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Grab Hold of Residential Investment

The single-family rental market offers growth opportunities for originators

With the refinance market declining and a purchase market that likely won’t take up the slack, mortgage originators should consider broadening their client base to include investors who are actively expanding their portfolio of single-family residential rental properties.

Modest economic growth, a tight labor market and rising wages all bode well for housing demand this year, but refinances are expected to decline sharply, producing a more subdued mortgage volume for 2017 than the previous year. Now is a great time to branch out and try to get the ear of a few residential investors in your area.

Despite an expected decline in total mortgage volume, the single-family rental market continues to grow. Even the prospect of additional interest-rate hikes hasn’t dampened investor’s appetite. The Mortgage Bankers Association forecasts the 30-year mortgage rate will hit 4.7 percent by the end of the year, 5 percent by the second half of 2018 and 5.5 percent by year-end 2019.

The percentage of real estate investors using mortgages to acquire cash-flowing single-family rental (SFR) properties is on the upswing as competitive lending opportunities beyond traditional banking widen the credit box for real estate investors who want to expand their holdings more rapidly than they could with an all-cash financing model.

One online turnkey portal for investing in real estate predicts that leveraged acquisitions of single-family rentals will surpass cash deals this year for the first time since 2007. This is arguably a growing opportunity for mortgage originators who desire to specialize in the single-family rental market.

Here is a quick snapshot of the market and its opportunities, according to Green Street Advisors:

  • SFR properties comprise about 37 percent of the rental market and roughly 13 percent of all occupied housing.
  • Institutional investor portfolios represent just 1 percent of the single-family rental market.
  • Real estate investors like single-family rentals because turnover is typically lower than with apartments, landlords don’t have common-area maintenance costs and the asset’s value has meaningful upside compared to apartments.
  • Home values are still below their peak in many areas, despite rising prices, and additional home-price appreciation is on the horizon.
  • An estimated 3.9 million renter households will form between 2016 and 2020. If SFR’s 37 percent market share remains steady, that means about 1.5 million new single-family rental units will be needed.

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Borrowing options

Before the housing crisis, real estate investors who wanted a loan to buy a non-owner-occupied investment property had few options. Typically, an investor would seek a mortgage backed by Fannie Mae or Freddie Mac, but this method of financing came with limitations.

Fannie allows up to 10 mortgages per investor when using Desktop Underwriter, but Freddie only allows up to four investment property mortgages. Although this remains a good and viable option for investors, many also do not qualify for these mortgages based on debt-to-income ratio requirements.

“ The percentage of real estate investors using mortgages to acquire cash-flowing single-family rental properties is on the upswing. ”

In the wake of the housing crisis, alternative lenders, including asset-based lenders and real estate crowdfunding platforms, emerged to cater to the residential real estate investor. Asset-based lenders use different metrics than traditional lenders, preferring to look at the current or expected cash flow of income-producing properties rather than focusing on personal income to qualify the borrower.

Real estate crowdfunders, also commonly called marketplace lenders, have a host of different models, but those who cater to the SFR investment market prefund mortgage loans — which speeds up the funding process — and then sell off the mortgage debt to a “crowd” of investors.

A common thread among all alternative lenders, despite their different goals and operating models, is the desire to simplify the mortgage process and to make investment capital more easily available for investors looking to acquire SFR properties. Most promote speed and ease of use backed by sophisticated qualifying and underlying technology.

The learning curve

Brokers and originators who want to expand their business beyond owner-occupants to residential real estate investors must take the time to research, learn and network with like-minded individuals and become specialists in this niche so they can serve their clients well. Here are a few ways for originators to hone their skills:

Read up on the market. Plenty has been written about single-family rentals. Search for some key terms online and start reading. Become familiar with large institutional investors, but also focus on mom-and-pop shops and regional players, which represent the vast majority of investors in this space.

