Last
year
might
best
be
described
as
a
risk-prone
atmosphere
for
the
single-family
rental
sector
and
the
related
fix-and-flip
market.

The
risky
operating
environment
has
been
marked
by
volatile,
high
interest
rates
(with
30-year
fixed
rates
now
hovering
around
7%),
high
financing
costs
and
moderating
rental
rates
as
an
influx
of
multifamily
rental
properties
continues
to
come
online
across
the
country. 

Still,
despite
the
gloomy
news
of
late
for
SFR
and
fix-and-flip
investors,
some
industry
experts
see
better
fortunes
ahead
in
2024
for
both
sectors.

“We
didn’t
call
it
a
bear
market,
but
we
did
call
it
a
lack
of
liquidity,
which
I
think
is
more
accurate,”
said
L.D.
Salmanson,
CEO
of Cherre,
a
data
integration
and
insights
platform
serving
the
real
estate market,
including institutional
owners
of
single-family
rental (SFR)
properties.

“That
started
in
Q4
of
2022,
so
it’s
been
about
six
quarters
at
this
point,
and
we
predicted
it
would
last
24
to
26
months,”
Salmanson
added.
“So,
there’s
at
least
two
[quarters]
left,
and
I
don’t
see
anything
that
will
turn
things
around
in
the
next
couple
of
quarters
where
we’re
going
to
see
a
massive
number
of
(institutional
SFR)
transactions.
It’s
going
to
be
a
few
more
quarters
before
that
happens.”

In
addition,
any
reprieve
in
the
housing
inventory
shortage
created
by
more
multifamily
units
hitting
the
market
is
expected
to
be
short-lived.
In
recent congressional
testimony,

Mortgage
Bankers
Association
(MBA)
chief
economist
Mike
Fratantoni
pointed
out
that
the
housing
market
is
now
extremely
supply
challenged.

“While
estimates
of
the
needed
supply
vary
widely,
it
is
clear
that
we
are
millions
of
units
behind
at
this
point,”
Fratantoni
said
in
his
statement
submitted
this
month
to
a
subcommittee
of
the U.S. House
Financial
Services
Committee.
“And
even
though
we
expect
to
see
a
large
delivery
of
multifamily
units
over
the
next
few
years,
this
will
not
resolve
the
broader
lack
of
inventory
that
we
see
across
the
country.”

The
inventory
shortage
—
in
addition
to
high
financing
costs
tied
to
elevated
interest
rates
and
related
inflation
for
construction
expenses
—
led
to
a

nearly
30%
decline
in
home
flips
in
2023,
according
to
real
estate
data
firm Attom.

The
performance
of
the
fix-and-flip
market
—
in
which
investors
purchase,
rehabilitate
and
resell
homes
—
can
serve
as
a
barometer
for
housing
supply
in
general,
given
that
the
sector
adds
for-sale
inventory
to
the
market.

Last
year,
there
was
a
total
of
308,922
single-family
home
and
condominiums
flips,
compared
with
436,807
in
2022,
according
to
Attom.
Gross
profits
for
home
flippers
also
declined
last
year,
to
an
average
of
$66,000
nationwide,
down
from
$70,100
in
2022.

Attom
points
out
that
investment
returns
on
these
projects
in
2023
were
at
levels
that
“could
easily
be
wiped
out
by
the
carrying
costs
during
the
renovation
and
repair
process,
which
usually
consume
20
to
33
percent
of
the
resale
price.” 

“In
2023,
the
landscape
for
home
flipping
across
the
U.S.
became
increasingly
challenging,”
Attom
CEO
Rob
Barber
said
in
a
statement,
adding
that
“the
sharp
decline
in
the
number
of
home
flips
likely
reflected
a
combination
of
a
tight
supply
of
homes
for
sale
as
well
as
dwindling
returns. 

“Either
way,
it
will
take
some
significant
reworking
of
the
financials
for
home
flipping
fortunes
to
turn
back
around.” 

