Kurt Carlton believes that real estate investors hold the keys — literally and figuratively — to unlocking a greater amount of affordable housing supply across the U.S.
Carlton said that the coming years present an outsized opportunity for investors who buy single-family homes and rehabilitate them before reselling them or renting them out. He calls this trend the “Great Renovation” and believes that it is poised to give the housing market a much-needed shot in the arm.
“We have 130 million families in the U.S. today. They need homes. That demand is continuing to grow,” said Carlton, the co-founder and president of New Western, in a recent interview with HousingWire.
Surge of small investors
On Tuesday, New Western — a Dallas-based online marketplace for investors — released a report that includes survey data from 1,300 investors in single-family housing across the U.S. It shows that small “independent” investors have grown their market share in the past two years as large institutional players like Pretium Partners, Invitation Homes and Tricon Residential have seen their share shrink.
Kurt Carlton
According to New Western, independent investors accounted for 82.6% of the properties purchased through its marketplace in 2021. Two years later, that share grew to 91.7%. During the same time, the share of purchases by institutional investors was cut in half, dropping from 17.4% to 8.3%.
Eight in 10 investors through New Western are small-business owners who plan to flip one to five homes in 2024. And 91% of those surveyed believe their businesses will grow this year, despite unfavorable conditions such as higher mortgage rates, higher costs for building materials and lower levels of inventory.
The survey also included an eye-opening stat: Last year, investors flipped nearly 164,000 homes in the 42 markets in which New Western operates. That’s only 13% less than the 185,000 new homes built in these same markets, according to the company’s analysis of Zillow data. New Western also reported that rehabbed homes returned to the market were priced at 21% less than the average sale price for the area.
Carlton cited data from the National Association of Home Builders (NAHB), which shows that 25% of the cost to build a new single-family home is tied to regulatory burdens, including building codes.
“I think there’s a lot of municipalities looking at how to streamline a lot of those things,” Carlton said. “And it’s entering the narrative now, but it’s going to be a problem for a long time, so it’s hard to build homes today.”
Attom’s most recent home-flipping report showed that even as fix-and-flip activity has declined significantly from its peaks of 2021 and 2022, it is roughly in line with its pre-pandemic levels. There were more than 67,000 flips across the country during the first quarter of 2024, representing about one in 12 home sales.
Like any other type of housing project, profitability is a key concern for these short-term investors, and Attom reported that the typical gross profit for a flip grew for the third time in four quarters, reaching $72,375 in Q1 2024. That was good for an average return on investment of 30.2%.
The NAHB analyzed census data and found that the median age of a U.S. home has grown from 31 years in 2005 to 40 years in 2022. The builder trade group also concludes that “over the long run, the aging of the housing stock implies that remodeling may grow faster than new construction.”
The homes that New Western offers to investors, however, tend to be younger ones built during “that last big boom” prior to the housing crash of 2008 and “need major renovations for the first time ever,” Carlton explained.
“That’s really the type of inventory that we’re looking at — not necessarily the 100-year-old house and things like that,” he added.
Last year, New Western added 68,000 new investor clients, bringing its total to more than 200,000. The majority of these people remodel and resell properties within 30 miles of their own homes.
In Boston, New Western investors flipped more than 4,300 homes in 2023, compared to fewer than 3,200 new homes sold by builders. Fix-and-flip projects in Boston sold for 7.8% less than the median area sale price, the company reported. Its investors also outperformed builders in several other markets — including Los Angeles, Chicago, St. Louis, Pittsburgh, Indianapolis and Denver — based on the number of closed transactions.
Younger and tech savvy
The survey also revealed a group of investors who are generally young and diverse.
Women represent a fast-growing group of clients for New Western. And they are more bullish on current market conditions than men as 19% of female investors surveyed said they expect their business to grow by at least 50% this year, compared to 13% of male respondents. Women also typically have smaller rehab budgets than men but are flipping homes more quickly and for higher sale prices, “highlighting their investment skills and market savvy,” according to the report.
Generation Z respondents expressed more confidence in the market than baby boomers, Generation X and millennials as they plan to buy more properties this year than other age groups. “The amount of REI (real estate investment) content available on YouTube and social media has allowed Gen Z to learn faster and absorb complex REI strategies using modern technology that they prefer,” the report stated.
Carlton said that the side hustle trend that has accelerated since the COVID-19 pandemic has filtered its way into real estate investing. As an example, he said, people with a short-term rental property through a platform like Airbnb have looking to expand their holdings and become full-time investors.
“It’s just such a more vibrant crowd these days,” Carlton said. “There’s all these technology vendors that built up a lot of property management tools, things like that, to manage from afar. And when the institutions started stepping out, they had to find new customers, so they kind of moved to a different segment. And they’re selling their services to smaller real estate investors now, so there’s a lot of new technology available.
“Gen Z, they can learn so much faster than maybe the typical boomer landlord because they’ve got YouTube. They’re following all the people on Instagram, on TikTok. They’re seeing all these different strategies. The information moves so much faster.”
Artificial intelligence (AI) is poised to have an expanded role in the fix-and-flip space, Carlton said. One example is through the use of computer vision and 3D mapping to integrate specific building materials with project plans. But for New Western, AI’s immediate prospects tie into its buyer marketplace.
“Our marketplace is very different than Zillow, where there’s 30,000 opportunities,” he said. “Our marketplace, you go on there, there’s 12 houses in your market in the morning and they’re all gone by the end of the day. … It’s very much about contacting the right investor about the right property at the right time.
“When we find one that they’re interested in, knowing that it’s going to be gone in like two hours, we have to send them a text, an email, a push notification, and drive a car with a siren across the front of their head. The technology is really (about) identifying … and matching them with the right properties that are look-alike properties in the future when they come along.
‘Overwhelming amount of demand’
While there are many nonqualified mortgage (non-QM) lenders that serve these borrowers with products like bridge loans and debt-service-coverage ratio (DSCR) loans, a robust secondary market is also important to financing more deals in the single-family rental and fix-and-flip spaces.
Kroll Bond Rating Agency tracked non-QM loan pools in which investment properties comprised at least 30% of the total volume. It found 20 of these securitizations — with an aggregate volume of $7.3 billion — took place in the first 10 weeks of this year. That was up slightly from the 17 deals and $6.5 billion in volume from the same period in 2023.
Companies like Kiavi are pushing these loans to the secondary market. The San Francisco-based private lender issued nearly $1 billion in securitizations of residential transition loans (aka fix-and-flip loans or bridge loans) during the first half of 2024.
Carlton thinks today’s higher interest rate environment has a disparate impact on landlords who rely on BRRRR (buy, rehab, rent, refinance, repeat) strategies. For these investors, it’s been challenging to refinance so they can access cash for their next purchase. For home flippers, it has less impact because “if you have a finished product that’s really nice, you’re going to sell it,” he said.
“Even with the interest rates where they are today, there’s still an overwhelming amount of demand for the supply that we have — and mainly for this affordable inventory,” Carlton said. “Since it can’t be delivered by the builders, these small investors are really filling that gap by finding this vacant inventory.”
