Evolving into a nationwide phenomenon with meaningful benefits for both investors and the communities they serve, the real estate investment landscape experienced steady growth between 2013 and 2023, primarily due to local mom-and-pop investors. Growth in real estate investment also creates opportunity for mortgage originators. These deals can be funded with residential transition and debt-service-coverage ratio (DSCR) loans.

“Despite the near-term headwinds in the market, the future is bright for real estate investors.”

 Knowledge of this market is a useful tool if you currently offer these products or are considering them for your arsenal. Real estate investing has a deep history, presents unique loan scenarios and promises a bright future.

Market history

Fix-and-flip home renovations might be a ubiquitous concept today, thanks to HGTV. But the phenomenon of acquiring properties to update and resell them really took off in the 1980s, when economic downturns and dwindling stock market returns led to a surge in home foreclosures.

Rather than let these properties go to waste, investors took notice of the profitable opportunity. They began purchasing foreclosed homes with the intention of renovating and reselling them for a profit once the housing market showed signs of recovery.

Throughout the 1980s and ‘90s, this trend was propelled by private financing that fueled a growing interest in renovation of older properties. Inspired by TV shows like “This Old House” and encouraged by emerging retail giants like Home Depot and Lowe’s, many new homeowners began to undertake DIY renovation projects that paved the way for the YouTube channels and TikTok videos of the modern era that are focused on house flipping.

Today, flipping is seen as a viable profession as investors have gotten the cycle of purchasing, renovating and reselling properties down to a science. The financial crisis of the late 2000s triggered a surge in private debt as the primary financing source for individual real estate investors, especially in the fix-and-flip sector. Private lenders began offering short-term bridge loans that became a hit for borrowers, due to the quick approvals and more lenient credit criteria when compared with traditional financing methods.

Trends over time

According to real estate analytics company Attom, the percentage of homes purchased for flipping purposes rose from 5.8% in 2020 to 8.4% in 2022. These investments yield varying returns but generally prove profitable, with year-end 2022 Attom data showing an average gross profit of $67,900.

Where these investments are happening has changed a lot in the past decade. The most popular residential markets of 2013 — including Houston, San Francisco, and Bethesda, Maryland — have now been superseded by markets like Atlanta, Raleigh and Dallas-Fort Worth, which topped the National Association of Realtors’ 2023 list of the hottest markets. Fix-and-flip transactions have increased from 4.6% of all U.S. single-family home sales in 2013 to 7.2% of all sales in third-quarter 2023. The current wave of fix-and-flip activity is being driven by several trends.

First, an increasing number of households are seeking move-in ready homes, driving the demand for renovated single-family properties. Existing home inventory has decreased steadily over the past decade. Although supply entered an upswing from the ultra-low inventory early in the COVID-19 pandemic, the 3.6 months of supply at the current sales rate in October 2023 was down from five months a decade earlier. Low supply has created opportunity for real estate investors to provide housing solutions.

Second, 60% of real estate investors are small-scale, mom-and-pop investors and business owners who prioritize investments in their local communities, according to Kiavi data. They play a pivotal role in revitalizing neighborhoods through renovation and repurposing of under-improved homes, bringing a community-based mindset to their projects.

Third, sustained demand for rental housing has created a steady stream of cash flow for real estate investors. The number of single-family renter households has increased from 40.2 million (or 30%) of all U.S. households in 2013 to 45.2 million (or 35%) in 2022, per census data. This provides investors with a consistent source of income.

Lastly, the aging U.S. housing stock presents an opportunity for real estate investors to renovate older homes and meet the growing demand for turnkey properties. This helps create more affordable housing options and future opportunities for homeownership.

Short-term forecast

Technology and data are the future of real estate investing. Data-driven technologies, including advanced artificial intelligence (AI) and machine learning models, are set to empower investors by dismantling traditional borrowing hurdles, automating time-intensive processes, and delivering swift and more tailored financing.

Today’s borrowers want access to personalized, transparent pricing and on-demand capital. Advanced technologies synthesize extensive data sources to reveal insights that enable investors to make faster, more informed decisions. Precise assessments of factors such as after-repair value ultimately increases the likelihood of success for each project. This efficient use of data clarifies potential risks and rewards, providing a structured pathway for investors to have lucrative and successful projects.

AI and machine learning models are becoming more sophisticated, providing clarity to lenders about primary risk factors tied to the investor, property and local market conditions. These models create better overall outcomes from an underwriting perspective and empower investors to successfully exit projects.

Although interest rates won’t be returning to historic lows anytime soon, there remain plenty of opportunities for investors looking to grow their business. Given the low inventory of homes for sale and the number of buyers looking for move-in ready homes, fix-and-flippers did well in 2023. And we can expect to see this trend continue in the coming years.