Looming
rebound

Despite
the
hardscrabble
market
realities
facing
SFR
and
fix-and-flip
investors
last
year,
2024
could
prove
to
be
the
year
a
rebound
occurs
—
even
if
its
full
effect
is
not
realized
until
later
in
the
year.

For
one,
the Federal
Reserve,
despite holding
its
benchmark
rate
steady at
its
March
meeting,
is
still
signaling
plans
for
three
rate
cuts
this
year.
That
should
help
to
unlock
more
inventory
while
also
reducing
financing
costs
for
leveraged
investors. 

In
addition,
new-home
construction
—
including
in
the
hot
build-to-rent
(BTR)
sector
—
is
helping
to
slowly
boost
housing
supply.

“While
existing
home
inventory
is
quite
constrained,
with
about
1
million
homes
for
sale
nationwide
…
builders
have
certainly
picked
up
their
pace
of
construction,
and
new
homes
now
account
for
roughly
one-third
of
homes
on
the
market,”
Fratantoni
told
the
House
committee.
“This
compares
to
a
more
typical
10%
share
of
total
home
inventory
historically.”

There
is
also
an
expected
surge
of
housing
demand
that
is
likely
to
translate
into
healthy
sales
and
rental
activity
in
the
years
ahead. 

“The
U.S
population
currently
has
about
50
million
individuals
between
the
ages
of
30
and
40,”
Fratantoni
said.
“This
large
millennial
cohort
is
in
the
ages
where
household
formation
is
at
its
peak,
and
we
are
seeing
roughly
1.5
million
households
formed
each
year.”

Keith
Lind,
CEO
of Acra
Lending,
a
leading
nonqualified
mortgage
lender,
said
early
indications
are
that
the
year
ahead
looks
promising for
non-QM
and
related
investment
property
lending
for
his
institution.
Non-QM
loans
typically
serve
clients
who
have
nontraditional
income
sources,
including
the
self-employed.

Lind
points
out
that
some
45%
of
Acra’s
non-QM
loans
are
to
borrowers
purchasing
investment
properties.

“Our
pipeline
of
non-QM
loans
is
up
30%
from
January
and
February
of
last
year,
versus
January
and
February
of
this
year,”
he
said.
“We
did
$2.4
billion
last
year
of
(non-QM)
originations,
and
we
think
we’ll
do
about
$3
billion
this
year.”

Secondary
market

A
review
of
securitization
deals
tracked
by Kroll
Bond
Rating
Agency (KBRA)
that
are
backed
by
non-QM
loan
pools
and
comprised
of
at
least
30%
investment
properties
(primarily
single-family
properties)
shows
that
in
roughly
the
first
10
weeks
of
2023,
there
were
17
private-label
offerings
with
a
total
value
of
$6.5
billion
that
closed.
This
year,
during
the
same
period,
20
such
securitization
deals
with
a
total
value
of
$7.3
billion
hit
the
market.

Peter
Van
Gelderen is
co-head
of
Global
Securitized
at TCW,
a
leading
global
asset
management
firm.
He
points
out
that
investors
in
the
secondary
market
are
attracted
to
investment
properties,
particularly
in
an
environment
where
rates
are
expected
to
soon
start
declining.

“Investors,
like
asset
managers
and
insurance
companies,
like
investment
property
loans
because
they
are
comfortable
with
the
underwriting
—
the
debt-service-coverage
ratio,
or
DSCR,
underwriting,”
he
said.
“But
investment
property
loans
also
aren’t
subject
to
the
same
protections
as
[traditional
residential
mortgages],
meaning
they
can
have
prepayment
penalties.

“And
so,
if
you
have
a
view
that
the
rates
are
coming
down
…
you’re
going
to
think
people
are
going
to
refi
more
quickly,
right?
Then
you’re
going
to
say
[as
an
investor],
“Oh,
how
can
I
make
some
extra
alpha,
or
money,
and
the
way
you
do
that
is
with
the
prepayment
penalties.”

