The past few years have been particularly difficult for fix-and-flip investors, with rapid price appreciation and slow recovery in stocks. Although the rate of home flips in the United States has been increasing steadily since March, ATTOM data reveals that profit margins have shrunk.
The return on investment for fix-and-flips fell to 33.5% from 37.2% three months earlier and 40.6% a year earlier. Looking only at the average, it would seem like a dismal year for fix-and-flippers. But profits are not the same for everyone, and experienced investors have a secret sauce for higher returns.
Experienced investors can be loosely defined as those who have been in the real estate game long enough to know how to handle dramatic fluctuations in the market, including rapid appreciation in prices and weakness in stocks. Before the pandemic, America was already in the midst of a housing affordability crisis, with low inventories and steadily rising housing costs. In 2019, 48.8% of households in the United States were overburdened with costs, meaning that 30% or more of household income went to housing costs, according to the US Census Bureau. But this problem increased tenfold during the pandemic, and not everyone was ready.
Last June, the S&P CoreLogic Case-Shiller National Home Price Index recorded the largest annual increase in home prices, at 18.6%, from 16.4% a month earlier. The reason neither mortgage advisers nor investors should panic is that this rapid price appreciation is fueled by consumer demand. Historically low mortgage interest rates have driven consumers to flood the market, and seasoned real estate investors are getting some of the best deals of their lives.
âThis is the best time for experienced investors,â said William Tessar, President of CIVIC Financial. âThe reason we haven’t slipped into another housing crisis or bubble is that we have historically low interest rates and an overwhelming amount of consumer demand. So price appreciation is actually a good thing, especially when thinking about resale value. This is a natural competition in the market, and experienced investors have taken advantage of these opportunities.
Experienced investors also have the privilege of partnering with service teams, such as property management teams or ancillary teams, to handle more minute details. They have also established partnerships with contractors, real estate agents and appraisers over the years. For example, seasoned investors know that a good real estate agent should act like a second set of eyes when buying flips, analyzing the appropriate purchase price, and estimating the value of the home after renovations. It takes time to develop these relationships, but you don’t necessarily need it to get better returns on your investment.
Remote work migration
To understand the economy, experts say “follow the money” and to understand real estate investing, experts say “follow consumer demand”.
âInvestors can’t do enough research,â Tessar said emphatically. âThe big reshuffle has had the biggest impact for both investors and lenders, and if you don’t pay attention to these trends you’ll be completely lost. “
The most important factor investors need to consider in today’s market are migration patterns, Tessar noted. Due to the proliferation of remote working during the pandemic, the upper and middle classes have sought more suitable places to live. Overall, preferences have changed because so many lives have changed. Suddenly parents needed a home office; mothers needed a classroom to teach their young children, and parents needed an extra bedroom to move in. In late August, Redfin reported that the sale of large homes (3,000 to 5,000 square feet) increased 21% year over year, growing 10 times faster than smaller homes.
âInvestors who know what they’re doing pay attention to people’s preferences. Houses get bigger, they’re used differently and people buy bigger, âTessar said. âThe great thing is that all of this information is available online. Where people migrate to the southern and western regions, you don’t need a team to figure it out. All information is easily accessible.
Indeed, many organizations have followed national migration patterns since the start of the housing boom a few months after the start of the pandemic. Zillow reported that southern states and metropolitan areas saw the largest inbound movements in the first 11 months of the pandemic, including Phoenix; Charlotte, North Carolina and Austin, Texas.
Zillow Senior Economist Jeff Tucker noted that âthe mid-sized and more affordable metropolitan areas of the Sun Belt have seen a lot more people coming than leaving, especially the more expensive and larger towns further north and on the coast. The pandemic has catalyzed the purchases of millennial first-time buyers, many of whom can now work from anywhere. ”
On that note, Tessar also pointed out that the most important trend that investors need to pay attention to is the permanent shift to remote working. According to a investigation by the PulteGroup, 53% of consumers would rather buy a home with a dedicated home office, rather than buy one with an extra bedroom. Additionally, a Ledger study of 10,000 American workers found that 21% of the workforce was still telecommuting as of March 2021.
Even more recent research from Zillow suggests that more of the U.S. workforce will become remote as the year progresses, with 84% of workers wanting partial remote work after telecommuting during the pandemic. Zillow’s survey even suggests a generational shift will occur, as half of all millennials and gen z workers said they are likely to look for a new job if their employer demands that they be. they are in person more than they would like.
Tips for new investors
As part of Tessar’s paramount point, investors should first look at affordable subways and counties that offer the largest inventory to meet the preferences of today’s consumers. At the start of the pandemic, states like Texas, Florida and Georgia experienced significant net in-migration, mostly from California subways and other expensive coastal cities. A recent report from Redfin noted that a buyer could buy three homes in Austin, Texas for the same price as a home in San Francisco or Los Angeles.
Only 7% of investors working with CIVIC Financial are newbie investors, âmainly because they’re all unique,â ââTessar said. âA lot of them come and see this investment as a hobby. They don’t realize how much effort it takes, and after experiencing multiple delays and cost overruns, they never want to do it again.
On the other hand, he said, âExperienced investors have reliable partnerships and a trustworthy team. They strategize by researching their domain, looking at a comparable inventory; they buy in bulk to allocate their assets and seek to invest in low cost rural areas where people move.
Essentially, today’s market is just as hostile to new investors as it is to first-time home buyers. Most investors are battered by rising prices, more on buying than on resale. The median resale price of reverse homes nationwide was $ 267,000 in the second quarter of 2021, generating gross profit $ 67,000 above the median investor purchase price of $ 200,000. This marks a 10-year low on fixed and inverted profit margins, according to ATTOM.
Rising material costs and labor shortages have already made home renovations difficult enough. The U.S. Bureau of Labor Statistics Purchase Price Index shows that, overall, building materials have increased 19.4% in the past 12 months and 13% since the start of the year. So without a reliable team to work flexibly and allow for discount rates, newbie investors are left behind.
Most of the time, investors try to save money on purchases by finding a good deal or reducing closing costs. Closing costs incur additional expenses, such as set-up costs, call points, appraisal costs, title searches, title insurance, surveys, taxes, registration fees. deeds and credit file fees. Investors can often find good luck negotiating fees from lenders to keep costs down.
âAs they say in golf, ‘work from the green to the back,’â said Tessar. âConsider what your end product would be. So if you want X amount of profit, what will your resale value be? What would your closing costs and renovation budget look like? Thinking this way can help set goals and define a better business model.
Going forward, many assume that the end of forbearance and the federal moratorium will provide investors with an opportunity to take hold of stocks. In recent months, the supply of used homes has been near its all-time low, but by early October, everyone will be taken out of federal aid. It is too early to say how much vacant homes this will leave, as many are in various stages of delinquency and may be able to pay off their mortgages.
Of greater concern is that repair investors will renovate affordable homes, increasing their value so that they are no longer affordable for low-middle-class families. Tessar responds to this by saying, âA lot of houses and buildings have fallen into disrepair during the pandemic. There are health and safety risks that need to be addressed, so it is important that our repair investors make the necessary renovations. This increases the cost of housing and we don’t want to move anyone, but it is important to build houses that are truly habitable.
About CIVIC Financial
CIVIC Financial Services is a private money lender, specializing in the financing of residential investment properties not occupied by their owners. CIVIC provides mortgage brokers and real estate investors with a fast and profitable source of financing for their real estate investing needs.