Despite the near-term headwinds in the market, the future is bright for real estate investors. From fix-and-flip projects to long-term rentals and new construction, each real estate investment helps to revitalize neighborhoods and provide much-needed turnkey housing, all while enabling investors to achieve their wealth-creation goals. ●

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Although the dynamics of America’s underserved communities are complex, one tried and true way to uplift and revitalize neighborhoods is by investing in and improving homes. Local real estate investors are often best positioned to pursue these opportunities. Their boots-on-the-ground perspective provides an ability to see the potential in a renovation project and its impact on the community.

“Building new housing stock is important, but housing supply is most needed at the lower end of the cost spectrum, in communities with little economic incentive to encourage new development.”

Let’s take a closer look at the benefits of residential real estate revitalization and how local investors can create opportunities for their own communities to flourish. Mortgage originators can be the bridge to assist investors in improving these communities.

Dividing line

Community deterioration has been well studied. Ill-intentioned public and private policies, often racially fueled, have served to extract community resources and concentrate poverty. For example, almost every distressed urban area in the U.S. has had a highway built through it at some point, quite literally creating a divide through the community, according to the nonprofit organization Purpose Built Communities.

Many of these projects specifically served to isolate and resegregate minority communities in many major cities across the country, including New York, Atlanta and Minneapolis. The effect of these actions is almost always the same: People who can afford to move away leave the area, resources and jobs follow, and the community suffers.

Residential real estate investment is a tool that, when used properly, can revive and strengthen communities. Investing in residential properties — particularly through the rehabilitation of dilapidated homes and land sites — heals communities from the inside by attracting new residents, diversifying socioeconomic demographics, and ultimately attracting jobs and community resources. This approach also has the potential to create generational wealth for the investors who are helping these communities.

Research from the Center for Community Health and Development at the University of Kansas found that improving the quality of housing increases neighborhood pride, leading to a reduction in crime, violence, vandalism and other social challenges. Residential real estate investment also encourages other types of community and commercial developments, thereby increasing city tax revenues and personal property values.

Housing disrepair

In addition to the rise in distressed communities, the nation is also suffering from a severe housing shortage. Recent research from the National Multifamily Housing Council suggests that the U.S. has a shortage of 600,000 apartment units and needs to build 4.3 million new apartments by 2035 to meet current demand.

The single-family home construction industry is nowhere close to meeting its goal either. A recent report from Realtor.com estimated that the nation has a shortfall of 6.5 million single-family homes. About 1 million single-family starts occurred in 2022, down 10.6% from the prior year.

What’s missing from these statistics is the allocation of housing. Building new housing stock is important, but housing supply is most needed at the lower end of the cost spectrum, in communities with little economic incentive to encourage new development. In these communities, functional housing obsolescence — a term used to describe homes that do not align with buyers’ needs and wants — has been on the rise for more than a decade.

Investment in existing residential properties — rather than in new developments — is a cure for this problem. Investors can breathe new life into outdated and obsolete homes. There are opportunities to repurpose unwanted housing stock and make it appealing to a new generation of homeowners. This type of residential investment actually increases supply and provides relief to the housing shortage at the lowest end of the cost spectrum.

So, why don’t more older existing homes attract investment? There’s not one simple answer, but one common challenge is that local investors often lack access to capital.

Meaningful change

The biggest challenge to supporting residential investment in underserved communities isn’t a lack of opportunity or desire — it is a lack of capital. Local investors may have the capability and inclination to invest in residential housing projects that could catalyze community growth and development, but they often don’t have the means to fund these projects.

National and regional banks are typically too risk averse to fund residential revitalization loans. Local investors don’t have the same access to the capital markets as large institutions. The good news is, capital is out there, but it might not be available through a local bank branch. Technology-enabled private lenders are filling the funding gap and democratizing investment capital for small and scaling investors.

Using a robust pool of data that focuses on the subject property and housing demand, rather than the singular credit of the borrower, makes it possible to underwrite properties and borrowers in a way that removes the traditional barriers to securing investment capital. A faster and more transparent application process means that borrowers who might not otherwise be able to secure a loan can pursue their goal of investing in real estate — and revitalize their communities while doing so.

Technology-enabled lenders are also diversifying investor pools and offering residents of the same neighborhoods that need revitalization an opportunity to build wealth. These loans have a meaningful impact on borrowers’ lives by creating opportunities that traditionally have only been available to a select segment of the market. For many prospective real estate investors, the ability to access capital and pursue promising career opportunities can be life changing.

It is clear that reserving capital exclusively for established investors is not a solution to the current housing crisis. Investment in residential real estate has the potential to truly address some of the nation’s deepest problems. By improving access to capital through technology and data-enabled lending, a new generation of real estate investors can pursue opportunities that create meaningful change for themselves and their communities — one property at a time. ●

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