Hard Money Facts

The terms of fix-and-flip private loans can differ from lender to lender, and sometimes even deal to deal. (Sadly, the bait-and-switch method still lives on in private lending. Luckily, our terms never change.) It’s a frustrating task to try and create an apples-to-apples comparison of loan terms, which is why sometimes investors eschew much of the information about their loans to focus on a single element: interest rate. But interest rates are only one influencing factor in the overall cost and quality of your loan. It’s mission-critical to understand each line item of your terms and know exactly how much you’ll have to bring with you on closing day (ideally… as little as possible!).

To understand the big picture, let’s unpack the most common terms written into a fix-and-flip private loan, and their impact on your ROI.

 

Amount Funded

It’s always a good day to get a check in the mail (or transfer to your account) from your rental properties. Your net cash flow is the money you get from your tenants, minus expenses and your loan payment.

Example: You purchase a $120,000 rental home. Tenants pay you $1,200 monthly. If your expenses and loan are $1,100, your net cash flow on a monthly basis is $100. Granted, $1,200 a year isn’t a large chunk of change. It’s more like the cherry on top of the other ways rental properties make you money. Compare it to the dividend of a stock; it’s likely not your primary reason for the investment, but it sure doesn’t hurt.

Related: Learn tips and tricks on calculating ARV from Michael Blatney, Portfolio Underwriting Manager.

5 WAYS RENTAL PROPERTIES MAKE YOU MONEY (AND WHY YOUR REAL ESTATE PORTFOLIO NEEDS DIVERSITY)

There are many reasons today’s most prolific real estate investors are gobbling up single family rentals: Home values are rising. The dollar is shrinking. The construction of single-family properties hasn’t caught up with demand. More American families can only afford—or find—rental properties. But rentals aren’t just a trendy way to invest into today’s market—they’re a long term money maker. And the return on investment for rentals is likely higher than you’d expect, thanks to the multiple ways this investment pays you back.

Here are the five ways you can expect a return on your investment with rental properties:

1. Mailbox Money 

It’s always a good day to get a check in the mail (or transfer to your account) from your rental properties. Your net cash flow is the money you get from your tenants, minus expenses and your loan payment.

Example: You purchase a $120,000 rental home. Tenants pay you $1,200 monthly. If your expenses and loan are $1,100, your net cash flow on a monthly basis is $100. Granted, $1,200 a year isn’t a large chunk of change. It’s more like the cherry on top of the other ways rental properties make you money. Compare it to the dividend of a stock; it’s likely not your primary reason for the investment, but it sure doesn’t hurt.

Does this scenario sound familiar?

You find an amazing investment property. Your heart is set on it. You scramble to find a private lender to close the deal—and things fall apart. Perhaps the lender denies you because it’s not one of their target markets. Or you can’t get them on the phone and another investor beats you to the punch. Or maybe—most infuriatingly—a Wall Street market turn makes your lender lose confidence and you’re left at the closing table without a closed deal wondering…. where did I go wrong?

There’s only one way to prevent every one of these scenarios: begin with the end in mind. (This is also one of Stephen Covey’s seven habits of highly effective people.) Select your lender before you look for properties, and do so with scrutiny. Choosing your lender first allows you to position your dominos so you can knock them all down, flawlessly, on closing day.

There are numerous private lenders out there. So how do you begin to compare? Ask the following questions, and the right relationship will become apparent:

Here are some things to consider when budgeting to flip vs. hold.

 

What is your private lender’s source of capital?

Few investors pay much mind to where their lender’s cash comes from. But you should, because many private lenders are backed by Wall Street sources of capital. So when the capital markets are all up and to the right, these private lenders close a high number of deals. But when the winds of Wall Street change—which they do from time to time—they cancel deals, alter terms or close up shop until the wind blows over leaving you, the investor, stranded.

Look for a private lender that uses their own money: a balance sheet lender. Residential Capital Partners is a balance sheet lender that controls its own destiny as well as yours through use of its own capital on each closed deal. That’s how we thrived during the 2008 housing crisis and throughout the 2020 pandemic. We approved countless deals for investors whose initial lender changed the terms of the deal at the closing table or flat out walked away from the closing table during a bear market.

According to the 2022 US Home Affordability Report by ATTOM, median-priced single-family homes and condos were less affordable in the fourth quarter of 2022 compared to historical averages in 99% of counties in the US. Moreover, major home-ownership costs now eat up 32% of the average national wage, the highest percentage in fifteen years.

With high interest rates, soaring property values, and inflation forcing the average home buyer out of the market, many real estate investors today have pivoted their investment strategy to focus on single family rentals. The problem is their rehab budget hasn’t pivoted. Many flippers are using the same approach to rehab rentals as they would a flip—to the detriment of their ROI.

Here are some things to consider when budgeting to flip vs. hold.

 

Rehabbing Fix and Flips vs. Rehabbing Rentals 

Every budgetary concern with your flip needs to align with your exit strategy. It’s not simply about rehabbing too much or too little (although that’s part of it); It’s about choosing upgrades that align with your ultimate goal, to flip or hold. Buyers and renters evaluate and use your property differently, so every decision you make—from which rooms to prioritize, to landscaping, appliances, and finishes—needs to take their perspectives into account.

 

Rising interest rates and inflation shouldn’t deter you from acquiring long-term rental properties.

