Not only are mortgage pool funds a great way to add income and diversification to a portfolio, but these funds can also be ideal vehicles for investing in local real estate markets. Funds that have a regional focus such as the Socotra Fund concentrate their lending activities in some of the country’s fastest-growing metropolitan markets. Real estate is essentially a local business and returns can vary greatly across regions. By investing locally, small mortgage pool funds may capture outsized returns. This makes them more nimble than very large funds, which must invest across many markets to find sufficient opportunities to deploy capital.
With a regionally-focused mortgage pool fund, investors get to pick the markets where they want to invest. In addition, investors can choose the property type and investment amount while avoiding the hassles and financial burden of direct property ownership. Since mortgage pool funds are professionally managed, no real estate expertise is required to invest and demands made on the investor’s time are minimal.
The Socotra Fund concentrates its lending activities in California and also makes loans in Nevada. California’s economy is significantly outperforming other parts of the country – more than 2.2 million new jobs have been created there since the Recession ended. In addition, California offers exceptional opportunities for real estate investors due to its tight housing inventory, rising demand from buyers and appreciating home prices. The California Association of Realtors predicts that housing demand will remain robust in 2017 and that selling prices will continue to rise, albeit at a slower, more sustainable pace.
While smaller than California, the Nevada market, led by Las Vegas, is equally attractive. Nevada home sellers are booking some of the highest profits in the country. According to RealtyTrac, average gains for Las Vegas home sellers exceeded 20% last year and median sales prices for previously owned homes were 14% above the national average. Despite recent gains, Las Vegas home values remain nearly 34 percent below pre-crash peak levels, suggesting plenty of room for growth.
Mortgage pool funds can generate outsized returns in local markets due to a lack of competition. Banks aren’t interested in making fix-and-flip loans because of the specialized due diligence and expertise in analyzing investment properties that is required. Mortgage pool funds focus exclusively on this lending niche and have the analytical tools and policies for minimizing underwriting risk. Most funds also have long-standing relationships with fix-and-flip investors, further reducing lending risk.
Statistics also indicate opportunities for above-average returns from investing locally due to the fact that most local businesses are under-capitalized. Local businesses represent more than half of the US economy, yet receive only a tiny fraction of the $30 trillion invested by institutions each year. Despite difficulties securing capital, sole proprietorships (the most common type of small businesses) generate net income averaging 10-11 times greater than corporate profits, according to the IRS.
By investing locally, fund shareholders can help improve their own communities. Economic studies have shown that there is an accelerated multiplier effect from local investing. The impact of every dollar invested locally is 2-4 times greater than the same dollar invested nationally. Local investing puts money to work creating jobs and improving real estate values in communities.
Local fix-and-flip investments re-build neighborhoods. Renovating properties once considered an eyesore not only increases one property’s value, but also enhances the worth of surrounding properties. Renovated homes also attract new buyers to the neighborhood, which brings in tax revenues and allows more services to be provided to the community. Local residents benefit as well from more capital available for loans and lower interest rates. Banks are able to move foreclosed properties off their books, freeing up capital that can be re-deployed for new loans.
Investors who are considering shares in a regionally-focused mortgage pool fund should carefully analyze the growth and stability characteristics of the local market. In addition to checking obvious trends such as home prices, population and employment, investors should also examine the following:
To assess regional housing supply and demand, new construction must be considered along with existing home inventory. A rise in building permits usually signals a growing population, but if building permits are high relative to the overall market, even a modest slowdown could lead to an oversupply of housing and drives prices down.
Economic growth drives a strong housing market, but investors should also consider whether the economy is diverse. Regions that are overly-dependent on a single industry are more exposed to economic downturns. Detroit, with its reliance on the automotive industry, fared worse during the Recession than did Minneapolis, whose economy is diversified across electronics, medical devices, finance, technology and food processing.
Other measures of regional market strength include: 1) average days on the market; 2) rental saturation rates and 3) the age of the housing stock. A declining trend in days on the market suggests a region where housing demand is rising. The rental saturation rate (i.e. the percentage of existing single-family homes being used for rentals) signals whether the area is predominantly a buyer or renter market. High rental saturation may indicate better opportunities for rentals than home sellers. Areas that have an aging housing stock often have better fix-and-flip opportunities. An example is Los Angeles, where nearly three-quarters of the homes were built prior to the 1970s. Replacing aging homes has helped make Los Angeles a high-growth fix-and-flip markets.
The most important characteristic of an attractive regional real estate market is stability. Rather than repeated cycles of boom and bust, the best markets have steady growth that has been accelerated by upswings in population and employment. Fundamentally strong markets offer consistency and ramped-up growth creates opportunities for superior long-term returns.