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What Does the Cooling Real Estate Market Mean for BRRRR Investors?
of Business Development Jarrod Ellis. “This demand creates opportunity for real estate investors looking to grow their rental portfolios. And, while relaxing modestly month over month, single-family rent prices remain at record annual highs.” According to CoreLogic, the national Single-Family Rent Index (SFRI) is up more than 13% from a year ago (compared to the 2%-4% annual average maintained for the prior decade). THE UPSIDE TO RENOVATING RENTAL PROPERTIES Aiming to acquire distressed homes to fix up, investors focused on renovating typically are not competing directly with traditional home buyers or potential renters looking for move-in ready housing. Given that two-thirds of existing homes across the country are at least 30 years old and 40% exceed half a century, those with an appetite to rehab properties in need of improvement have the numbers on their side. As LYNK Capital CFO Matt Brothers explained, “Even with increased borrowing and supply costs, rent returns on updated homes can realize positive cash flow more quickly than in prior market cycles. The imbalance between supply and demand would indicate little chance of a dramatic dip in rental prices for the near future. This paired with the slow rate of housing starts, the current opportunity to capitalize on improving distressed housing cannot be understated.”
by Ben Lyons
nvestors looking to build value beyond simply purchasing
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PENT-UP DEMAND FOR HOUSING Even as the pace of real estate price growth slows and home sales are impacted by affordability concerns, a fundamental lack of housing inventory remains. Freddie Mac estimates a shortage of 3.8 million homes (including both rental and ownership) across the United States, and the Department of Housing and Urban Develop- ment’s August report indicates single-family housing starts in July were more than 10% below the June figure. Although the Fed is expected to initiate additional rate increases and mortgage applications recently reached the lowest levels this millennium, the fundamentals of the real estate market are very different from the dislocation that occurred in 2008, because mortgage lending standards are now more robust. Given the pent-up demand and slowing supply, few expect real estate prices will fall by any significant amount.
turnkey properties (i.e., those already rehabbed, tenant occupied, and generating positive cash flow) can be rewarded with significantly higher cash-on-cash returns. And, as a renovated property becomes a seasoned rental, investors repeat the process with a cash-out refinance, building a high-return residential rental portfolio with low to no out-of-pocket expense. Considering the recent and significant market shift away from historically low interest rates, the frenzied flow of home sales, and ever-increasing property values, a question is on the minds of many real estate investors: “Is there still opportunity for BRRRR investors in the cooling real estate market?” In a word, yes. Professional real estate investors continue to Buy, Rehab, Rent, Refinance, and Repeat. Although real estate investors always face challenges, the current environment can hold promise for experienced professionals looking to build a rental portfolio by renovating distressed or undervalued homes. The leaders of LYNK Capital share some important market indices and trends that support the potential upside and ongoing need for renovations-to-rentals in the housing industry.
RISING COST OF HOME OWNERSHIP CREATES OPPORTUNITY
“As the cost of home ownership continues to rise, many Americans are choosing to rent rather than buy a home,” noted LYNK head
10 | think realty magazine :: november – december 2022
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