Hard Money Facts

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)

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.

Now that we’re less than half a year away from 2022, what do we know so far about 2021? In the last year alone, median values of single-family homes and condos rose more than 10% nationally. This rising surge of new house hunters and a super tight supply of housing inventory was also impacted by an ongoing pandemic. With mortgage rates remarkably low, home buying became an attractive option for many Americans seeking more space, a second home, or a work-from-home office with a better view.

SLIGHT DIP OR REAL DOWNTURN?

Now, halfway into the 10th year in this housing boom, many home investors wonder: will real estate markets flatline or drop? How long will these high prices last? While we can’t see into the future, we have some new data about how 2021 compares so far to prior years, both before and since the housing boom. According to a report from ATTOM, fix-and-flip real estate investments have fallen to the lowest level since 2000. In the first quarter of 2021, the same report cites only one in 37 transactions, or only 2.7% of home sales, were flips. Compare that figure to where we were in the first quarter of 2020: down from 7.5%, or one in 13 sales were categorized as fix-and-flips.

The secret to successful real estate flipping is knowing which improvements attract buyers and enhance the value of the home.

Here are some of the win-win improvements that make buyers and investors both happy.

1. Minimize Costs By Choosing Wisely

The bones of the home, i.e. the basic framework and layout, determine the size of the rehab budget. Jonathan Faccone, Founder, Halo Homebuyers LLC, has this sage advice for flippers: “When choosing a property, look for houses that can be improved without being reconfigured.” That’s particularly true if you want a house with an open concept, or if you envision adding value by adding a bedroom or bath.

Simply put: Painting walls is cheap. Moving walls is another story. If the old adage “you make your money on the buy” is true, then finding a floorplan that works as-is yet needs some love and attention is critical.

2. Cost-Efficient Kitchen Remodeling

A nice, remodeled kitchen is a huge draw for potential buyers. One caveat: It’s easy to go overboard. If you gut an entire kitchen, a mid-range remodel can easily run up to $60,000 — and net you only a fraction of that when the time comes to sell.

It pays to make your kitchen shine when you do it cost effectively:

• Sand and paint cabinets instead of replacing them.
• If paint isn’t enough, try replacing the doors instead of demoing the cabinets
• Instead of a $4,000 stainless fridge, find a tasteful one on sale for $1,000.

Remember: Your hard money loan is generally limited up to 70% of a home’s after-repair value. Choose the remodel projects wisely.

A large segment of today’s housing market is fueled by real estate investors seeking to turn a fixer upper into a nice, tidy profit. If you manage to avoid the common rehab pitfalls, you can turn a profit too! But know, mistakes are not made by properties. Mistakes, most often, are made by novice investors and the assumptions they employ on their way to becoming a seasoned investor.

The good news is that the most common mistakes investors make are entirely preventable…if you do these seven things:

1. Underestimating The Project Scope

Underestimating the time, hard costs and the amount of work involved is one of the surest ways to drain the profitability of your flip. You estimate four months of work – it takes six. You estimate for some new shingles – you need a new roof. You estimate your property will sell in four weeks – it sits unsold for three months. In short, each inaccurate estimate makes a direct impact on your bottom line.

2. Underestimating Or Ignoring The Non-Material Costs

Drywall, flooring, windows and landscaping aren’t the only costs that will go into your flip. To turn a profit, you will need to anticipate all the other “soft” costs you’ll incur including: appraisals, closing costs, building permits, inspection fees, realtor costs, property taxes and utilities, as well as interest from the real estate investment loan.

It’s easy to fall into the trap of thinking: “those will be covered when I sell”. But that’s just another way of saying: “it’ll come out of my profits.” Wise investors anticipate those costs up front and build them into their overall budget.

Your contractor can have a profound impact on almost every aspect of your real estate flip: deadlines, quality of work, budget, and return on investment. And whether the overall experience will be energizing or draining can also depend on whom you hire.

So, if you’re funding a flip, or using a hard money lender, it’s important to keep your flip on schedule and on budget. We all know that time is money. But unfortunately, not all contractors understand or care. Follow these steps and you’ll be able to find good contractors and build lasting relationships with the ones who come through for you.

Flipping a house requires money – lots of money. Beyond the purchase price, single-family investors must come out of pocket for legal fees, appraisal fees, title costs, closing costs, home inspections, rehab costs and disposition costs. In a Seller’s market, these costs have a tendency to go the way of home appreciation…up, up, up and away. Given the median purchase price for existing homes in June 2020 of $295,300, these numbers add up fast especially when you are doing more than one flip investment at a time.

Whether you are flipping one, two, or dozens of houses per year: maintaining adequate cash reserves is critical to keeping your operation up-and-running, so that you can realize the back end profits associated with your investment. As they say…cash is king!

That is why so many single-family investors look for a financing partner to fund their fix-and-flip investment properties. Having more cash on hand gives you, the investor, flexibility in a dynamic market whether that means more cash to realize an unexpected opportunity, more cash to negotiate a better deal with a faster close or more cash to give you peace of mind through the investment cycle. Knowing which available financing options will give you the most flexibility as an investor is the key.