This discussion (Part 12. of our discussion on quantifying the economic impact of the investor business,) has found and correlated the many data sources that prove the real estate investment business is a vast, dynamic and growing business that has been in existence since people needed homes and other people had money to invest in housing them. It is larger than most of us understand and financing is what makes much of it work.
Look for this comprehensive NATIONAL ECONOMIC IMPACT OF SINGLE FAMILY REAL ESTATE INVESTORS Report to become available by October 30th 2016. Contact Tim@REI2020.com to get your copyFINANCING SINGLE-FAMILY INVESTMENT CATEGORIES
There are a number of single-family investment activities where financing is needed to make the process work. The investor can always buy for cash, or use a combination of cash and financing. Financing allows leverage for better cash on cash returns as well as expanding the investment capacity of the investing entity. Financing may be needed when:
- Purchasing investment property
- For renovation to prepare for sale (fix & flip)
- To renovate to hold and rent, or
- To refinance an exiting property or portfolio to expand an investment business.
FINANCING AVAILABLE TO ENTREPRENEURS & INVESTORS
Conventional bank loans are not typically available to real estate investors. Banks tend not to lend to an entrepreneurial investor or entity unless they fall into a category the bank finds attractive, like a large balance and long-term client or a commercial entity that has a proven track record with this particular class or investment. This emphasizes the necessity to think of real estate investment as more about this being a business rather than real estate.
In 2015 about 1,090,000 were sold to real estate investors (individuals, small-, mid- and large-cap entities.) In 2015 RealtyTrac (a division of Attom Data Solutions,) analyzed recorded sale data and found 179,778 were flips that were sold within 12 months of purchase date, concluding these were the product of an investor fix & flip activity. This is 5.5% of the total home resale market.
FIX & FLIP LENDING
Looking at more recent but similar data for Q’2 2016 RealtyTrac found more than 51,000 single-family homes and condos making this the highest number of flips in a three month period since 2010. In this sample RealtyTrac also found that 32% of investors engaged in flipping used short-term financing again exceeding the last record set in Q3 of 2008. These 51,000 or so flips were completed by a nine-year high of nearly 40,000 investment entities.
To translate this back to short-term financing we use previous data about the fix & flip market.
In 2015 179,778 houses were flips, the category spread, following rules of thumb that use 2016 RealtyTrac findings and typical margin rules,
|Renovation Class||Market %||# Houses||Est. $ Value||X 32% of F&F||Financed @ 65% LTV|
|$1million +||10%||18,000||$1.8 billion||$600 million||$390 million|
|$500K to $ 1 M||15%||27,000||$13.5 billion||$4.3 billion||$2.8 billion|
|$100K to $500K (av. =$223K)||60%||108,000||$24.1 billion||$7.1 billion||$5.5 billion|
|<$100K (av. =$75K)||15%||27,000||$2.0 billion||$648 million||$421 million|
Based on 32% financed at 65% Loan to value)
– 5,760 Luxury flips needed some $390 billion in short-term loans
– 8,640 high mid market flips needed $2.8 billion in short-term financing
– 34,560 median market flips, needed about $5.5B in financing
– 8,640 affordable flips required $421million in financing.
Following these assumptions fix and flip activity required $9.1 billion in short term or mezzanine financing that is most likely provided by local lenders. These may be private money loans generating around 10% per annum with or without special fees. Hard money lenders also provide short term funding with added fees at an average of around 14%. In any market there are a number of other entities and institutions that are structured to provide funding for real estate investment businesses.
Using simple math, this $9.1 billion in financing at an annualized 10% generates about a billion in interest and fees, and this is just for the fix and flip aspect of the market. It is most likely more than this as the lender want more than one turn a year out of their money.
RENTAL INVESTOR LENDING
The rental investor market is five times the size for both the short-term renovation in preparation of placing in this property as a rental or selling to another investor as a rental.
Purchase Renovation: The fees generated by short-term loans for this activity are not all a simple addition to the fees generated by the fix and flip business. We suspect many of the fix and flip loans may cross categories but clearly safe to assume that at least double the funding is needed for rental renovations that generate interest and fees to the lenders that represent at least another $2 billion in economic.
Rental Refinance: This class of financing has become visible in the last three years as a number of institutions have come to understand the low risk of lending to well managed, cash-flow positive rentals secured by title to the properties. The fees generated by these loans to this potential base of 8 to 10 million investors (serious individuals and investment businesses) owning some $26 million doors valued at around $6 trillion dollars.
Major Wall Street investment funds realize this is an untapped market and are processing hundreds of millions of dollars applications for the early adopters among the investment community. Once the market gets comfortable with this class of asset, asset performance, class of loan, lender and borrower, this market will become one of the high points of the financing industry as a single-family rental are generally accepted as a business asset.
Until this occurs it is safe to assume the investor financing industry is generating at least $3 billion a year and interest and fees for small to medium lenders and individuals willing to make private loans. If you are in need of investor financing from a fix & flip to rental property/portfolio refinance 2020 REI company 3L Finance can help.