are holding out longer than ever, because they know the competition when they go to buy is going to be equally challenging. This combination results in fewer opportunities for investors looking for high volume purchasing outlets and a decision as to how to maintain and grow their businesses.
With the limited number of investable properties and intense competition in most markets, we’re seeing many clients who were once exclusively light fix-and-flip investors diversifying their businesses into deeper rehabs, tear downs, ground-up construction, and rental properties. By tackling larger value-add projects such as adding square footage, increasing bed/bath counts, and improving the overall value of the house and neighborhood, we’re seeing our clients maintain healthy profit margins and continuing to flourish. These larger projects take more time and inherently have more risk, so it’s critical to closely watch demand trends and stay in tune to the local market to ensure you’re not over-improving a house for the neighborhood.
A critical part of the larger rehab and construction project is understanding the draw management process that your lender uses. Projects quickly get off track if you’re not able to quickly and simply get reimbursed for the work completed. This is one of the reasons that Lima One Capital built an in-house construction management department. The inspection and draw management process is critical to the investor’s success, so we’ve spent years finding the right people and process to build out the entire draw management function in-house. By reviewing budgets and managing the construction draw process, we’ve found that we add tremendous value for our clients and help them finish even the biggest projects on time and on budget.
With these larger projects, it’s critical to ensure your investment team has experience successfully completing similar projects. A ground-up construction project is far different than a light rehab, so we encourage investors who are expanding their scope to partner with seasoned professionals who can help navigate the new territory. Investors can quickly get over their skis by taking on projects where they don’t have expertise, and lenders recognize this risk, so they protect themselves with lower leverage and potentially higher pricing for teams that don’t have adequate experience. Partnering with a seasoned pro not only helps you with a higher probability that you’ll be successful in completing your project on time and on budget, but also can also get you better terms from your lender partners, increasing your ROI.
2. Secondary and tertiary markets offer fresh opportunities
Tier 1 markets are highly competitive these days—competitive not only for investable housing stock, but for reliable labor and ancillary investment team members (real estate agents, attorneys, sub-contractors, property managers, etc.).
As a result, we see many investors branching out from Tier 1 cities into secondary and tertiary markets in search of properties and teams to support their business. This is evidenced by the third-quarter 2019 U.S. Home Flipping Report published by ATTOM Data Solutions, in which the five best markets for flipping homes include Pittsburgh, Penn.; Scranton, Penn.; Flint, Michigan; Cleveland, Ohio; and Hickory-Lenoir-Morganton, N.C.
The best investor markets tend to share many common characteristics, such as strong population growth, diversity of employers and job growth, excellent school systems, good city infrastructure, and friendly property tax rates.
Local knowledge in the market is critical, but that doesn’t mean you need to be born and raised in a certain city to be a successful investor there. The availability of market data and investment property marketplaces has never been greater. Companies like Renters Warehouse, Roofstock, and SVN | SFRhub make investing in new markets easier than ever before.
So if you’re looking to grow your business but are having challenges in the big Tier 1 cities, take a look off the beaten trail for cities that exhibit the characteristics that support your investment goals, do your research, and utilize the array of reputable online marketplaces and start networking to find a great team to support you with local expertise.
3, Choose the right financing partner
Over the past 10 years, the availability of financing for investment properties has significantly changed. What was once an industry bifurcated with only two real options (banks or small local private lenders) has matured with a third option—large national private institutional lenders. These national lenders are typically backed by deep capital sources like private equity firms, hedge funds, and REITs. This is great news for investors, because not only has the availability of financing increased dramatically, but costs have decreased as well. These private lenders are proving that fix-and-flip, ground-up construction, and rental property financing done properly offers stable and predictable returns, and we see more and more entrants coming into the market.
In years past, an investor who wanted to flip, build, and rent houses, needed three different lenders to get the right products. Today, lenders like Lima One Capital and a handful of nationwide private lending peers offer a complete end-to-end product suite of options for all investment purposes. Successful investors should have time to focus on finding deals, managing projects, and building their network, because they have the confidence that their lender partner has the right product at the right price to help them quickly accomplish any goal.
In the second quarter of 2019, the volume of financing for fix and flips reached a 13-year high, and homes purchased by an investor with financing represented 41% of all homes flipped, according to ATTOM. This is a steady uptick over the past few years, but still remains far under the 65% of flips that were financed pre-2008. We meet many investors using all cash to purchase properties, thinking their options are limited to a high-cost provider who erodes profit margins or an option with a frustrating and cumbersome process. These customers are pleasantly surprised to learn there are new lenders like Lima One Capital who have far lower costs than they’re used to, simple processes, and common-sense underwriting.
Another great evolution in recent years is the variety of loan products available to investors. From lines of credit to flexible pre-pay and term options to hybrid build-to-rent one-time close offerings, the best lenders are listening to their clients and growing products to fit their needs. Offering investors flexibility is the reason that Lima One Capital created the industry’s first one-time close Fix2Rent and Build2Rent product. These loans allow an investor to finance the rehab or construction project with a 13-month interest-only loan, and then convert the loan to a 30-year, fully amortizing rental property loan upon construction completion and renter occupancy. This process saves investors time and money by avoiding going through a second closing and gives peace of mind having the long-term rental loan already in place day one. The investor maintains flexibility because they can opt into the permanent financing and hold a property as a rental or opt out and sell the property if plans change.
So as you evaluate your business goals, consider your capital stack options carefully and explore the variety of new financing options available. You may be pleasantly surprised what you’ll find!
As we head into 2020 and the demand for investment properties continues to outpace supply, we’re faced with a highly competitive market where investors need to act quickly if they find a desirable property. But don’t let a competitive market discourage you from pursuing your dreams! Stay flexible, consider heavier rehab opportunities, evaluate ground up construction projects, and consider adding to your rental portfolio with new Fix2Rent products. Explore new markets, do your homework, partner with a great team, and grow your business!
Your lender should be more than just someone you make your monthly payment to. They should be deeply involved in understanding your business goals, strategy and a partner beside you from beginning to end. Lima One Capital prides itself on listening closely to our customers, building innovate products to support the shifts in the market, and growing with the demands of today’s investor. As you evaluate your options and 2020 strategy, we invite you to contact us to learn how we can help you reach new heights!