Hard Money Facts

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.

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.

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.

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 pandemic has changed our lives and the economy in major ways. For many Americans, it has meant making the switch from working at the office to working from home. And it looks like working from home will continue permanently for many workers, even though some offices have reopened. With the flexibility of working from home, many Americans have opted to change where they call home. You may even be reading this from the comfort of your own home or local coffee shop!

With this new flexibility, some Americans have opted for a new view from their home office window. They are heading for both rural and suburban areas. We’ve witnessed younger households swap city life for the suburbs, while elderly Americans have hurried the decision to relocate to their retirement destination. Others still, have found refuge in country living. So, what’s left to buy, rent, fix, or flip?

To help you on your journey from rehab to rental, download the free Investment Rental Property Neighborhood Checklist.

How Can Single-Family Rental Property Investors Thrive in the Current Market?

All this has meant a hefty surge in demand for suburban single-family homes, retirement locales, vacation homes and investment properties. And while prices of homes in those markets have skyrocketed, both seasoned and first-time rental property and/or fix-and-flip home investors would be wise not to overlook other options with big potential. The flip side of this current real estate market is that with home prices spiking, little inventory, and high construction costs, an urban buy-to-rent property might be your next best investment opportunity.

Even as the talk is still churning about the swelling suburbs, it’s time to take a second look at urban areas. Urban areas have shown a growing increase in both revitalization and investment. Recent real estate market reports  also indicate that this urban renewal and resurgence began in the spring and should swell well into summer.

What conditions have created this opportunity for the buy-to-rent investment? There are two factors at play: First, an increasing number of young and would-be first-time home buyers are being priced out of the suburban markets where they find themselves looking for a home. Second, many of the most urban areas have been negatively impacted by this suburban “flight to quality." These two factors could create some urban buying opportunities for the single-family rental investor as the undertow brings the urban dweller back to the city in search of a rental home.

The opportunity for buy-to-rent is here. And whether you are new or a seasoned investor, you won’t want to go into new territory without the right partner. That’s where Residential Capital Partners comes in. We can help you decide if a buy-to-rent investment is right for you.

Your inbox: it’s overflowing. Your desk: it’s piled high. Your mind: it’s scattered, to say the least.

A seller’s market can be a godsend when you’ve just rehabbed a promising fix-and-flip property. But when a seller’s market brings you a high volume of offers, things can get complicated fast. Overwhelmed by your good luck, you may be tempted to simply select the highest offer from the stack.

Don’t. Competition breeds excellence. Use the forces at play in the market to your advantage. Borrowers may lie to you. Markets never will.

Follow these negotiation best practices:

1. Highest and Best Offer

If you are staring at a stack of offers on your rehabbed property, then you have done something right. Now, take your game to the next level. Study the offers that have come in comparing price, closing timeframe, conditions to close, etc., and use the best terms of each offer to outline what would be your perfect offer from the perfect buyer. Pick the 3 to 5 of the strongest buyers that:

• Have the best price and terms.
• Have the most experience.
• Have the strongest proof of funds letter or balance sheet presentation.

Call these buyers and tell them they have been hand selected out of many to sharpen their initial offer into a Highest and Best Offer. Tell them they have until 5:00 PM to get their final offer to you. Tell them you will call them by 6:00 PM to inform them if they won or lost. If they ask, have your “perfect offer” list by your side to give them a hint of where they need to improve. And then, go enjoy your day until the clock strikes 5:00 PM.

When you take out a hard money loan, bridge loan or investment property loan to buy a flip, you do it with one goal in mind: to make a profit.

In the process of your rehab, many factors will conspire to eat into your profits. Weather. Time. Unreliable vendors. The list goes on. But, few things eat away as much of your profits as taxes; the more you make, the more you pay.

One of the most effective ways to protect  your profit margin is to find legal ways to minimize your taxes. We’ve identified five proven ways to minimize your tax exposure – so you can keep more of the money that you’ve worked so hard for.

1. Maximize Your Deductions

Coronavirus has spread across the globe in rapid time, disrupting nearly every industry in its wake. House flipping is no exception. Real estate investors are now forced to navigate new challenges to secure funding. Banks are preoccupied and most hard money or private lenders are either sidelined, denying loans or raising interest rates and cash reserve requirements. The clock is ticking—what do you do?

Take a deep breath. You’ve landed in the right place.

Long before COVID-19 came onto the scene, Residential Capital Partners made the decision to run our business with refreshingly straightforward terms: No money down. 100% funding up to 70% ARV. 10% interest. 3 points rolled into the loan. 9-month term.

We’ve always prided ourselves on our transparency and now, more than ever, investors like you need a lender that can deliver on their promises, so you can keep making progress towards your goals.

So, true to our word, here’s a transparent look at what’s happening in the real estate flipping industry, and what you can expect from us:

Scott Gurten and his partner Nick Ferroni have funded five house flips through Residential Capital Partners and counting. Two were house flipping success stories that caught the attention of Philadelphia Magazine.

Their house flip on South 45th street was news-worthy due to Scott and Nick’s masterful renovation. Like many homes in the Northeast, part of the townhome’s charm was its history. Scott and Nick wanted to preserve the home’s character while modernizing key features.

1846 Latona St., Philadelphia, Pa. 19146 | Bright MLS images via BHHS Fox & Roach Realtors

In Scott’s words, “We finance our flips through Residential Capital Partners because they offer 100% financing to keep my up-front costs low. This creates opportunity and flexibility with my cash during the investment period, because I don’t have to put large down payments down.”

With more cash in their pocket, Nick and Scott were able to make updates to the front of the home while preserving the original 1800s woodwork on the façade.

Main entry