Today’s housing market is experiencing a significant issue with shrinking inventory in available real estate due to such a high demand from buyers; coupled with historically low housing starts, resulting in a steady increase in the price of properties when they come on the market.
According to a report conducted by Zillow, “there are 10 percent fewer homes on the market to choose from than a year ago, and up to 40 percent fewer in housing markets where home values are appreciating fastest.” Zillow continued to report that the median home value for the U.S. rose 6.5 percent over the past year to $206,300, a record high.
This decrease in the pool of potential properties coupled with increased buyer demand and elevated property prices has caused serious competition amongst real estate investors and this competition has affected the rental market as well. Zillow reported that “median rent across the nation rose 2.6 percent since last December.”
As investors are trying to get in on the rental market action, the bigger institutional investors are quickly buying up the most profitable real estate and properties that would be considered “rent-ready,” leaving smaller investors struggling to find that next deal. A rent-ready property is one that only requires minor cosmetic fixes such as painting or new carpet.
What does this mean for these smaller investors looking to get ahead in such a competitive market?
Investors will need a different strategy to create value in properties where it is not always so apparent. This strategy is known as “fix-to-rent” (also known as rehab-to-rent). Whichever name you know it as, fix to rent is where investors purchase properties and put significant renovations and repairs into them, then rather than flipping or selling it within a year, decide to keep it as a rental and fill it with tenants.
For example, if an investor purchases a distressed property with four bedrooms and only one bathroom, they may find that converting the smallest bedroom into a master en suite bathroom would raise not only the property’s value, but also the potential for charging higher monthly rents.
Fix-to-rent may not be for everyone because it will require a more hands-on approach from the investor. Rather than just buying a rental and finding tenants, the investor will need to take on a more active role in the renovation portion of the project, and for some investors, this may not be an appealing idea.
However, that extra legwork can be worth it in the long run because investors are providing themselves with a chance for better returns on their investments, long-term sustainable cash flow, income generated from monthly rents, and the added incentive of the property increasing in value through home-price appreciation. Rental investors may also find there is less competition among other investors for these types of properties because they are going after the market-ready ones more so over the distressed ones.
In this highly competitive market, fix to rent will continue to be a growing trend amongst investors looking to find that next deal and create value. As a result, a greater number of investors will seek methods of financing for these types of projects.
Instead of just a typical fix-and-flip loan or a rental loan, investors have access to LendingOne’s Rehab-to-Rent program which offers a fix-and-flip loan for the initial purchase and repairs, and the option to roll into a refinanced rental loan when the property is leased. By using the same lender, investors save time and money on fees since all their information is already on file from the underwritten property.
Check out our Rehab-to-Rent loan as well as our Fix-and-Flip or Rental loans for more information. Apply today and receive an instant rate quote absolutely free.