multifamily housingThere appears to be a housing revolution taking place in metro areas all across the United States. In major metro areas, single-family housing has been the norm for the majority of residentially zoned areas. In New York, only 15 percent of the city’s residential real estate is zoned for detached single-family housing only, but that’s a rarity. Many other cities have zoned the majority of their residential real estate for single-family housing.

In Minneapolis, it’s 70 percent. In Los Angeles, 75 percent. Portland has zoned 77 percent of its residential real estate as single-family. Seattle has zoned 81 percent. Charlotte; Arlington, Texas; and San Jose are zoned single-family only 84 percent, 89 percent, and 94 percent, respectively.

Recently, however, these cities are beginning to change their tunes. Minneapolis has put an end to single-family zoning. California and Oregon are both considering bills to do the same statewide. It appears that single-family zoning may have a downside.

What’s Wrong With Single-Family Zoning?

There’s nothing intrinsically wrong with single-family housing. The truth is, it’s a matter of supply and demand. Since the 2008 recession, institutional investors have been on a buying spree, snatching up starter homes left and right, and it’s driving up real estate prices everywhere. This is cutting a lot of younger would-be homeowners out of the housing market and forcing them to rent instead.

Sooner or later, the single-family market is going to close. Either institutional investors will exit the market and sell the homes, probably for a huge gain, or they’ll continue to hold those homes and rent them out. Either way, a big need for affordable housing will exist.

The solution to the housing affordability crisis for millennials, who are ready to own, could be financing for multifamily housing.

Why Multifamily Housing is Necessary

As the hole for starter homes closes, millennials are getting married and having children. Their families are growing. That means they’ll need bigger houses. But if they can’t afford starter homes, they likely won’t be able to afford larger homes either, at a time when they will want their children playing on swingsets in the backyard.

When people think of multifamily housing, they tend to think apartment complexes, but those aren’t the only types of multifamily housing available. Duplexes, fourplexes, townhomes, and condominiums can also serve a need in the real estate marketplace, and these types of properties could fill the niche that needs to be filled. But, someone will need to finance the construction of these properties as well as the facilitation for millennials to become homeowners.

Since large metro areas are now beginning to end single-family zoning or limit its use, the door is opening for more affordable housing that can meet millennial needs.

  • Duplexes – A duplex can feel like a single-family home without the detached structure and yard. Private lending can play a useful role in building affordable two-unit family housing where homes can share a backyard or simply be attached with their own unique amenities.
  • Fourplexes –  Fourplexes offer less privacy, but they can be more affordable as properties share some of the same amenities. It isn’t quite the same as apartment living but can serve as affordable starter housing.
  • Townhomes – Like duplexes and fourplexes, townhomes can give the feeling of single-family ownership without a large property to take care of.
  • Condominiums – Condominiums feel more like apartment living, but with the added advantage of homeownership.

Let Private Lending Solve the Housing Affordability Problem

Government alone cannot solve the current housing crunch, but it can get involved in solving social challenges. Such challenges can best be solved with a private-public partnership. If cities and states will open the door for private lenders to finance multifamily housing projects where single-family zoning once was the standard, more people can experience the American dream of homeownership. Everyone wins.

Starter HomesThere’s been an interesting trend in starter homes in the last few years all across America. In some parts of the country, for instance, investors are snatching up more than 20 percent of starter homes. In Memphis, 20 percent of the starter homes were purchased by investors last year. In Philadelphia, it was 23 percent. In Detroit, investors picked up a whopping 27 percent of the starter homes. Long Island, Oklahoma City, and Atlanta weren’t far behind with 19 percent, 19 percent, and 18 percent, respectively. These figures are based on CoreLogic data.

Many of these investors are institutional. In fact, since the Great Recession, institutional investors have flocked to real estate markets in droves and purchased homes at severely depressed prices. More than two million homes have been purchased by investors since 2008.

This trend was brought about by the real estate crisis that resulted in the housing collapse. Large-scale investors saw the opportunity and seized upon it. Once the best buys were out of the market, they were expected to move to business as usual. But they didn’t. They continued to buy homes and are now competing with first-time homebuyers in markets all across the country. This investor activity is driving up prices and leading to some would-be homeowners pricing out. 

Three Kinds of Real Estate Investors

Generally speaking, there are three kinds of real estate investors.

  • Fix-and-flip investors buy cheap real estate, fix it up, and resell it for short-term profit. It’s quite popular, but how successful one can be at this endeavor depends on the market.
  • Buy-and-hold investors who rent out properties for the passive income. These investors are generally institutional investors, but not always.
  • Property traders buy properties and wait until values appreciate before they sell. This can be anywhere from a few weeks to a few years depending on the market.

