If you are thinking of diversifying your retirement savings by adding some passive real estate investments, now is the perfect time to consider getting involved with lenders in the residential fix and flip market. Current real estate conditions in the Washington, D.C. area—and the rest of the nation--favor borrowers who have access to capital and the expertise to buy older homes, renovate them and quickly return them to market.
Here's why NOW is a good time to invest with the private lenders who are serving those borrowers:
1) Demand for housing is strong
Now that the job market is more stable and mortgage rates are low, there are more buyers in the market. Millennials purchasing their first homes make up the largest percentage of the buyer pool. In 2016, 34% of all home buyers were Millenials, followed by Baby Boomers at 31%, and GenXers at 28%.
2) Supply is low
Eager buyers, however, are being held back because there are too few homes on the market to meet demand—particularly in the small and mid-size home categories. According to the National Association of Realtors, the number of existing homes for sale (1.93 million) rose slightly in April, but the existing home inventory is still 9 percent lower than it was a year ago. Existing home sales were down 2.3 percent in April over March, and the median number of days a home stayed on the market was just 29 days—down from 34 days in March and 39 days in April of last year.
Renovating an older home opens up some opportunities for homebuyers, but most Millennials—as well as other buyers--do not have the time, knowledge or interest to handle the ins and outs of renovation.
Therefore, professionally executed fix and flips can add like-new inventory to a market that is craving product.
3) Home values are on the rise
Strong demand and low supply are driving up prices. According to NAR data, nationally the average price of a single-family home was $244,800 in April--up 6 percent from last year. Meanwhile, the median home value in Washington, D.C., at the end of April was up 10.2 percent over last year at $558,500, according Zillow's Home Value Index. The median listing price for a home in Washington was $504 per square foot ($221 per square foot for Washington Metro) and the average listing price was $550,000, according to Zillow.
New U.S. single-family home sales rose in May and the median sales price surged to an all-time high, suggesting the housing market had regained momentum.
4) Conventional loans are hard to get
With traditional lenders ramping up their credit criteria in recent years, many fix and flip investors have trouble securing conventional loans. This has created opportunity for private lenders who are willing to overlook some credit issues when the right fundamentals (location, pricing trend, overall borrower profile, and execution plan) are in place. [See our blog post on hard money lenders and credit checks.]
5) Builders need money fast
Thanks to reality TV shows that make it look easy to turn a three-bedroom eyesore into a state-of-the-art dream home, the fix and flip market is competitive. Borrowers who identify a rightly-priced deal need to act fast. In addition to flexibility, private and hard money can act at a speed conventional lenders cannot match. Borrowers will pay a premium for that speed.
So where do you fit into the fix and flip market? Hard money lenders offer retirement-minded investors the opportunity to add real estate to their portfolios without having to pick up a hammer or a nail. At Walnut Street, for example, our passive real estate funds of diversified first-lien mortgages provide reliable monthly dividends and some built-in cushions against risk. Our loan-to-value ratios do not exceed 75 percent of after-improvement value and, since the loans terms are typically 6-12 months, our exposure for each deal is relatively short.
Contact Walnut Street Finance if you are an accredited investor who is looking to invest at least $50,000 in a passive real estate fund. We provide professional, expert management based on decades of development/construction and lending experience.