Institutional investor focus on traditional Fix & Flip (or Hard Money) loans has been the result of several factors. The primary motivation for the increased focus is displayed in the above chart. Fix & Flip loans have a higher yield for assets of similar maturity. In today's market, assets with similar yields are closer to maturities of 8-10 years versus the 1.5 - 2 year duration for the loans.
Improved business intelligence (BI) tools for real estate are another factor in the increased institutional focus. Better methods for the valuation of residential properties in current condition and after repairs allows the institutions to sort through more opportunities before committing costlier traditional due diligence. Better improvement cost estimates are available with the widespread use of home improvement tools that can provide costs for specific product SKUs.
Institutions also took note of the rise of venture-funded online-originators with increased data transparency and lending discipline initially popularized after passage of the JOBS Act. These initially crowdfunded backed loans received more attention from institutions regarding their products and process. Compared to traditional lenders that lacked the technology investment, the online originators provided a business that was more easily reviewed and appeared more consistent.
The institutional focus also created some challenges for the market. Primarily, the increased amount of investment capital has led to the reduction of the net loan rate due to additional competition among investors. This reduction has occurred as short-term interest rates have increased as the Fed Funds Rate was raised by the Federal Reserve Bank. This relationship is displayed below in an oversimplified fashion below (oversimplified because there is no standard industry source for net loan rate).
This reduction leads to a lower net spread versus a treasury of similar maturity as pictured below.
An additional challenge for institutional investment is the regional nature of some online and traditional lenders in the space. While many lenders continue to expand nationwide, many still have regional strengths which may not translate nationally. This limited scale requires investors to knit several lenders together in their investment portfolio.
Whatever the challenges, the space will continue demand focus and grow due to demographics in the US, the increase of the median age of the US housing stock and the limited number of new starter homes being built.
Disclaimer - This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.