There are pros and cons to each of these investment strategies. Those who use these strategies usually understand their exit before they get in. They know when they want to sell and for how much they want to sell, and they have a plan in case the investment goes south. But with so much investment activity in the starter home market, potential owner-occupants are having a hard time competing. In some cases, sellers specify in their advertising that they want cash, and when a buyer walks in their door with cash in hand (an investor, usually), they take it. Who wants to wait for the long, drawn-out process of titling, value assessments, and credit checks?

How Marketplace Lending Fits Into the Picture

It’s clearly an investor’s market. When you have the money, you can wait for the right deal. If you’re a seller, you’re going to sell your property to the highest bidder who is ready to close a deal right now. If you’re a buyer, the best way to compete is to be liquid and able to close a deal quickly. These three factors mean institutional investors have a leg up.

An entire industry has grown up around investing in single-family homes. Investors with a system in place are able to buy dozens of homes at a time, and often are able to sell them before they even hold the deed. Lenders put up the capital. And brokers work their lists, bringing the two together. Add a layer of technology to the equation and it’s easy to see that sellers can find buyers even more quickly, and buyers can find homes. Marketplace lending just fuels the fire.

This is a good thing for investors. If you’re looking for a good deal on a property and know the market you want to invest in, you can find it easily. If you’re on the other end of the equation, you can find a buyer. The only question is: How long will it be before a good investment climate comes to an end?

baby boomersWe already have discussed the migration habits of millennials after the Great Recession. Now, we’ll discuss the migration habits of the baby boomer generation and the similarities as well as differences to those of millennials.

How Often Seniors Move

Seniors have traditionally been more sedentary than younger people. They tend to move less often, but when they move they often make drastic changes. For instance, some seniors, after retirement, may decide to move from the city to the country. Others may change states, preferring to live where there are higher concentrations of other seniors. Whatever the case, in 2004-2005, people fifty-five years and older moved at a rate of 2.5 versus 9.0 for younger Americans. By 2006-2007, those numbers dropped to 2.0 and 7.5, respectively. In 2007-2008, senior migration lowered slightly to about 1.75 and remained between 1.5 and 2.0 through 2016-2017, showing fewer fluctuations than the migration rate of younger people.

Where Do Seniors Move To and From

For people fifty-five years and older, the top migration magnets from 2004-2007 were Phoenix, Atlanta, Dallas, Tampa, and Houston. From 2007-2012, seniors preferred Phoenix, Riverside, Tampa, Austin, and Atlanta; and from 2012-2017, the fifty-five plus sect preferred Phoenix, Tampa, Riverside, Las Vegas, and Jacksonville. In all three time periods, Phoenix was a draw for between 16,000 and 18,275 seniors. The second city on the list each year saw fewer than 10,000 senior migrants.

It’s clear the migration patterns for seniors is different from that of younger persons. While both preferred the Sun Belt, the migration pattern for seniors is narrower, less diverse. The metro areas with the largest net migration losses for seniors included New York, Los Angeles, Chicago, and Washington D.C. for all three time periods. However, New Orleans was among the top five pre-recession while San Francisco made the top five in both time periods post-recession. It appears that seniors want to stay away from New York and California while migrating toward Florida and Arizona, or the southwest.

Other Ways Seniors Differ From Millennials in Migration Patterns

Millennials tend to shy away from pricey areas, or metro areas where the cost of living is high. However, they are spread out more broadly across the country than seniors, who also prefer to stay away from places with a high cost of living. Millennials also prefer local economies based on education or knowledge, areas known for their sophistication rather than luxury. And they are more mobile than their older counterparts, able to shift to meet new opportunities as they arise. Seniors prefer warmer climates, areas rich with recreational opportunities, and places known for attracting retirees.

In all three time periods, both seniors and millennials moved away from New York, Los Angeles, and Chicago in droves. The net migration magnets for both cohorts were most similar prior to the Great Recession when both seniors and millennials preferred Phoenix, Atlanta, and Houston. The differences were millennials chose Riverside and Charlotte more often while seniors moved to Dallas and Tampa more often. New Census Bureau information indicates millennials today prefer educated places highly affordable economies, such as Minneapolis and Kansas City. Information regarding these migration flows is taken from a study by the Brookings Institution.

Where Should You Invest in Real Estate?

