Hard Money Facts

As we move further into 2024, the real estate market continues to evolve, with suburban areas emerging as prime spots for rental property investments. The pandemic’s lasting impact on work-life dynamics has driven many families and professionals to seek more space and a better quality of life outside urban centers. For real estate investors, this shift presents a golden opportunity. Let’s explore some of the hottest suburban markets for rental properties in 2024.

As an experienced real estate investor, you've achieved a level of success that many aspire to. With numerous deals completed and a solid track record, it’s easy to fall into the trap of complacency. However, maintaining excellence requires constant vigilance and adherence to the principles that built your success. Here are some common mistakes seasoned investors often make and how to avoid them.

CNBC’s Squawk Box recently reported that through the first eight months of 2023, the real estate investment community turned to private lenders to fund their deals 70% of the time. It’s no secret why single-family real estate investors choose private lenders over traditional banks: speed. The private lending community moves faster than traditional banks and, thanks to their business acumen and experience, is more likely to take mitigated risks during uncertain times.

That said, it is not uncommon for real estate investors to hear “no” from lenders in periods of market volatility. When interest rates are high, lenders—especially those backed by Wall Street—are far more scrupulous of the deals coming across their desk, which can extend their time to approve or deny your loan. The longer it takes for your deal to be approved—the greater the likelihood of the deal falling through. A “no” hurts, but if received in a timely manner, still leaves you with time to find financing elsewhere. A “slow no” can be death by a thousand cuts, evaporating the time you need to find a financing solution. 

What’s an investor to do? Here are a few practices single-family real estate investors can employ to circumvent a “slow no” from private lenders, as told from three of Residential Capital Partners’ account executives, James Loffredo, Kyle Dreyer, and Hunter McLean.

The first rule of investing: don’t lose money. The second rule: don’t forget the first. (Thank you, Warren Buffet.)

Residential Capital Partners has been in the investment-making business for over 25 years. Along with my three partners, we’ve adhered strongly to rules one and two, as well as generating several other investment principles to live by, gleaned by our own experiences—namely in respect to the importance of due diligence, rigorous financial analysis, and conservative exit expectations to mitigate risk and protect margin.

The following principles have shaped the structure and growth of Residential Capital Partners over the past 15 years, but they’re applicable for any investor, whether you’re wholesaling houses, rehabbing and flipping houses, or investing in single family rentals to build wealth. 

In business as in life, you’re only as strong as your relationships. Which is why we’re so proud of our relationships with HomeVestors franchisees over the last 15 years. Our relationship spans the global financial crisis of 2008, the global pandemic of 2020 and the rising interest rate environment of 2023. Through it all, we have been honored to help the franchisees at HomeVestors succeed in good times and bad.

Henry Ford said it best: “Coming together is a beginning; keeping together is progress; working together is success.”

To tell our story of success with HomeVestors, we gathered Residential Capital Partners’ leadership and a couple of HomeVestors’ top performing franchisees for an interview that’s been a long time coming.

How did HomeVestors and Residential Capital Partners first join forces?

Paul: Everyone in finance has a story from 2008. For Residential Capital Partners, it was the beginning of our relationship with HomeVestors. The global financial crisis created a void of credit in the single-family rehab and rental marketplace and HomeVestors needed a balance sheet lender to supply financing for its franchisees. Wall Street shut down and traditional banks sat on their hands, but we decided to lean in and provide capital to the HomeVestor franchisee community because we were so impressed with their training, work ethic and values. Since that time, we’ve closed 3,153 loans for HomeVestors franchisees.

This month, Fitch Ratings downgraded the United States’ long term ratings from AAA to AA+, citing growing government debt and repeated fights in congress over raising the debt ceiling as major factors in their determination. You might be wondering: is this bad news for single-family real estate investors?

Hold that thought.

Single-family real estate investors are usually good with numbers – they have to be in order to achieve success in the real estate investment business. The math equation going into every real estate investment is paramount to profitability – which makes it easy to get fixated on finding the lowest possible interest rate (especially when interest rates are high), and potentially overlook the signs of a wily lender attempting a bait-and-switch.

Suspicious you’re not getting the deal that got you to walk in the door? Here are the telltale signs your private lender does not have your best interest in mind, and how to avoid the bait-and-switch trap:

Networking is an essential skill for success in any industry. For house flippers, it can open doors to new opportunities, partnerships, and perspectives that can help you scale your business. (Even when interest rates are high!) Business cards and social media groups are a good start – but the following underused strategies will give you an edge over the competition.

Demand for affordable housing remains high, which is good news for single-family real estate investors across America. As the single-family rental (SFR) industry continues to mature and become more institutional across the board, many investors are opting to keep their flips as rental properties.

The steps to fix-and-flip and fix-and-hold are similar, but there are important things to consider as you build a rental portfolio. You’ll want to answer some strategic questions on your journey to building long-term wealth.

Should I Choose a Fixed or Adjustable Rate?

After nine consecutive rate hikes by the Federal Reserve since March 2022 and a Fed Funds rate over 5%, every investor in America is acutely aware of interest rates and the impact they can have on their investment. For the SFR investor looking for the right financing solution for a rental property, there are two options: a mid-term or long-term approach.

The mid-term solution comes in the form of a 5, 7, or 10-year interest-only, adjustable-rate mortgage (ARM). The benefits of a mid-term solution are two-fold: 1.) You only pay interest on the principal balance of the loan, which means cashflow is higher than that of a fully amortizing loan, and 2.) You have a window of time to assess long-term interest rates and plan for the day when you ultimately lock in a long-term 15 or 30-year financing solution. The risk of an ARM is that long-term interest rates move higher than your existing interest rate during the 5, 7 or 10-year window and you get stuck in a negative leverage situation.

The long-term solution comes in the form of a 15 or 30-year fully amortizing, fixed rate mortgage. The benefits of the long-term solution are also two-fold: 1.) You have certainty of what your mortgage payment will be over the long-term, regardless of what happens in the interest rate market, and 2.) At the end of the financing period, the asset will be free and clear of all debt while still providing a steady stream of cashflow. The downside of a long-term solution is that these mortgages typically come with hefty pre-payment penalties over the first five years of the mortgage period, which makes it more costly if you want to refinance the asset as/if long-term interest rates move down during that five-year period.

Related: 5 Ways Rental Properties Make You Money 

Is your stomach turning every time the Fed raises their rates? You’re not alone. America is facing an affordable housing crisis; demand for affordable housing is high, but the high interest rate environment created by the Fed is producing gridlock when it comes to supply. You may be thinking it’s a good time to circle the wagons and wait out the storm. A defensive stance like so is not uncommon in times of economic uncertainty. But if history has a way of repeating itself (and it does), then now is the time to hunt for opportunity.

Down payments are typical in private lending. Real estate investors usually accept down payments as a necessary part of financing their rehab, focusing instead on finding the lowest rate. But your down payment has a huge impact on your business. Down payments leave you cash poor in a cash intensive game.

When choosing a lender, most real estate investors don’t put much thought into the origin of the lender’s source of capital—or whether they sell their notes. But choosing a balance sheet lender goes a long way in your ability to control your own destiny. In the words of Rick Morgan, Chief Investment Officer at Residential Capital Partners, “If your lender is selling your loan to Wall Street, you’re not a customer—you’re a trade.”