Geographic
growth

A
November
2023
report
published
by The
Hamilton
Project
and
focused
on
the
SFR
market
notes
that
large
institutional
investors
(those
controlling
at
least
1,000
SFRs
or
more
and
have
a
presence
in
at
least
three
markets)
represent
about
3%
of
the
total
SFR
sector.
But
the
bulk
of
mega-investor
holdings
(354,000
of
the
446,000
SFRs)
are
concentrated
in
20
markets,
which
are
located
primarily
in
the
Southeast
and
Southwest
regions,
the
report
notes.

“For
example,
Atlanta
is
the
largest
single
market,
with
almost
72,000
single-family
rental
units
in
the
[metro
area]
held
by
institutional
investors,”
the
report
states.
“For
this
market,
institutional
single-family
investors
hold
27.2%
of
all
single-family
rental
properties
and
9.53%
of
all
rental
properties
(single-family
plus
multifamily).”

It’s
worth
noting
that
data
analysis
and
size
groupings
in
the
fast-moving
and
wide-ranging
SFR
space
vary
across
studies.
They
also
depend
on
the
timeliness
of
the
data
and
the
specific
focus
of
the
research.
Cherre’s
Salmanson,
for
example,
estimates
that
the
institutional-investor
share
of
the
SFR
market
could
be
as
high
as
6%
to
7%
nationwide. 

Fratantoni’s congressional
testimony reveals
that
regardless
of
the
percentage,
SFRs
are
in
great
demand
across
the
board.
His
congressional
statement
notes
that
some
40.4
million
residents,
or
39%
of
the
102.8
million
renters
nationwide,
now
live
in
SFRs. 

In
terms
of
expanding
their
holdings
via
open-market
home
purchases,
however,
Salmanson
said
the
large
institutional
players
have
been
essentially
“sidelined”
in
the
current
market.

He
expects
market
dynamics
to
continue
keeping
these
big
players
on
the
sidelines
for
at
least
the
next
two
quarters
—
or
at
least
until
the
interest
rate,
inventory
and
home
price
environment
improves
in
their
favor.
In
the
meantime,
these
institutional
SFR
players
have
turned
to
a
strategy
of
buying
existing
portfolios
from
smaller
investors
and
doubling
down
on
build-to-rent
purchases.

Not
enough
supply

As
an
indicator
of the
slowdown in
home
purchases
in
the
institutional
SFR
space,
data
from
KBRA
shows
that
in
2023,
institutional
operators
issued
four
securitization
offerings
valued
at
$1.5
billion
in
total.
In
2022,
there
were
15
such
deals
with
an
aggregate
value
of
$10.3
billion.

“So,
if
I
can’t
buy
in
the
open
market,
I
either
build
or
buy
a
portfolio,”
Salmanson
said.
“Those
are
the
two
strategies
employed
in
the
last
18
to
24
months
—
rolling
up
the
portfolios
[of
smaller
SFR
operators]
and
more
build-for-rent.

“I
don’t
see
any
way
[rent]
goes
down,”
he
added.
“It’s
not
growing
at
the
same
pace,
but
there’s
nothing
that
tells
you
[a
decline]
will
happen
when
home
prices
are
still
high.
The
demand
is
increasing
for
these
types
of
assets
and
we
don’t
have
enough
supply.”

Brandon
Lwowski,
senior
director
of
research
at HouseCanary
—
a proptech firm
that
provides institutional
investors,
lenders
and
other
clients
with
residential
real
estate
analysis
—
said
there
are
currently
about
73,800
SFRs
available
for
rent
at
the
national
level. 

“That’s
up
25.7%
from
last
year
(as
of
March
11),
so
it’s
a
big
increase
in
inventory,”
he
added. “Yet
the
rental
price
is
still
staying
up.”