It’s clear from this data that real estate investors interested in targeting millennials and those targeting seniors will want to look at different areas and demographics. The Sun Belt is hot for both markets, but seniors, who are likely downsizing, prefer retirement locales while young millennials prefer places with educational amenities such as book stores, museums, and colleges. These observations should be true whether you invest in traditional real estate or invest through a marketplace lending platform like Sharestates.

millennialsYoung people have always been more transient than older generations. That’s largely due to lifestyle since young people are more likely to change jobs more often and new jobs often mean relocation. They are also more likely to move when they marry. These differences in lifestyle often mean that migration rates are largely tied to generational gaps. A recent report published by Brookings confirms this.

How Often Millennials Migrate or Relocate

Prior to the Great Recession of 2007-2009, Millennials moved fairly often. However, migration rates have slowed since then. From 2004 to 2007, the annual inter-county migration rate for millennials was between 7.5% and 9%. It dropped to 6.2% to 7% between 2007 and 2012. From 2012 to 2017, the annual inter-county migration rate for millennials fluctuated between 6.5% and 7.1%, slightly higher than the previous five years but considerably lower than pre-recession.

One of the factors Brookings Senior Fellow William H. Frey believes drives migration rates for millennials is the fact that they tend to delay marriage and major life decisions such as childbearing and buying a home.

Migration rates aside, millennials are beginning to enter the home buying market now, so this may lead to more migration as more young people become homeowners. But looking at the current data, where does Brookings say millennials are migrating to and from?

Millennial Migration Patterns

Frey identified seven metropolitan areas that experienced net millennial migration gains of 7,000 or more from 2012 to 2017. Those metro areas include Houston, Dallas, and Austin, Texas; Denver, Colorado; Seattle, Washington; Portland, Oregon; and Charlotte, North Carolina. Two-fifths had college degrees in four of these areas.

Something else that is interesting is that 17 of the top 20 Sun Belt migration magnets for millennials are in the South and West regions of the country. And half of all U.S. states–18 of them in the Sun Belt–experienced net migration gains among millennials.

This migration pattern is slightly different from the preceding five-year period when Washington, D.C. instead of Dallas, Texas was in the top five metro areas. Still, each of the metro areas grew as a migration destination for Millennials from the previous period to the later period. Some of that growth was quite significant. For instance, Houston, Texas had annual net migration among millennials of 9,981 from 2007 to 2012 and 14,467 annual net migration from 2012 to 2017.

Net migration losses among the bottom five metro areas were much larger than the net gains among the top five metro areas. Los Angeles lost over 50,000 Millennials from 2004-2007. New York City lost 20,608 and 37,648 from 2007 to 2012 and 2012 to 2017, respectively. Both New York and Los Angeles, as well as Chicago, were among the top five losers during all three periods.

Frey points out that Millennials preferred suburban areas and the Southwest prior to the recession. That’s why Riverside, California and Phoenix, Arizona were the top two metro areas for Millennial migration from 2004 to 2007. Houston, Texas is the only metro area in the top five net gainer category during all three migration periods.

What Does This Say About Real Estate Investing?

Since Millennials have put off homebuying, it’s safe to say that if real estate investors want to focus on this market, then rentals and starter homes are the best places to look. However, as they grow their families and have more children, larger homes will become the trend. There’s no reason not to expect the same trend with real estate crowdfunding investments, but you should perform your own due diligence on any type of real estate investment.

fix & flipTwo of the most important determinants in whether a fix & flip property is a good investment are the price you buy the property and the location. If you buy into a bad neighborhood, you may have trouble selling after you’ve made improvements. Or, you may have to sell at a diminished price and lose part of your profits. This is backed up by data on the 10 best states for house flipping.

Next to these two factors, one other important thing to note is the general health of the economy. If the economy is too bad, people may be holding back before buying a house. They may want to rent instead. On the other hand, if the economy is too good, that could drive increased competition in the fix-and-flip markets and diminish the profits for everyone. A buyer’s market is not good for serious real estate investors looking to sell volumes.

So what are the ideal market conditions for fixing and flipping properties?

Is the Economy Right for Fix & Flip Properties?

The overall health of the economy is important for understanding the real estate market. Three metrics worth noting are housing inventory levels, first-time home buyer demand, and whether housing prices are trending upward or downward.

1.  Housing inventory – Two years ago, housing inventory was low. It was also the perfect climate for house flippers. That’s because home buyers looking for a property had fewer good selections, especially on the new home front. That creates a higher demand for rehabilitated properties. In 2019, we’re seeing a reversal of the trend. After several years of lowering housing inventory levels, the housing market is turning the other way. It still hasn’t corrected enough that I’d say fix-and-flips are done (in fact, housing inventory still declined), and this is only one metric. But investors should keep an eye on housing inventory levels for the rest of the year.

