People often ask us, “why have an investment strategy geared specifically to lending to the residential Fix and Flip real estate market?” Well, there are a lot of good reasons. But one of the most important is that we prefer to ‘be the bank’. We did some research and found that banks have done quite well over the last several hundred years, 2008-2009 aside. Turns out, when it comes to investing in residential real estate, ‘being the bank’ has several advantages.
First, we don’t actually have to own individual property. Owning property can be a hassle. Property costs money to operate, maintain, and insure. Owning property sends money OUT the door. For us, money comes IN the door in the form of loan payments and interest income. Those income payments tend to be stable and consistent. That’s more like it.
Second, owning individual property typically means taking out a mortgage loan – particularly as an investor. In return for that loan, banks require a personal guarantee. That guarantee gives the bank access to other assets on the borrower’s balance sheet. Being the bank, the situation is reversed. We get a steady stream of income, along with access to the borrower’s personal balance sheet if things go wrong. We like that.
Third, being the bank, we have the option to foreclose. This is a powerful tool. If something goes wrong with the loan, we most likely will have access and ownership of a valuable asset – the actual property. We can then choose how and what to do with that property – sell it, fix it up, or utilize it for rental income. The point is, that when things go wrong, being the bank offers options. And better optionality lowers investment risk.
Fourth, it means that we do not have to be experts in construction or development. At Aloha, we lend to real estate professionals that buy, rehab and sell residential real estate properties. We refer to this as the ‘Fix and Flip’ market. We primarily lend to real estate professionals who can point to a proven and repeatable process. As investors, lending to these professional operators allows us to profit from the development expertise of the borrower.
Finally, being the bank offers us access to the enormous US residential real estate market. We have written extensively about its strong fundamental underpinnings (Three Market Trends Make a Strong Case for Residential Real Estate Lending). We expect it to remain strong for some time. In addition, lending in a Fund structure allows investors a tremendous amount of diversification among regional markets, property types and borrower profiles. This has supported Aloha in producing a less-risky, more stable and consistent stream of returns.
Being the bank has its advantages. We believe lending is a lower-risk approach to residential real estate investing, and that for certain investors it has significant advantages over owning individual properties. We have been lending in the residential real estate market since 2015 and have 68 consecutive months of positive performance under our belts.
If this investment approach makes sense to you, or you are interested in learning more – feel free to reach out to us.