“On
the
single-family
rental
side
is
where
we’re
kind
of
in
this
land
of
the
unknown,
where
we’ve
never
seen
this
much
inventory,
historically,
in
single-family
rentals,”
Lwowski
said.
“So,
that’s
telling
me
that
…
there’s
still
enough
demand
to
keep
(rent)
prices
elevated
even
though
we’re
seeing
inventory
grow.”

Lwowski
added
that
national
rental
rates
for
SFRs
are
up
2.7%
from
last
year
even
as
inventory
has
expanded.
He
pointed
out,
however,
that
within
the
SFR
space
(which
includes
BTR),
it
is
the
larger
homes
that
are
in
greater
demand
and
that
are
propelling
rent
growth
in
the
space,
given
“we’ve
actually
seen
price
decreases”
for
the
smaller
SFRs
that
consist
of
one-
and
two-bedroom
homes.

Kurt
Carlton,
co-founder
and
president
of New
Western,
a
large
national
private
real
estate
investment
marketplace
that
serves
some 200,000-plus
investors,
said
the
institutional
SFR
players
are
now working
closely
with
builders
and
“guaranteeing
the
purchase
of
a
certain
amount
of
their
future
pipeline”
for
the
BTR
market.
In
fact,
Carlton
suggests
that
many
of
these
large
SFR
platforms
now
prefer
to
operate
in
the
BTR
space
rather
than
purchase
homes
on
the
open
market,
where
they
compete
with
consumer
buyers.

“What
I
think
is
going
to
happen
when
these
institutions
do
come
back
is
they’ll
start
to
focus
more
on
constructed,
new-build
inventory,”
Carlton
said.
“It’s
just
easier
for
them
to
forecast
and
manage
those
properties.

“They’re
evolving
to
a
state
where
they
can
do
that,
and
it
won’t
make
as
much
sense
to
focus
on
infill
[by
purchasing
homes
on
the
open
market
and
competing
with
individual
homebuyers].”

The National
Association
of
Home
Builders (NAHB)
estimates
that
about
8%
of
all
single-family
starts
are
now
BTR
construction.
Salmanson
estimates
that
the
figure
is
closer
to
16%
because
“a
lot
of
the
pipeline
just
isn’t
captured
yet
by
the
data.”

Even
if
the
BTR
market
slows
down
a
bit
as
projected,
it’s
still
expected
to
play
an
outsized
role
in
the
new-home
market
given
the
larger
forces
that
affect
the
housing
market
at
large.

“Demand
by
investors
for
single-family
rental
units,
new
and
existing,
has
cooled
in
recent
quarters
as
financial
conditions
have
tightened,”
NAHB
reported.
“Given
affordability
challenges
in
the
for-sale
market,
the
(single-family
BFR)
market
will
likely
retain
an
elevated
market
share
even
as
the
sector
cools
in
the
quarters
ahead.”

Optimism
ahead

New
Western’s
Carlton
points
out
that
there
also
are
some
15
million
vacant
existing
homes
in
the
U.S.,
with
one-quarter
of
these
built
prior
to
2008
and
starting
to
“enter
a
phase
where
they
need
to
be
rehabbed
for
the
first
time.”
He
said
this
is
a
prime
market
for
fix-and-flip
investors
given
the
shortage
of
for-sale
inventory.

“For
example,
there
were
50,000
new
homes
constructed
by
builders
last
year
in
Dallas-Fort
Worth,”
he
said.
“And
there
were
17,000
homes
that
were
purchased
and
then
resold
as
flips. 

“So,
that’s
about
[one-third]
of
the
new
inventory
that’s
coming
from
homes
that
have
been
remodeled
and
returned
to
the
market.
…
I
see
fix-and-flip
investors
as
one
way
to
help
alleviate
[the
housing
inventory
issue]
because
they
can
at
least
bring
what
was
off
the
housing
market
back
to
the
market.”

John
Burns
Real
Estate
&
Consulting conducted
a
recent
survey
of
fix-and-flip
investors
and
found
that
49%
of
those
polled
expect
to
acquire
more
properties
in
2024
than
they
did
last
year,
despite
the
challenges
they
faced
in
2023. 