2. First-time home buyers  For years, the real estate sector was aghast that millennials were waiting to buy homes. The millennial generation has waited longer than any other generation before buying their first homes. Now, they are either buying homes or planning to buy homes. Demand for first-time home buyers is trending upward.

3. House prices – According to the Federal Housing Finance Agency, house prices rose 5.6 percent from January 2018 to January 2019. We’re still seeing prices creeping upward. On top of that mortgage interest rates are on the rise, which means houses could soon be unaffordable for many families.

While the metrics aren’t looking good for fix-and-flip properties, it’s important to realize that we are at the beginning of the turnaround. The housing market saw a few years of these metrics trending downward, now they’re beginning to change. If the trend continues, I’d say investors should start looking toward rental properties instead of fix-and-flip properties. But for now, we likely still have a little time left for fix and flips.

The real estate investing market is constantly in flux. Pay attention to the trends. If fix-and-flips go sour, investors can still turn to the rental market. If the bottom falls out of residential, commercial real estate will likely still be good. And don’t forget the most important idiom in real estate: location, location, location. Just because one fix and flip market turns south doesn’t mean there isn’t opportunity elsewhere. Diversification is just as important within real estate investing as it is for your overall investment portfolio. Marketplace lending will continue to present opportunities for real estate investors interested in asset class diversification.

At the end of 2017, President Trump signed the most sweeping tax cuts bill in over 30 years. The tax cuts went into effect on January 1, 2018. It’s been almost a year-and-a-half since those cuts went into effect. Has there been a drop in home sales?

Are Home Sales Really Falling?

In July 2018, Bloomberg noted that new home sales fell to an eight-month low. Again, in March this year, Bloomberg reported that new home sales hit a three-month low in January. Meanwhile, existing home sales increased in the same month by the most since 2010. So what’s going in the market?

The Federal Reserve Bank of New York published a series of analyses on the housing market last month. In their fourth post, they concluded that the tax law reforms contributed to the slowdown in the housing market last year. However, they also admitted that the evidence is not conclusive. To that, I would agree.

In April, Bloomberg reported that new home sales rose to a 16-month high in March of this year. That’s one heck of a turnaround. In that report, Bloomberg noted that single-family sales rose 4.5 percent while the median sales price decreased 9.7 percent from one year earlier. Property sales for homes where construction hasn’t started yet grew to the most since November 2017. Does this mean the property market is recovering, and what does it have to say about the tax reforms?

What Caused Housing Sales to Decline in 2018?

There is any number of reasons why home sales may have declined last year. Tax reforms could be one reason. It could also have been that economists overall, and the general public, simply weren’t confident in the economy. There was a lot of talk of a coming recession.

According to one survey, as many as 36 percent of Americans expected a recession to begin in 2018. Of course, that didn’t happen, so maybe some of those Americans are feeling confident again. At any rate, if potential homeowners don’t feel confident about the overall economy–and real estate is generally seen as an indicator of economic confidence–then they won’t buy new homes.

Another reason real estate sales may have taken hit last year is because real property buyers weren’t sure how the new tax changes were going to impact their finances long-term. If that is the case, they likely deferred real estate purchases until they could feel confident they could take advantage of tax benefits in a positive way. Chances are, the reasons for last year’s decline in home sales were mixed and can’t be pinned only one thing.

Is the Real Estate Housing Market on a Bounceback?

It certainly is good news that new home sales are on the rise again. However, we can’t be confident that new home sales will continue to rise. The real estate market has been in flux for a couple of years. There clearly is no bull market, and I do not see signs of a bear either. We’ll likely continue to see some ups and downs. But what does that mean for investors?

In times of high volatility and market uncertainty, the best course of action for serious investors is portfolio diversification. If you haven’t examined your asset class mix in a while, now could be the time to take a serious look.

One asset class worth considering is real estate crowdfunding (RECF). Whether you’re looking for a debt-based investment or an equity-based deal, real estate crowdfunding can help you diversify your portfolio beyond your current holdings. Not only can this be healthy for your portfolio overall, but RECF also gives you plenty of opportunities to diversify within the asset class itself since you can spread your RECF investments among several different properties and different types of property investments. The nature of this type of investing makes it easier to do so more quickly.

Another advantage to RECF is that investments are typically short term. This will give you time to see where the market is headed so that you can respond to the next shift with confidence.

