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Legendary Wall Street buyout firm KKR doubles down on house flipping

Billionaires Henry Kravis and George Roberts bet big on "flip loans"

Legendary Wall Street buyout firm KKR is doubling down on house flipping. The private equity firm run by billionaires Henry Kravis and George Roberts is putting another $250 million into Toorak Capital Partners, which buys short-term loans made to real estate investors who buy and flip houses, according to The Wall Street Journal. 

That’s on top of the $250 million KKR already has invested in Toorak, which currently holds about $1.5 billion of so-called flip loans on its books, the WSJ said. Flip loans typically have a maturity of a year and can pay yields of 8% to 11%.

“We remain very positive and constructive on U.S. housing-related risk and therefore see real opportunity for growth for Toorak,” Dan Pietrzak, a portfolio manager for KKR’s private credit funds, told the WSJ.

There are plenty of risks associated with flipping, the WSJ pointed out: “The housing market could sour mid-flip. Remodeling estimates might be way off. Flippers might misjudge house hunters’ tastes.”

There’s also a question of KKR’s timing. ATTOM Data Solutions put out a report last week that showed signs the flipping market may be softening. While activity spiked to a nine-year high in 2019’s first quarter, with 7.2% of all home sales being a flip, the average return on investment, or ROI, fell to a near eight-year low. ROI, calculating the cost of acquisition versus the cost of sale, was 38.7% in the first quarter. That’s down nearly 10 percentage points from a year earlier.

Of course, the results varied by geography. In 11 markets, investors doubled their ROI, including Pittsburgh, Pennsylvania; Flint, Michigan; Shreveport, Louisiana; Scranton, Pennsylvania; and Knoxville, Tennessee.

“While the home flipping rate is increasing, gross profits and ROI are starting to weaken and the number of investors that are flipping is down 11% from last year,” Todd Teta, ATTOM’s chief product officer, said in last week’s report.

Nationally, the average flip sold for a median price of $215,000 and the average gross flipping profit in Q1 was $60,000, according to the ATTOM report. The average timeframe to complete a flip was 180 days. 

Home prices are at a record in many areas, and builders have struggled to produce homes affordable for first-time buyers, the WSJ story said. 

“That has left a big market for rehab specialists who can get their hands on physically distressed or out-of-date properties for peanuts,” the WSJ said.

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