The residential rehab investment market continues to offer lots of opportunities.
In the second quarter of 2019, investment soared. According to a report from ATTOM Data Solutions, 59,876 homes and condos were sold, up 12.4% from the previous quarter. That accounts for 5.9% of all home sales (up from 5.4% a year ago).
Clearly, the residential rehab investment market remains very hot, with transactional volume continuing to reach all-time highs.
In hot markets like these, identifying value can become difficult for fix-and-flip investors. That’s why you should pay attention to the housing rehab market. It helps you see where opportunity awaits.
Let’s dig a little deeper into the current state of the rehab market in the US.
Supply and demand—and the impact on home flipping profits
Housing inventory fell to a 3.9-month supply in October 2019, according to the National Association of Realtors. That means it would take that long to sell all the available homes for sale.
That indicates housing demand is high, but supply is low. In a market with balanced supply and demand, it would take six months to sell all the available homes.
“Inventory remains constrained, making finding deals difficult for many investors,” states Don Wenner, CEO of DLP Capital Partners.
That difficulty finding deals has equated to lower house-flipping profits in 2019. In the second quarter of 2019, home flipping generated an average gross profit of $62,700. That equates to an investment return of 39.9%.
While the numbers indicate high profits, those returns have been declining.
Home flipping ROI has declined for six consecutive quarters but remains high in comparison to years past.
“Due to easier access to capital, more real estate investors can buy now. This has led to increased demand and competition, making it even more challenging to buy value in the residential rehab market,” says Wenner.
Indeed, residential rehab financing has increased greatly in 2019. As a CNBC article details, the dollar value of home flipping loans has risen 31% in 2019.
As a real estate investor, you must understand the current home flipping market: there’s low inventory, high demand, and easy access to capital (thanks to low-interest rates).
While this can make it tough to find good real estate investment deals, a crucial fact remains: you can still profit in this market.
“The fundamentals of the market continue to boost the ability to sell or rent renovated homes. Inventories remain low, home prices and rents continue to rise, and interest rates remain low. With a good strategy and great execution, you can achieve success,” attests Wenner.
Preparing for what’s next: The residential rehab market in 2020
As you can see in the chart above, you can still generate high profits in the residential rehab industry (despite a recent decline). We expect 2020 to be a good year.
First and foremost, housing prices and rents will continue to increase, thanks to limited inventory and low interest rates. Most other experts agree. For instance, real-estate data firm CoreLogic anticipates home-price growth of 5.4% in 2020. Rents, which grew by 2.3% in 2019, will also rise in 2020.
Moreover, a decline in foreclosure rates indicates a healthy real estate market in general. Homeowners are in good shape. Before the 2008 housing crisis, foreclosure rates had been steadily increasing.
Simply put, sound market fundamentals favor the residential rehab market. With a solid strategy and execution, you can achieve great success as a real estate investor in 2020.
Specifically, 2020 will be a year about finding value. While prices are high in some markets, other markets are undervalued. According to CoreLogic research, 1-in-4 housing markets nationwide are undervalued. You can find great value in such locations. Just remember: You make money on the buy.
“At DLP Capital Partners, we invest in secondary and tertiary markets because the opportunity for stronger returns exists in part because there’s less competition, which makes finding better yields possible,” describes Wenner.
“When flipping homes, the key is investing in markets where you can find deals, or in other words, where you can acquire properties for less than the current value. In addition, you must be able to execute on the renovation—have the boots on the ground or a close relationship that does. If you’re going to hold and rent the property, focus on investing in markets that have strong fundamentals. The markets should have a high probability of being stable, with growing demand even in a recessionary environment,” adds Wenner.
Of course, 2020 will still present other challenges for home flipping entrepreneurs. Namely, a lack of inventory makes it vital you find and execute deals quickly. To do that, you need good sources of capital.
Where do home flippers and rehabbers get funding?
Since residential rehab loans have short term lengths (6-12 months), traditional banks typically don’t lend to fix-and-flip or fix-to-rent investors.
However, other types of home flipping financing exist. Options include loans from family or friends. These are best for beginners, or if you have people in your network that are real estate investors. You must be careful of not letting professional business impact personal relationships, though.
If you have good credit, personal loans or lines of credit can help with funding for home flipping. Interest rates are low. However, as a house flipping loan, a personal loan or a line of credit has limitations. You can’t get more than $50,000—and that’s probably not enough.
Given the issues with the above options, fix-and-flip and fix-to-rent entrepreneurs often look for capital partners, private money lenders, and hard money loans. Here’s why:
- These lenders and investors can provide fast approvals and closings. That’s necessary for this market—because good deals go fast.
As a real estate investor, you can differentiate yourself from the competition with the ability to execute deals quickly. That requires a good relationship with a reliable private money lender. Hard money lenders will only become more important in 2020. Look at the rise in private money lending in the past decade:
- Within the residential rehab market, those private money lenders that have great strategy and execution will have an advantage. The ability to close quickly will also create separation from the competition.
For example, Direct Lending Partners, a DLP Real Estate Capital company, provides private loans for real estate investors. Loans include bridge financing and fix-and-flip loans, and they can be closed within a few days.
For those that wish to invest in real estate direct lending, the market presents opportunities as well. You can make money by offering cash to residential rehab entrepreneurs.
At DLP Capital Partners, we have our Direct Lending Fund. This fund lends to successful, typically “bankable” real estate investors. These entrepreneurs operate in the same markets in which we invest. By partnering with good borrowers across various markets, we mitigate risk and produce higher returns for our investors.
Our results speak for themselves: Our Direct Lending Fund has achieved more than five years of 12%+ returns, with a 14% average annual return since inception.
Success in the residential rehab market: 2020 and beyond
While finding value won’t be easy as the early 2010s, opportunity awaits in the residential rehab market. Those with the right strategy and execution will win the day.
At DLP Capital Partners, we’re very active in the home flipping and renovation sector. We not only have investment expertise, but we also have experience on the ground. We know what it takes to succeed in 2020 and beyond.