Single-familysingle-family rental rentals are a niche market for landlords that can be lucrative if you have the right properties in the right markets. Fortunately, for serious rental investors, ATTOM Data Solutions has ranked single-family rental markets for 2019. There are some interesting findings on this list.

The firm analyzed 432 markets nationwide and determined that the average annual gross rental yield is 8.8 percent, up one-tenth of a percent since last year. That’s good news. So where are the highest rents?

Where to Find The Highest Single-Family Rental Returns in 2019

In over half the counties analyzed, rental returns increased from a year ago. In 2019, the highest single-family rental returns are in the following areas:

  • 5 percent in Baltimore City, Maryland
  • 9 percent in Bibb County, Georgia
  • 2 percent in Cumberland, New Jersey
  • 1 percent in Winnebago, Illinois
  • 1 percent in Wayne County, Michigan

Wayne County, Michigan is a great benchmark community since it consists of Detroit and contains a population of over 1 million residents. Other counties in the same demographic show modest gains in returns over last year. These include:

  • Cuyahoga County, Ohio with 12.0 percent annual gross rental yields
  • Allegheny County, Pennsylvania with 10.9 percent
  • Cook County, Illinois with 9.7 percent
  • Philadelphia County, Pennsylvania with 9.4 percent

Counties in the west mid-Atlantic and east midwest sections of the country seem to fare well with single-family rentals. That may be due to higher property values and lower wages, which put homeownership out of reach for many income earners. But what about the areas with lower single-family rental returns? Where are they located?

Where the Lowest Single-Family Rental Returns are Located

The part of the country with the lowest single-family gross rental returns is in the western states. Specifically, most of the counties in this category are in California.

  • 4 percent in San Mateo County, California
  • 7 percent in San Francisco, California
  • 0 percent in Marin County, California
  • 2 percent in Santa Clara, California
  • 3 percent in Kings County, New York

Brooklyn, New York, where Kings County is located, seems to be the outlier. However, that county does have one thing in common with Santa Clara County in California. Both counties have a population of at least 1 million. Other counties with a similar population and that show low potential for annual gross rental yields include:

  • Fairfax County, Virginia (where Washington D.C. is located) shows 4.7 percent potential
  • Queens County, New York shows 4.8 percent
  • Alameda County, California shows 4.9 percent
  • Orange County, California shows 5.0 percent

Where Rents Are Rising Faster Than Wages

Areas where rents are rising faster than wages could be areas to stay away from. That’s because rising rents could cause renters to seek home ownership options, but every geographic area is different. If the cost of ownership is out of reach, wage earners could still prefer renting, but they may need to downsize their quarters or cut expenses in other areas.

Rents are rising faster than wages in 236 counties, 55 percent of those studied. That includes the following areas:

  • Los Angeles County, California
  • Harris County, Texas
  • Maricopa County, Phoenix
  • San Diego County, California
  • Orange County, California

The reverse is true in the following counties:

  • Cook County, Illinois
  • Kings County, New York
  • Clark County, Nevada
  • Tarrant County, Texas

When wages are rising faster than rents, renters could seek home ownership options. Investors looking for good rental opportunities should pay close attention to this data and invest responsibly.

An opportunity zone is a federally designated low-income area targeted for investment in order to revitalize the communities and kick start the economy. Real estate developers are offered tax incentives for reinvesting capital gains into these zones. Recently, LOCUS published a report ranking the top opportunity zones in the U.S. But what does this ranking mean for real estate developers?

An Overview of Opportunity Zones

There are currently more than 8,700 opportunity zones in the continental U.S., district of columbia, and U.S. territories. The LOCUS National Opportunity Zone Ranking Report compares these zones against three primary metrics – Smart Growth Potential, social equity, and a Vulnerability Index score (SEVI).

Smart Growth Potential is a proprietary filter to help investors identify which opportunity zones take priority based on their potential to deliver economic, environmental, and social returns. This filter rests on four identifiable metrics: Walkability, job density, housing diversity, and distance to the nearest top 100 central business district (CBD). Scores range from a minimum of 10 to a maximum of 20. For social equity and SEVI, LOCUS used four variables: transit accessibility, housing, and transportation affordability, diversity of housing tenure, and the Social Vulnerability Index. Again, the minimum score is 10.

Using these metrics and the scoring algorithm, LOCUS made some interesting discoveries. Only 2% of the opportunity zones scored a 10 or higher on these metrics, 13% of the opportunity zones with Smart Growth Potential less than a score of 10 are in rural areas, and only .18% of Americans live in both a high opportunity and a high equity opportunity zone (i.e. they are walkable urban places and socially and economically inclusive).

