Flipping the Script: What To Do When Flip Margins Tighten But Rents Improve

By Mario Navarrete.

As we enter the final quarter of 2019, a lot has happened in the last nine months that has had a direct effect on the markets being driven downward. First, we entered into trade wars with Mexico and China. Our stock market continues to be in flux. Globally, we witnessed uncertainty and struggle. Iran continues to posture itself with any nation it considers a threat. As a result of all these challenges, nationally and abroad, Chairman Powell and the feds have cut interest rates for the second time in two months instead of raising them in 2019 as they have alluded to at the end of last year.

All of these events and the high level of uncertainty has had a profound impact on the markets, as the 5-year swap rate is down nearly 100 points YTD. How does this all relate to real estate investing? For one thing, it means that renting out properties will become a lot more attractive—especially now that we are continually seeing less of the price displacement, we have had in real estate over the last several years.

Having a Backup Plan

Numerous clients I have spoken to this year have stated that margins on flips are tightening, and that they are not able to sell at the price they originally calculated when they purchased the asset. Interestingly, I alluded to this likely being the case in a previous blog titled 2019 Outlook.
 

 
The notion was that as we approached a contracting market, we as investors would be wise to look at a purchase this year through two lenses. The first being, how much profit will be made by flipping the property, and the second being, if the desired margin on a flip is unattainable at the moment, will the asset cash flow allow one to hold on to it through the cycle until it is? Assessing a property in this manner provides a back-up plan in the event that you are forced to hold on to an asset—essentially as a defensive play against the market.

The good news is that with Wall Street being driven downward, the cost of capital is going right along with it and making all our rental models cashflow nicely.

Understanding Cash Flow

To this point, we are experiencing an increase in build-to-rent project requests, as well as investors going after stabilized portfolios altogether. Both of which are impacted by the ability to cashflow the assets well and more cost-effective leverage is certainly making that a possibility.

In encouraging property flippers to take on a new business model from their normal exit strategy, it is evident that some have never even bothered to consider a rental model. Therefore, we encourage investors to familiarize themselves with what cashflow is needed in their specific market to become successful long-term landlords. If the market forces us to look for the yield play, rather than the appreciation play, as it has the over the last several years, it is likely that everyone would prefer to be prepared for it. I believe most, if not all, of my colleagues in the space would agree that the time is now.

Finding the Yield

Investors looking to convert from flippers to rental operators can rest a bit easier knowing this fact: for over thirty years, historical data shows that not only are SFR yields counter cyclical, but they have never gone negative. We all know the last thirty years have been quite the spectacle in real estate investing as well as the economy in general, so it’s comforting to see real data and facts point to the level of security that single-family rentals bring.

Are you ready to take advantage of the lower interest rate market? Do you seek capital for your next investment property? Our loans have helped thousands of investors finance more than 40,000 units and close over $6 billion in loans.

CoreVest provides attractive long-term debt products for stabilized rental portfolios as well as credit lines for new acquisitions. For more information about how CoreVest can help you grow your rehab or rental business, please call Mario Navarrete at 949.936.0007 or email [email protected].

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