Attend real estate investment networking events. Most big cities and many small and midsize cities have real estate investment associations. These groups typically hold monthly meetings where originators can meet investors, landlords, property managers, wholesalers, note buyers, rehabbers and others who could be potential clients or referral sources. Most of these groups exist for investors to learn from one another, so the educational and networking component is noteworthy.

Seek out alternative lenders operating in the SFR space. Besides becoming familiar with which local banks and nonbank lenders serve the investment community, originators should familiarize themselves with online national lending platforms. Find out which ones are reputable and have staying power. While these online lenders may not have brick-and-mortar locations in the originator’s city, it is likely they are licensed to make loans there.

The power of SFR

The cheap lender-owned properties that attracted institutional investors to the single-family rental market several years ago have mostly faded away, but interest in renting remains strong. Besides the obvious interest by the millennial generation, baby boomers who want to downsize are among those now renting or planning to rent in the future.

The Joint Center for Housing Studies (JCHS) at Harvard University illustrated the shifting composition of the housing market into a renter’s market in its 2016 State of the Nation’s Housing report. The report notes that demand for rentals is up among all income groups, and that much of the recent demand has come from middle-aged households, not just from millennials and baby boomers.

“ Several trends indicate a strong rental market well into the future. ”

Fundamentals also remain strong for investors who want to continue to expand their single-family rental portfolios or for new investors to enter the rental market. The average annual gross rental yield, calculated by dividing annualized gross rent income by the median purchase price of single-family homes, was 9 percent for the first quarter of 2017, down slightly from 9.1 percent during the same period in 2016, according to surveys of 375 counties conducted by Attom Data Solutions.

In addition, average fair-market rents increased in 2017 in 86 percent of the markets Attom analyzed, while average wage growth outpaced rent growth in 67 percent of those markets, creating what Attom calls a recipe for sustainable growth in the rental market. This is great news for originators looking to expand into investment financing.

Looking ahead

Demand for rentals is expected to continue. The JCHS report noted that the national rental-vacancy rate fell every year between 2010 and 2015, hitting a 30-year low of 7.1 percent in 2015. In addition, renter households jumped by 9 million from 2005 to 2015, the biggest 10-year increase on record, bringing the number of renters to about 110 million, according to the center’s 2016 report. The 2017 report is scheduled to be released this month.

The erosion of the homeownership rate has likely helped fuel the booming rental market. According to a CoreLogic report from this past February, more than 10 million homeowners lost their homes between 2006 and 2016. The nation’s homeownership rate, which peaked at 69 percent in 2004, declined to just 63.4 percent in 2016, the lowest level since 1966.

In addition, according to the CoreLogic report, that 2004 homeownership-rate peak was “inflated by relatively easy mortgage credit primarily provided by subprime and low- or no-doc loan products.” These products have largely disappeared from the market since the housing crisis, so many of those previous homeowners are more likely to remain renters today.

Several trends indicate a strong rental market well into the future. For one thing, minority households could account for the formation of as many as 75 percent of net new households in the next 10 years, according to CoreLogic, which notes that “these households have historically had lower homeownership rates.” CoreLogic also notes today’s smaller credit box for owner-occupant mortgages, which could continue to impact ownership rates. Finally, renting has become more of an accepted lifestyle choice today.

So, despite rising home prices, many housing experts expect rental demand to remain strong for many years to come, creating a sustained opportunity for mortgage originators who know how to capitalize on the single-family residential rental-investment market.

ABOUT THE AUTHOR Robert Greenberg is chief marketing officer at Patch of Land. He is responsible for branding, corporate communications, lead generation, marketing automation and managing integrated marketing activities. Prior to Patch of Land, Greenberg led the marketing efforts for B2R Finance, where he helped originate nearly $2 billion in real estate investor loans that led to the industry’s first-ever multi-borrower single-family rental securitization. Reach him at [email protected].

This contributed article was originally found on: Scotsman Guide.

If you want to learn more, take a look at some of the most commonly asked questions we receive about real estate crowdfunding on a daily basis and find out why so many people are crowdfunding real estate projects across the country with Patch of Land.
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