Where are the Top U.S. Opportunity Zones Located?

According to the report, the top scores for opportunity zones among the top 30 metro areas with the most Smart Growth Potential are New York, Los Angeles, Philadelphia, and Chicago. Charlotte, San Antonio, Orlando, and Dallas received the lowest scores. The states with the highest scores include New York, California, Maryland, New Jersey, Pennsylvania, and Ohio.

According to the report, the top scores for opportunity zones among the top 30 metro areas with the most Smart Growth Potential are New York, Los Angeles, Philadelphia, and Chicago. Charlotte, San Antonio, Orlando, and Dallas received the lowest scores. The states with the highest scores include New York, California, Maryland, New Jersey, Pennsylvania, and Ohio.

The top 11 opportunity zones based on Smart Growth Potential are:

  1. Downtown Portland (CBD) – Census FIPS 41051010600
  2. Downtown Oakland
  3. Downtown Seattle
  4. Center City East in Philadelphia
  5. Inner Harbor of Baltimore
  6. Downtown Newark
  7. Downtown Portland (CBD) – Census FIPS 41051005100
  8. Downtown Detroit
  9. Journal Square in New York
  10. Downtown St. Paul
  11. Wilshire Central BID in Los Angeles

The top 10 social equity and vulnerable places with high Smart Growth Potential include:

  1. Downtown Portland (CBD)
  2. Downtown Oakland
  3. Downtown Seattle
  4. Downtown Newark
  5. International District in Seattle
  6. Downtown Sacramento
  7. Wilshire Central BID in Los Angeles
  8. Westlake in Los Angeles
  9. Campus District in Cleveland
  10. Downtown Honolulu

Top U.S. Opportunity Zones by Product Type

Product types make a difference too. New York, for instance, scored high among offices asking for rent, multifamily properties asking for rent, and retail space asking for rent. Other notable high scorers among office space include Hollywood, San Francisco Bay Area, Miami, and Seattle. Among multifamily properties, Cleveland’s Campus District, various Los Angeles neighborhoods, San Francisco, and Seattle scored high. Rounding out the top five in retail are Miami, San Francisco, Los Angeles, and Seattle.

Top opportunity zones across all product include Hudson Yards/Hell’s Kitchen in Manhattan, East Village in Manhattan, Kips Bay in Manhattan, Williamsburg in Brooklyn, Greater Flushing Queens, Brooklyn Heights, East Harlem, Central Harlem, Downtown Brooklyn, and Williamsburg South in Brooklyn.

The Four Opportunity Zone Quadrants

When scoring, LOCUS categorizes each opportunity zone as either high or low equity and either high or low opportunity, based on their scores in the associated metrics. In that regard, each opportunity may be considered to fall into one of the following four quadrants:

  1. High Equity / Low Opportunity
  2. High Opportunity / High Equity
  3. Low Equity / Low Opportunity
  4. High Opportunity / High Equity

The report contains a lot of detail on each opportunity zone with each of the metrics analyzed for each opportunity zone. It’s a great read, and developers looking for opportunity zones to invest in would do well to check it out.

An opportunity zone is a federally designated low-income area targeted for investment in order to revitalize the communities and kick start the economy. Real estate developers are offered tax incentives for reinvesting capital gains into these zones. Recently, LOCUS published a report ranking the top opportunity zones in the U.S. But what does this ranking mean for real estate developers?

An Overview of Opportunity Zones

There are currently more than 8,700 opportunity zones in the continental U.S., district of columbia, and U.S. territories. The LOCUS National Opportunity Zone Ranking Report compares these zones against three primary metrics – Smart Growth Potential, social equity, and a Vulnerability Index score (SEVI).

Smart Growth Potential is a proprietary filter to help investors identify which opportunity zones take priority based on their potential to deliver economic, environmental, and social returns. This filter rests on four identifiable metrics: Walkability, job density, housing diversity, and distance to the nearest top 100 central business district (CBD). Scores range from a minimum of 10 to a maximum of 20. For social equity and SEVI, LOCUS used four variables: transit accessibility, housing, and transportation affordability, diversity of housing tenure, and the Social Vulnerability Index. Again, the minimum score is 10.

Using these metrics and the scoring algorithm, LOCUS made some interesting discoveries. Only 2% of the opportunity zones scored a 10 or higher on these metrics, 13% of the opportunity zones with Smart Growth Potential less than a score of 10 are in rural areas, and only .18% of Americans live in both a high opportunity and a high equity opportunity zone (i.e. they are walkable urban places and socially and economically inclusive).