In the current market, it can be difficult to determine whether now is the right time to acquire long-term rental properties. Interest rates are still on the rise. According to Bank Rate, the current average rate for a 30-year fixed mortgage is 7.04%, up 12 basis points since September 30, 2022. While inflation appears to be leveling out on some fronts, the buying power of average American families cannot withstand the high cost of money today. This is forcing many Americans to step back and assess the feasibility of buying a home right now.

So, why is it still the right time for the SFR investor to acquire long-term single-family rental properties?

 

 

UNLOCKING THE VALUE OF SFR INVESTMENTS

When it comes to investing in single-family real estate (SFR), the best investors are focused, disciplined and strategic. In this article, we’ll explore the merits of two different investment strategies:

• Strategy 1: Fix and Flip (buy, rehab, sell)
• Strategy 2. Fix and Hold (buy, rehab, rent)

...and how combining these strategies can lead you down the path to wealth.

On the surface, these investment strategies seem quite simple, almost colloquial to the conversations held at almost every cocktail party or backyard BBQ. Who doesn’t have a friend or family member who told them the story of a house they bought low, sold high, and took the profit to the bank?

By that same token, with the maturity of the SFR asset class over the past decade, who hasn’t heard of the BRRR method—the Rich-Dad-Poor-Dad approach to wealth creation via real estate? Or, knows someone in their circle with a small portfolio of rental houses that provides passive income on the side. The investment in housing as a side hustle or full-time profession seems almost as old as the American Dream of home ownership.

But investing in single-family real estate is not as easy as the newest HGTV show would have you believe. As stated earlier, it requires focus, discipline, and strategy. And the best SFR investors combine the art of the flip with the science of the rental as they walk toward the finish line of wealth creation. If all we have is time and money, let’s explore how we can best utilize both for ultimate success in this game, otherwise known as single-family rental investments.

Demand for affordable single-family homes is (still) astronomical! If you're a seasoned rehab professional, you know that between sky-high prices and bidding wars, getting your hands on an affordable rehab has been challenging. The good news is that once you get a property under contract, your margins for profit are strong – short term and long term. But, given market conditions, now may be the right time to go long on single-family rental properties to build wealth over time. With interest rates rising, the cost of a mortgage may force prospective buyers to keep renting. And given the stark reality of inflationary pressures in this market, investors can use single-family real estate investment to hedge inflation while building wealth over time.

 

After years of low interest rates, it seems 2022 is the year we’ll see them on the rise. With the Federal Reserve planning to embark on a series of interest-rate hikes this year beginning in March, real estate investors are preparing for these predictions to potentially become reality.

Fortunately, smart investors work from a strategic point of view, and many apply the BRRRR model, which helps in situations like these. To refresh, the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) Method is a real estate investment strategy that involves buying and rehabbing a property, renting it out, and refinancing the leased up rental property over a 30-year term at a fixed rate of interest. This Method provides an opportunity for passive income and a diverse rental portfolio. If BRRRR Method is one of your investment strategies, now is the time to lock in for the long-term.

 

Welcome back to the second installment of our goal-setting series. If you missed the first installment on SMART goals, be sure to check out Part 1 and begin crafting your goals. Remember, these aren’t resolutions but actionable, achievable goals to help you grow your business. Journaling has a place within that story, and we’re here to help you get started.

 

 

JOURNALING to Success

Journaling allows you to take inventory of the past and present and forge a new path for the future. It’s a simple way to get all your thoughts onto the page, and it can help you sort through your priorities. This is a great exercise to help you refine your SMART goals or help you identify what you want to prioritize before you document them. There are no right or wrong answers in journaling; it’s all about getting your thoughts out of your head and onto paper.

Whether you're beginning this new year with goals to start investing in single-family real estate or you’re a seasoned investor who wants to continue expanding your single-family rental portfolio, it's essential to set actionable goals, measure progress, and seek the right guidance along the way.

 

 

Why Goals Matter

Goals are very different from New Year's resolutions. While resolutions may be well-intentioned, they are often thrown together without a plan or willingness to sacrifice what’s required for success. Statistic Brain analyzed New Year's resolutions and found that just 8% of people achieve their New Year's resolutions while a whopping 92% fail completely.

Goals, on the other hand, are usually more well-thought-out, and come with action items attached to them. Those action items help frame the decisions and direct the resources applied to accomplishing the goal. They are the milestones to the roadmap which leads to the accomplished goal!

With 450 million travelers worldwide choosing vacation rentals over hotels in 2020, it’s no wonder why this investment strategy seems so appealing to investors. As the market continues to quickly grow with the prospect of profit (and a few other perks), there are still some considerations to weigh.

Whether you were flipping houses long before Chip and Johanna Gaines had a television show or you’re just now considering dipping your toe into the industry – this market is sure to leave you wondering if now is the time to start (or continue) your fix-and-flip journey. Together, we’ll be looking at the opportunity for profit and the obstacles that currently stand in the way.

 

1. Is the current market conducive to making a profit?

Home prices are still on the rise. The nationwide median listing price for active listings in September 2021 was $380,000, up 8.6 percent from the previous year and up 20.6% compared to 2019. The S&P CoreLogic Case-Schiller Index published the Home Price NSA Index on September 28, 2021, revealing home prices had soared 19.7% in the last 12 months. With affordable housing inventory still low and buyers (or renters) incredibly hungry for a place to call their own, sellers are being showered with offers that are much higher than list price. No one know when the market will flatten out or turn – that’s why it is so important to never forget that there are still other market factors to take into consideration when assessing an opportunity.