Institutional Capital Now A Reality for SFR Investors
In the last 2 years some big names in institutional real estate have entered the investor SFR lending landscape either establishing or acquiring lending platforms. They are providing rehab loans, which up until 2013 were largely the domain of small local lenders, and in addition they are originating longer term loans secured by rental properties. This has resulted in some positive changes in the market.
For rehab loans, competition is up significantly and there are changes in offerings as a result. Some of those changes include:
- Lines of credit are now more readily available for purchasing and renovating multiple properties saving borrowers time and money on the financing side of their business.
- Most are recourse, but some lenders are offering non-recourse options, so that borrowers are putting only their properties on the line versus their entire net worth. (at a lower loan to value ratio (“LTV”)
- Advertised starting rates are down, but the reality of where deals get done depends upon a number of factors including borrower’s knowledge of the lending market and/or borrower’s representation.
For scaled rental property owners the options for longer term financing have improved substantially. A few of those improvements are as follows:
- There are no specified limits on the number of rental home loans an investor can have outstanding.
- LTV’s are up to 75% LTV (depending upon loan term and amortization) with cash outs being allowed.
- Non-recourse loans are now a possibility, for portfolio loans.
- Amortization options available include up to 30 years or even interest only (at lower LTV’s).
- Rates are more competitive relative to banks.
- The process of qualifying and closing your loan is much simpler process than bank loans.
There are some kinks to be worked out. The loans secured by rental homes are being originated and securitized in residential mortgage backed securities (RMBS) offerings. This creates some issues as loan structure affects marketability and pricing for those securities. A good example of this is yield maintenance. Yield maintenance is a prepayment penalty designed to insure the lender (or securities holder) receives a minimum rate of return on the loan, whether it is prepaid or not. Where this becomes problematic is when rates (at time of an early payoff) are lower than when the loan was originated. In this situation the size of the prepayment penalty can increase substantially to compensate the lender for the fact that it must now lend the money out at a lower rate. This is something that is already changing as some lenders are now offering step down prepayment options that are better defined and much more limited in scope. It is however, a good example of the fact that the term loans are slightly more complex than a bank loan and the market is adapting quickly due to the high level of competition, so thorough homework is important.
What’s the Bottom Line?
For the investor buying and renovating homes it is easier than ever to finance the growth of your business efficiently, having to deal with an entirely new loan process much less often through the use of lines of credit and more attractive pricing than in the past.
If you are a landlord who owns a portfolio of rental properties your options for liquidity are exponentially better than they were just 3 or 4 years ago. It is a great time to secure a long term loan at a reasonable rate and potentially eliminate recourse.
Due to the rapidly evolving market and the securities related hurdles on the term loan side, it pays to do some significant due diligence or get help in that regard.