When analyzing mortgage pool funds as investments, one of the key factors to consider is the fund’s geographic focus. Some mortgage pool funds invest nationwide, but many seek to enhance returns by focusing lending activities in more profitable regional markets. The Socotra Fund concentrates its lending operations in California and Nevada, two Western states that are among the nation’s best-performing housing markets.
California is especially attractive due to its vibrant economy and large, growing population. In fact, California is the nation’s most populous state, with its nearly 39 million residents representing almost 12% of the US population. Furthermore, California recently surpassed France as the world’s sixth largest economy, with gross state product estimated at $2.46 trillion in 2015. In addition, California leads the nation in job growth and in 2015, the state’s GDP grew 4.1%, nearly twice the US GDP growth rate of 2.4%.
As a result of California’s strong features, nearly 451,000 home were sold last year. This state’s housing market is characterized by robust demand, limited supply, and property values that rise every year. Because of these factors, experienced rehabbers can realize above-average returns on fix-and-flip investments while minimizing risks associated with a home not selling quickly.
Home prices are rising in California as a result of a limited inventory of available homes, which creates immediate opportunities to flip properties at a profit. Particularly in southern California, home buyers face fierce competition. A recent story in the LA Times noted that buyers in Los Angeles and Orange counties were often making five or more offers on a house before they were successful. The combination of rising home prices and low housing inventories makes California an ideal market for fix-and-flip investing.
Gross profits generated from fix-and-flip investments in California trend well above the national average. According to RealtyTrac, flip profits nationwide averaged $55,000 per home in 2015 and gross ROI (return on investment) averaged 45.8%. In many areas of California, flip profits average four to six times this national average. A RealtyTrac study of the top 30 “hipster” zip codes in the United States for profitable home flipping showed several California cities near the top of the list:
California/Nevada Top “Hipster” Zip Codes
|Zip Code||City||2015 Homes Flipped||Flips as % of All Sales||2015 Gross Profit||2015 ROI|
|90026||Los Angeles, CA||17||8.6%||$270,000||56.3%|
|89119||Las Vegas, NV||48||10.1%||$57,500||57.5%|
#1: Berkeley, California
Berkeley boasted gross flipping profits averaging $301,500 and ROI of 52.6%. Home prices in Berkeley are trending 9% higher this year and the average selling price for a Berkeley home hit $1.05 million in August.
Berkeley offers a less congested alternative to San Francisco and many commuters live there. The city’s top employers are University of California, Lawrence Berkeley National Laboratory, Bayer and Kaiser Permanente.
#2: Los Angeles, California
Los Angeles posted exceptionally attractive flip profits and ROI well above the industry average. Gross profits on flipped homes averaged $270,000 in 2015. With most of the mid-range homes already gone, investors are flipping upscale properties that may offer larger profits.
Los Angeles has 18 million residents, making it the second largest city in the US. Three of the six major film studios (Paramount Pictures, Universal Studios and 20th Century Fox) are located in LA and the local economy is fueled by international trade, aerospace and technology.
#3: Oakland, California
Oakland ranked fifth in a nationwide ranking of households having the highest combination of income and education. Oakland is also the third largest city in the Bay area, has the busiest port in Northern California, and the fifth busiest port in the US.
Flips represented 12% of homes sales in the two Oakland zip codes. Flip profits averaged $188,750, or more than three times the national average, and ROI was 80.8%, nearly twice the national average
Oakland’s growth prospects are strong due to development plans for a new 140-acre neighborhood between downtown and the airport. Coliseum City would feature a 750,000-square-foot technology park, 3,500 housing units, 380,000 square feet of retail space, and as many as three sports stadiums, according to Bloomberg Technology news.
#4: Las Vegas, Nevada
The Socotra Fund is also active in the rapidly heating up fix-and-flip market of Las Vegas. Home sales in this city generated gross flipping profits of $57,500 in 2015. Also noteworthy were the number of flipped homes (48) and flips as a percentage (10.1%) of all Las Vegas home sales last year.
Nevada was recently ranked 11th nationwide for job growth. Most job opportunities are in Las Vegas, which is America’s leading destination for business travel and the number one trade show destination. Las Vegas is benefiting from the resurgence in gaming and tourism, with several major gaming strip construction projects currently underway.
Zillow recently reported a median sales price for existing Las Vegas homes of $200,600. While home values are up more than 7% from last year, prices remain well below pre-recession levels, suggesting plenty of room for growth.
By focusing lending activities in stronger-performing housing markets, regional lenders such as Socotra Fund are better able to deliver consistency, attractive returns and low risk to their investors.