With low risk and annualized returns currently ranging around 8-9%, mortgage pool funds are among today’s most attractive real estate investments. These funds improve diversification within a retirement portfolio by adding a real estate component that enable investors to participate in one of the largest and fastest-growing sectors of the US economy. And, unlike other products that require hands-on management, mortgage pool funds are suitable for investors who aren’t real estate experts. The fund’s portfolios are professionally managed. All that is required of investors is to commit their capital and collect their monthly distribution checks.
In addition to being good products for retirement portfolios, mortgage pool funds are good for the American economy. These funds are helping the housing market recover by funding the renovation of vacant homes, creating affordable housing for new home buyers and assisting the growth of small businesses. The pictures below show “before” and “after” shots of a fix-and-flip project financed by Socotra Capital. Here are three ways that mortgage pool funds contribute to a growing US economy:
Repurposing vacant housing. According to Corelogic, roughly five million homes slipped into foreclosure during the housing crisis. The housing market collapsed as a result of ballooning inventories, falling prices, and sharply reduced home sales. Loss of equity for home owners contributed to greatly reduced consumer spending (70% of the US economy), loss of consumer confidence, and an evaporation of wealth that created headwinds worldwide.
Stepping in to make vacant homes livable again were thousands of fix-and-flip investors. Nearly 157,000 homes were flipped in 2013, which was up more than 110% from two years earlier. Flipped homes represented nearly 5% of all single family homes sold in 2013. Since then flipping activity has continued to accelerate. In 2015, nearly 180,000 homes were flipped, accounting for roughly 5.5% of all homes and condos sold that year. Flipping activity hit a six-year high in mid- 2016, according to ATTOM Data Solutions (the new parent of RealtyTrac), with more than 51,000 homes flipped during the second quarter. This pace translates into an annualized rate of more than 204,000 homes flipped.
By reducing the inventory of existing homes, fix-and-flip investors support rising home values, returning consumer confidence and increased investment in the US economy.
Making homes affordable for new buyers. Many home owners whose credit histories were marred by foreclosures or bankruptcies during the housing crisis are preparing to re-enter the property market as buyers. The National Association of Realtors estimates that approximately 950,000 formerly distressed homeowners are now re-eligible for mortgages and projects another 1.5 million will re-enter the housing market over the next five years.
By helping to gradually draw down housing inventories, fix-and-flip investors contribute to the effort to keep the appreciation in home prices measured and sustainable. An orderly housing market on an upward trend encourages new home buyers to act now. Another way that fix-and-flip investors help keep home prices affordable is by adding new units to the inventory of existing homes available for sale. The price difference between an existing home and new construction is significant and widening. Newly built homes carry a hefty price premium. According to the National Association of Realtors, the price gap between new and existing homes has historically ranged between 15 and 20%, but in recent years, that gap has widened to 30 to 40%. Home pricing data from 2016 shows the median price of a newly built home currently exceeds $306,000, while the median price for an existing home stands at $250,000. For a first-time buyer, this $56,000 spread can make the difference between qualifying for a mortgage and becoming a homeowner. By renovating and re-selling existing homes, fix-and-flip investors make more options available for home buyers and renters.
Funding the growth of small businesses. Fix-and-flip renovations kept thousands of carpenters, plumbers, electricians and other tradesmen working during the housing market recovery. Estimates compiled by 2020 REI Group pegged average renovation costs at $100,000+ for high-end properties, $20,000 to $50,000 for middle-market properties and $10,000+ for low-end properties. Spending costs generally allocated 60% for labor and 40% for materials. Based on these estimates and the mix of luxury, middle-market and low-end homes flipped last year, 2020 REI Group estimated that fix-and-flip projects contributed approximately $10 billion of activity to the US economy. The firm’s estimates are likely conservative since only flipped homes being marketed for sale were considered. No economic contribution was included from properties being flipped as rentals.
According to RealtyTrac, the average gross profit on a flipped home was $55,000 in 2015, the highest average gross profit for flipped homes nationwide in ten years. Generating healthy gross profits from fix-and-flip also helps boost the US economy by encouraging reinvestment in new properties. This in turn creates steady employment opportunities for tradesmen, contractors, building materials suppliers and other small businesses.
As a result, mortgage pool fund subscribers not only reap the benefits of a reliable, high-income investment, but can also take pride in helping to fuel the US housing market recovery and the growth of small businesses.
