TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/1215180
28 | M R EP O RT FEATURE R eal estate investors are successful because they've learned to be opportunis- tic and shift strategies to align with market opportunity. In years past, this meant capitalizing on the vast availability of proper- ties that only required light rehab to stabilize and quickly resell 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-oc- cupants, large iBuyers like Open Door and Zillow, and institutional investors like Invitation Homes. How are investors evolving? Here are some ideas and lessons we've learned that will hopefully help you refine your real estate investing strategy for 2020 and beyond. Diversify Your Investment Strategy and Broaden Your Scope F oreclosure activity nationwide has hit historic lows, according to LegalShield's Foreclosure Index, reaching a 35-year low for foreclo- sure starts in Q 3 2019. As a result, fewer homes are sitting vacant compared to in previous years. Sellers are reluctant to take any- thing 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 main- tain 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 diversify- ing their businesses into deeper rehabs, tear downs, ground-up construction, and rental proper- ties. By tackling larger value-add projects such as adding square footage, increasing bed/bath counts, and improving the overall value of the house and neighbor- hood, 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 manage- ment 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 we built an in-house construction manage- ment 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 review- ing 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 proj- ects 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 part- ner 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 ex- pertise, and lenders recognize this risk, so they protect themselves with lower leverage and poten- tially 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 success- ful in completing your project on time and on budget, but also can also get you better terms from your lender partners, increasing your ROI. Secondary and Tertiary Markets Offer Fresh Opportunities T ier 1 markets are highly competitive these days—com- petitive not only for investable housing stock, but for reliable labor and ancillary investment team members (real estate agents, attorneys, sub-contractors, prop- erty managers, etc.). As a result, we see many inves- tors branching out from Tier 1 cities into secondary and tertiary markets in search of proper- ties and teams to support their business. This is evidenced by the Q 3 2019 U.S. Home Flipping Report published by ATTOM Data Solutions, in which the five best markets for flipping homes include Pittsburgh; Scranton, Pennsylvania; Flint, Michigan; Cleveland; and Hickory-Lenoir- Morganton, North Carolina. The best investor markets tend to share many common charac- Eyes on the Prize With increasing competition ranging from iBuyers to institutional investors, success in single-family rental demands innovation to avoid stagnation. By Josh Craig