The fix and flip investor had a banner decade. The sheer volume of distressed assets on the market after the financial crisis meant a savvy investor could turn properties around fast and reap huge ROIs. Heck, some of them became reality-show celebrities.
As rates have steadily come down and the housing market has heated up, however, those ROIs have shrunk. Where a fix and flip might have yielded 80% in 2012, it was yielding 40% by 2016 and with the recent boom in the housing market, the numbers are looking tougher and tougher for fix and flip investors.
As the fundamentals of the market shift, many of them are looking to mortgage professionals for answers. They need cashflow and returns, but the margin on a fix and flip isn’t worth it. Luckily, just as the fix and flip market got tighter, the single-family rental (SFR) market has taken off. One lender, RCN Capital, has been working extensively in both the SFR and fix and flip space for years. Justin Parker (pictured) SVP of treasury at RCN, explained exactly how mortgage professionals can guide fix and flip investors into the SFR space to generate cashflow until those fix and flip margins grow back to attractive levels again.
“We have a lot of customers that approach us with deals and fix and flip transaction, and it’s our stance to be a partner to them,” Parker said. “We look at fix and flip deals based on all the resources at our disposal and we ask if this is going to be a profitable deal for them or if they should consider positioning themselves to hold on to this deal and potentially wait a couple of years.”
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With the flexibility of a lender that can work in both spaces, RCN is capable of taking a borrower who initially approached the property with the intention to fix and flip and switching them over to a loan designed for an SFR property. RCN can refi the property based on rental income as the borrower holds the property for long enough to see house price appreciation drive the value up and ROI with it. It’s a challenge for these borrowers to transition their business model, but RCN’s experience in both spaces can help bridge that gap and drive profitability for the borrower.
Parker stressed that this process can’t be completed without buy-in from brokers and loan officers. Increasingly, Parker has seen ordinary brokers and originators coming to them to learn more about both the fix and flip and SFR markets, to better capture volume from this fast-growing aspect of the more widely struggling commercial mortgage sector.
RCN, Parker explained, treats those brokers and loan officers as key partners in this process. They lean on their own experience to ensure loans are closed quickly and painlessly, while offering their broker partners high-level insights and tailored resources that can help them stand out in these lending spaces.
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Helping an investor borrower upend their whole business model invariably comes with challenges, hiccups, and unexpected difficulties. Parker explained that for the borrower and the broker, it’s crucial to have a lender partner that has been around the block and knows the challenges that must be overcome.
“We’ve had a ton of volume over the years that has been able to guide us in the marketplace and give us a huge amount of experience,” Parker said. “The reality is we’ve made our mistakes and we’ve learned from them. As we’ve been around for a while, we have originated a huge number of loans. Working on those loans has allowed RCN to really figure out what works and what doesn’t. Now we can see where things maybe aren’t working and have a tendency to lead to non-performance. We can see, too, the things that are working and what, in today’s market, will lead to good performance and solid returns.”