The next buzz-worthy category in niche loans

by Kimberly Greene13 Feb 2019

Fix and flip has been hot for a while now, but it’s also an increasingly difficult space for investors to operate. Due to the overall housing inventory shortage, coupled with steady population growth and job opportunities in many markets, investors have found themselves competing with first-time buyers for properties. Even when investors do find a suitable property and there’s a lot of potential given the strong appreciation of home prices, many investors are inexperienced, and either pay too much for the home, and/or miscalculate either the rehab costs or the after-repair value (ARV).

Sure, there might be a bit of profit made, but chances are, the projects for most people aren’t as profitable as they were in recent years. 

But there’s another side to the investor mortgage coin, and that’s the build-to-rent space, which is generating a lot of buzz.

Robert Greenberg, chief marketing officer at Patch of Land, says that the for the investors, the fix-and-flip types, they’re used to getting a 12-month interest-only loan, and don’t necessarily know where to go to get a build-to-sell or even a build-to-rent loan. They’re specialized, and not always easy to find.

“I think from a mortgage origination standpoint, and certainly from a broker standpoint, recognizing what’s happening in that segment and being able to find lenders that are doing that kind of business that you can bring your clients to and get them a loan is I think a really great opportunity in the current climate.”

While Patch of Land does do these types of build-to- loans, they’re a small percentage of their overall business. Even so, with about $30-$40 million a month, Greenberg says, they’re still probably one of the top lenders in the space.

The build-to-rent space is by definition a commercial loan, which means that it has to be non-owner occupied, built with the intent to either sell it to someone or, if it’s going to be rented, rented to someone other than a family member. It may be harder to find lenders who have these types of loan programs, Greenberg said, but the final results may be more favorable to buyers for a number of reasons.

The first reason is that home are simply older than they were 10-15 years ago. Homes that may have been ripe for renovation at that time, left to their own devices, are now in even worse shape. It makes more sense for someone to tear them down and build anew—something that new buyers find very attractive. Another reason is that as mortgage rates rise, buyers may simply not have the money to do renovations themselves, so they’re better off buying a house that’s not going to need repair.

This doesn’t mean that the fix and flip model is going away, Greenberg said. Only that it’s going to get more challenging over the next couple of months.

“We’re going to see the same cycle that we’ve seen every decade or so [since] post-WWI. We’re going to see interest rates do what they’re doing, our government’s doing what it’s doing, the economy’s been doing what it’s doing, it’s time for things to correct a little bit, and that’s certainly a healthy thing,” Greenberg said. “Part of the by-product of all of that going on is, it becomes a little bit unnerving for people who are not really sophisticated to come into a project and feel confident that they’re going to be able to get out with the margins that they need. So as a result, lenders and originators and everybody is going to see some number of fewer deals out there, and the deals are going to be harder to get, and part of that is because the guys who are wanting to do those deals, there’s just less of them and they’re being less aggressive.”

When considering whether to invest in a build-to-rent or a fix-and-flip space, buyers obviously need to consider their profit margins in terms of comps, building costs, and the like, but they also need to consider the demand for the finished product.

“Despite what might happen with home prices, there’s still going to be demand. I have no reservations whatsoever. I believe housing demand is not going away, there’s tons of people coming to this country, there’s tons of people moving from one area of the country to another, where the jobs are. Like the whole DC with the Amazon thing—you’re crazy to think that the housing market is going to implode. It’s just not.”

Greenberg thinks this is going to be an exciting segment of the business for the next couple of years. Originators can start by finding lenders who offer these products, and then seek out the investors who are interested these types of loans. The latter isn’t hard.

“Like the fix and flip business, there’s group meetings, people that are brokering these kinds of things, they have a way of getting to the people who are getting to the people who are doing this kind of work. The trick is to be able to have a solution for them.”

For more details on loans that can set you apart, come to Anaheim on April 4th for our Niche Loans session featuring Laura Brandao, Don Currie, and Chad Jampedro.