(Bloomberg) — The US housing boom is creating a new class of real estate tycoons with an easy source of financing: their own homes.
Rising prices have showered property owners with record equity windfalls, sending cash-out refinancing at levels not seen since the peak of the housing craze of the mid-2000s. For some people, that means cashing in for a remodel or vacation. But others are putting that money to work by buying the second, third or 10th house.
“With the pandemic, everything is skyrocketing,” said Keshav Agarwal, a 33-year-old Californian who pulled $300,000 out of his family’s Orange County home in late 2019 toward five rental properties in low-cost Atlanta. Invested money
Those homes have doubled in price. And Agarwal, who started his cash-out with $150,000 in credit card debt and a little savings, is peeling away his equity to buy more.
“I’m growing fast from a refinance,” he said.
Across America, novice investors are trying to harness the power of home price inflation to grow rapidly and become wealthy by becoming landowners. They are contributing to rising prices, especially for starter homes that are in short supply. But it may also work in favor of these buyers – as long as they are willing to pay – because Americans are getting a price from home ownership, in turn increasing rental demand.
Cash-out refinancing allows investors to tap into their home equities to purchase more. For US landlords and second homeowners, these loans more than doubled in the fourth quarter from a year earlier to $8 billion, the highest level since 2006, according to data provider Black Knight. Wall Street has also jumped to funding investor deals with flexible underwriting and higher rates than traditional mortgages.
While it’s hard to pinpoint the number of investors, the make-it-big strategy is everywhere, in meetup groups, by wealthy gurus, and on media such as the BigPockets podcast, which gave it a name: Buy, Rehab, Rent, Refinance, Repeat. , or BRRRR for short. A rise in prices provides even more support for a faster move, stacking one mortgage on top of the last. Risks arise when the red-hot housing market is booming.
“While leverage can turbocharge your returns, when prices are rising, it accelerates losses when prices are falling,” said Greg McBride, chief financial analyst at Bankrate.com. “If there is a slowdown in the economy and suddenly tenants are not paying their rent, it creates a cash-flow problem.”
Investor influence on the US housing market is increasing, as tech-fueled home flippers such as Opendoor Technologies Inc. and publicly traded rental firms such as Invitation Homes Inc. compete for properties. But even in areas where prices have risen the most, such as Phoenix, Atlanta and Tampa, Florida, mom-and-pop landlords far outnumber institutional ones.
In Phoenix, 32% of single-family purchases in January were made by investors with fewer than 10 properties, up from 28% a year earlier, according to data from John Burns Real Estate Consulting. By comparison, large investor purchases account for 12% of transactions.
“Young investors are refinancing their first investment to get a down payment for their second investment,” said John Burns, founder of Irvine, a California-based firm. “It’s like they don’t know there was a recession in the late 2000s.”
See also: US housing is so hot that not even a Fed governor can buy a house
To be sure, the real estate investment boom may not end with a crash—at least not on the scale that led to the financial crisis. For one thing, the nearly $10 trillion in tapable US home equity provides a cushion for homeowners and their lenders. Underwriting standards for investment purchases are also far stricter than they were in the 2000s, typically requiring a down payment of 20% or more.
And even as rising interest rates and the war in Ukraine bring uncertainty to the global economy, there is little to indicate that the US housing market will soon slow down. The same dynamics that have been sending property prices higher over the years have only strengthened as the millennial generation approaches the peak home-buying age and inventory just hardens.
“I always wondered what would happen if there was a recession,” said Grace Gudenkoff, who left her job as a mechanical engineer in Cedar Rapids, Iowa, to focus on real estate investing. “But the housing shortage is so extreme that I don’t think it will happen anytime soon.”
Gudenkoff, 24, bought a fixer-upper with her boyfriend last year for $82,000 and invested $36,000 in its rehab. He had a valuation of $185,000, which allowed him to withdraw $129,500 with a cash-out refinance to buy more. The couple now has 11 properties with 20 units each.
Goodenkoff essentially takes out cash from one home to use for another, also tapping private loans designed for investors. Small landlords can finance up to 10 properties using traditional financing, but they face tougher underwriting standards that factor into the borrower’s ability to repay. For those willing to pay a higher rate, companies like Finance of America Cos, which counts Blackstone Inc. as its largest shareholder, and DeepVane Mortgage, owned by investment firm Pretium, have loans with more flexible terms. .
These loans are often packaged and sold in the secondary market. Alternative financing for rental and vacation homes reached nearly $12 billion last year, nearly quadrupling since 2018.
David Greene, a police officer-turned-investor who co-hosts the BigPockets real estate podcast and author of the book “Buy, Rehab, Rent, Refinance, Repeat: The BRRRR Rental Property Investment Strategy Made Simple,” said that The method works, but only if investors educate themselves.
“Leverage always helps the wise and hurts the fools,” said Green, who also has its own mortgage company and sales team. “Give a nail gun to a good contractor and they’ll build fast. Give a nail gun to a little kid, they’ll hurt themselves.”
After a stint of unemployment during the pandemic, Jordan Pavao, a Massachusetts construction worker, began following the BRRRR strategy, which he learned from real estate celebrities on Instagram. He was four payments behind on his pickup truck and kept calling the bank, he said.
He previously worked in real estate, bought a three-family home eight years ago and then moved into his home in 2019. But in 2021, he decided to sell that house and buy another multi-family property. A couple later rehabs and refinances and now has three family homes and is getting ready to buy a fourth.
Pavao, 31, said he already earns as much on houses as he does on his construction work. Last month, he received a license to sell real estate to help him buy into Boston investors in his hometown of Fall River, a blue-collar area near the Rhode Island border that’s set to get its first commuter rail stop next year. is ready.
Now the “working class” tattoo on his right arm – illustrated with a zombie with a flat hat and a cigarette hanging from his mouth – may no longer apply.
Pavao said of the tattoo, “My view is that it’s blue-collar until death and even then you’re still working.” “Real estate will hopefully prevent this from becoming my destiny.”
In California, Agarwal is thinking big. He pulled out $200,000 from his two West Atlanta townhouses and bought another nearby office building.
“I want to become 100 crorepati and I am wondering how can I reach there in less time,” Agarwal said. “At the end of the day, the only thing that made me real money is real estate. That’s a true fact.”
To contact the author of this story:
Prashant Gopal in Boston [email protected]