The real estate investment market has changed significantly in the past decade. As the U.S. housing stock has aged, real estate investors have found tremendous opportunity to refurbish outdated properties and meet demand for modern, move-in ready homes. At the same time, investors are achieving their personal goals of financial independence and generational wealth.
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. ●