Where are the Top U.S. Opportunity Zones Located?

According to the report, the top scores for opportunity zones among the top 30 metro areas with the most Smart Growth Potential are New York, Los Angeles, Philadelphia, and Chicago. Charlotte, San Antonio, Orlando, and Dallas received the lowest scores. The states with the highest scores include New York, California, Maryland, New Jersey, Pennsylvania, and Ohio.

According to the report, the top scores for opportunity zones among the top 30 metro areas with the most Smart Growth Potential are New York, Los Angeles, Philadelphia, and Chicago. Charlotte, San Antonio, Orlando, and Dallas received the lowest scores. The states with the highest scores include New York, California, Maryland, New Jersey, Pennsylvania, and Ohio.

The top 11 opportunity zones based on Smart Growth Potential are:

  1. Downtown Portland (CBD) – Census FIPS 41051010600
  2. Downtown Oakland
  3. Downtown Seattle
  4. Center City East in Philadelphia
  5. Inner Harbor of Baltimore
  6. Downtown Newark
  7. Downtown Portland (CBD) – Census FIPS 41051005100
  8. Downtown Detroit
  9. Journal Square in New York
  10. Downtown St. Paul
  11. Wilshire Central BID in Los Angeles

The top 10 social equity and vulnerable places with high Smart Growth Potential include:

  1. Downtown Portland (CBD)
  2. Downtown Oakland
  3. Downtown Seattle
  4. Downtown Newark
  5. International District in Seattle
  6. Downtown Sacramento
  7. Wilshire Central BID in Los Angeles
  8. Westlake in Los Angeles
  9. Campus District in Cleveland
  10. Downtown Honolulu

Top U.S. Opportunity Zones by Product Type

Product types make a difference too. New York, for instance, scored high among offices asking for rent, multifamily properties asking for rent, and retail space asking for rent. Other notable high scorers among office space include Hollywood, San Francisco Bay Area, Miami, and Seattle. Among multifamily properties, Cleveland’s Campus District, various Los Angeles neighborhoods, San Francisco, and Seattle scored high. Rounding out the top five in retail are Miami, San Francisco, Los Angeles, and Seattle.

Top opportunity zones across all product include Hudson Yards/Hell’s Kitchen in Manhattan, East Village in Manhattan, Kips Bay in Manhattan, Williamsburg in Brooklyn, Greater Flushing Queens, Brooklyn Heights, East Harlem, Central Harlem, Downtown Brooklyn, and Williamsburg South in Brooklyn.

The Four Opportunity Zone Quadrants

When scoring, LOCUS categorizes each opportunity zone as either high or low equity and either high or low opportunity, based on their scores in the associated metrics. In that regard, each opportunity may be considered to fall into one of the following four quadrants:

  1. High Equity / Low Opportunity
  2. High Opportunity / High Equity
  3. Low Equity / Low Opportunity
  4. High Opportunity / High Equity

The report contains a lot of detail on each opportunity zone with each of the metrics analyzed for each opportunity zone. It’s a great read, and developers looking for opportunity zones to invest in would do well to check it out.

underwritingLate last year, RealtyShares, one of the pioneers in real estate crowdfunding, announced it was shutting down. Then, in January, National Real Estate Investor wrote: “In addition to understanding economic fundamentals, local markets, and the capital markets, becoming a successful real estate investor requires highly specialized underwriting, and asset and property management skills, among many others. While technology is important, it is merely the facilitator for real estate crowdfunding.”

I couldn’t agree more. Solid underwriting practices are one of the most important components for a successful real estate crowdfunding platform.

Now, I’m not saying RealtyShares didn’t have solid underwriting practices. There are a number of reasons why a business would go under, but as real estate crowdfunding matures, solid underwriting practices will become much more important to the survival of the platforms that remain.

Why Underwriting is Important to Real Estate Crowdfunding

Underwriting is an important aspect of real estate investing in general, but for real estate crowdfunding, in particular, for a number of reasons. For starters, if investors can’t trust the platform, they won’t stick around for long. Crowdfunding platforms earn the trust and respect of investors by performing due diligence on borrowers and sponsors of real estate projects.

Another aspect of this is the risk assessment process itself. While it is important to perform a risk assessment on borrowers and sponsors, it’s just as important to perform a risk assessment on the properties. It’s the properties, after all, that investors are investing in.

Underwriting is also important for the sponsor. When a sponsor approaches a real estate crowdfunding platform to ask for a loan or to offer equity in a deal, they understand they will have to prove they, and the property they are sponsoring, are worth investors taking a risk. It’s expected that not every deal will be worthy of investment. By performing due diligence, the real estate crowdfunding platform can weed out some of the competition, which increases the chances for worthwhile projects to receive funding.