Arvind
Mohan
is
CEO
of
fix-and-flip
lender Kiavi.
Mohan
said
the
John
Burns
survey
is
already
hitting
home
for
the
lender,
which
he
said
posted
“a
notable
uptick
in
fix-and-flip
loans
in
our
pipeline
in
the
first
six
weeks
of
this
year
relative
to
the
same
period
last
year.”

“The
biggest
challenge
for
flippers
in
2024
is
acquiring
new
properties
while
housing
stock/inventory
is
limited
and
there
are
few
‘good
deals’
available
that
make
sense
from
an
investment
perspective,”
Mohan
said. 

Still,
despite
the
challenging market
in
2023,
last
year
was
a
banner
year
for
Kiavi. The
company
funded
a
record
$4
billion
in
fix-and-flip
and
bridge
loans
across
some
13,000
loans
to
5,800
individual
investors,
representing
a
7%
year-over-year
increase
in
volume,
according
to
a
company

announcement.

One
sign
of
the
proverbial
sun
starting
to
peek
through
the
clouds
that
have
hovered
over
the
market
since
early
2022
—
when
the

Federal
Reserve
began
to
raise
benchmark
rates
—
is
the
return
of
institutional
capital
to
the
private-label
securitization
market,
which
is
facilitating
greater
liquidity
in
the
primary
market.

“The
outlook
for
Kiavi’s
RTL
(residential
transition
loan,
aka
fix-and-flip]
securitizations
looks
strong
this
year,”
Mohan
said.
“Our
recent
deals
(including
a $350
million
offering
that
closed in
February)
have
been
consistently
oversubscribed,
which
is
a
good
sign
of
investor
demand.

“That
gives
lenders,
myself
and
others
more
confidence
that
we
can
sustain
our
pipelines
and
service
our
customers
well.
What
I
would
say
is
over
the
last,
like,
two
to
three
months,
we
have
reduced
pricing
to
customers,
just
given
the
trends
in
the
capital
markets
and
so
forth.
We
definitely
see
an
uptick
there.”

Although
2023
was
a
difficult
year
to
navigate
for
large
and
small
investors
alike,
as
well
as
“solopreneurs”
in
the
fix-and-flip
space,
there
is
reason
to
hold
out
hope
for
a
brighter
time
ahead
by
reading
the
tea
leaves.

“It’s
just
like
there’s
a
lot
more
confidence
in
the
directionality
of
where
things
are
going,
more
than
in
how
quickly
they’ll
get
there,”
Mohan
said.
“But
the
good
thing
is
it’s
moving
in
the
right
direction.”

Another
change
for
the
better
in
the
SFR
market
that
shouldn’t
be
underestimated,
Carlton
noted,
is
that
recent
advancements
in
technology
are
now
being
driven
down
to
the
smaller
investors,
making
it
easier
to
find,
finance
and
manage
properties
—
whether
for
sale
or
rent
—
in
the
SFR
sector.

“A
lot
of
the
benefits
that
the
institutions
have,
that
they’ve
built
up
over
the
years
with
technology,
is
starting
to
reach
these
independent
real
estate
investors,”
Carlton
explained,
“because
when
these
institutions
went
on
pause,
a
lot
of
these
(tech)
vendors
had
to
find
new
customers,
so
they
made
that
technology
available
to
smaller
investors.

“So,
now
it’s
a
lot
easier
for
me,
if
I
live
in
Seattle
and
I’ve
got
some
money,
I
can
invest
in
Ohio
and
buy
some
houses
because
now
there’s
better
technology,
there’s
better
ways
of
managing,
there’s
more
of
a
network
of
property
management
across
the
U.S.”

“I
think
the
real
tailwind,
however,
is
just
that
there
is
a
fundamental,
authentic
demand
for
single-family
homes
simply
because
we
just
haven’t
built
enough
homes,”
he
added.

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