What Makes for Good Underwriting Criteria?

Every real estate crowdfunding platform has its own criteria, of course, but there are some specific details that should be important to anyone in the real estate crowdfunding industry. Some of the most important criteria for assessing a lending or equity risk for the sponsor include real estate development experience, experience specific to the type of deal they are sponsoring, credit history, success ratio to development deals, and whether or not they are backing their own project.

For properties, it’s important to look at how much of the total project is the investor seeking funding for, what is the loan-to-value ratio, what is the after-repair value of the property, and is the property in a good location? One other thing to look at is the type of project it is that is seeking funding. A residential fix-and-flip project is very different than a new office development project built from the ground up.

After assessing all the risk factors and analyzing the criteria, the real estate platform should be able to justify to potential investors why a particular project, and a particular project sponsor, deserve funding. If the platform cannot do this, investors should question their underwriting practices.

What Makes Sharestates Unique Among Platforms

Sharestates is unique among real estate crowdfunding platforms because it’s founding team came from a traditional real estate background rather than from a technology background. Because of that background, we’ve developed a sound underwriting and risk assessment strategy that we use across the board on every project and every sponsor. That doesn’t guarantee success, but it greatly increases the opportunities for both investor and sponsor to see a positive return on investment.

Real estate crowdfunding is entering a very critical time in the life of our industry. The platforms that survive the next crisis will be the ones who have a solid underwriting practice in place, a strong financial position, and the ability to justify the investments it’s willing to offer investors.

Click here for a deep-dive into Sharestates’ underwriting process, including our detailed risk matrix.

Hard money loans are short-term higher-interest loans that assist real estate developers and investors acquire property and bankroll expenses related to their real estate projects so that they remain solvent, liquid, and increase their chances of success. They’re an integral part of the real estate investing process with some clear upsides and downsides.

The Pros of Hard Money Loans

There are several reasons why serious real estate investors rely on hard money loans to finance fix-and-flip projects. Here are the top benefits of hard money loans for house flippers:

l  Speed – Hard money loans can be acquired much more quickly than traditional bank loans. They do not usually require credit checks and other due diligence that causes the process to move more slowly at banks. Many hard loan lenders are able to provide money for real estate investments because their primary consideration is whether an investment is a good deal or not.

l  Flexibility – Every hard money lender has their own set of criteria to loan money for a real estate project. Most hard money loans do not come with a list of restrictions that usually beset conventional loans. For that reason, they are more flexible and allow real estate investors to change project goals midstream if necessary.

l  Leverage – Hard money loans provide tremendous leverage for fix-and-flip investors. The investor can enter a project without putting their own money at risk and remaining liquidity.

The Cons of Hard Money Loans

While there are incredible benefits to using a hard money loan for fix-and-flip real estate investments, there are some downsides. Before taking a hard money loan, do your due diligence on the loan, the lender, and, of course, the property investment.

Some downsides to hard money loans include:

l  Interest rates – All real estate investors should consider the cost of capital. Hard money loans are typically higher-interest loans because they are riskier for the lender.

l  Higher-risk – The lender is not the only person assuming a risk on hard money loans. The borrower is also taking a risk. Because the loans are higher-interest and short-term, these loans are riskier because they can lead to high financial burdens if not entered wisely.

l  Must be paid back quickly – Hard money loans are short-term loans. They are typically for 12 months or less, and the investor is on the hook for repaying the loan in the time frame specified. If they are not paid back on time, the investor may be seen as a bigger risk on the next loan and find it difficult to get a loan for their next fix-and-flip project.

Where to Find Hard Money Loans

Hard money loans are not hard to find. Banks, however, do not offer them. Years ago, local private real estate lenders were the primary source of hard money. More recently, however, the JOBS Act of 2012 has made it easier to find hard money loans online. Real estate crowdfunding platforms, marketplace lenders, and other peer-to-peer business models may or may not refer to themselves as hard money lenders, but that is, in essence, the service they are providing.

When you are ready to fund your next fix-and-flip property, be sure to conduct your due diligence on potential lenders thoroughly. Whether you get your hard money loan from a single lender or from an online marketplace with multiple investors financing your project, make sure you look at the lender’s loan history and review the terms of your loan closely. Ultimately, you’ll want to find a partner with a track record of success lending on the property type you’re interested in developing, so that you can grow together over time with more successful projects down the road.

Learn more about Sharestates track record.