With a possible recession looming, investors seeking to de-risk their portfolios are looking at an increasingly limited menu of stable investment options. Yet one of those options is clearly evident: multifamily remains a popular option for investors and capital providers alike. That’s largely because home affordability issues and changing lifestyle preferences are driving more renters to stay in apartments longer, strengthening demand and, in turn, pushing up rents. In fact, rents in the third quarter of 2019 were up 2.9 percent over the previous year, according to RealPage Inc., a real estate analytics firm.
Foreign investors alone acquired $16.1 billion of apartment properties in the U.S. between the second quarter of 2018 and the same period this year, according to research firm Real Capital Analytics. This occurred even as those investors pulled back on other asset classes.
Investors who are trying to increase their presence in the multifamily market don’t have to look far to find lenders to finance an acquisition. There’s plenty of capital to go around. The Mortgage Bankers Association (MBA) projects multifamily lending will grow to $359 billion in 2019, up from last year’s record total of $339 billion.
Unlike previous “top of the market” eras, there’s a healthy dose of caution from providers of capital, even as they compete for deals. While capital providers share an enthusiasm for multifamily, they also share concerns about overbuilding and sometimes unattainable projections. Lenders and investors alike are cautiously analyzing demand drivers to minimize risks.
For those seeking capital for a multifamily property, it’s important to articulate your strengths as a borrower to potential capital providers. To do so, here are five actions you can take to solidify your case for the financing you need in any economic cycle.
Share your story
Long before you fill out paperwork, articulate your case as a borrower, detailing your knowledge and previous experience. A lender wants to know that you have the expertise to manage the asset well, so be prepared to share all the proof points demonstrating that you will live up to the terms of your agreement. In a recent multifamily opportunity, one of the keys to getting the deal closed was the sponsor’s extensive proven track record with challenging multi-property portfolios.
Know your market
Successful multifamily investors have a detailed understanding of their local market, well beyond macro trends. For example, apartment rents are up 6 percent to 7 percent in Las Vegas, Orlando, Fla. and Phoenix, according to RealPage. Yet there are many factors in play within each of these markets that could strengthen or weaken a potential investment. Investors need to be familiar with what’s happening in their specific submarket, down to the neighborhood level.
Articulate your long-term strategy
Lenders will want to have a clear understanding of your plans for the property. For example, are you planning a long-term hold, or do you have a timeline to sell at some point? Perhaps you plan to do a fix-and-flip, or aggregate units to sell to an institutional investor. For any given strategy, be prepared to explain why your plan makes sense for the subject property. Lenders will typically request borrower projections, allowing you to convey your expected returns on the property.
Prioritize your debt needs
Not all capital is created equal. The type of financing you need will depend largely on your strategy for the property. It’s important to understand what types of debt are ideal for your financial structure and how flexible you’re willing to be with the terms. For example, are you looking for a non-recourse loan at the highest rate? It’s important to consider these questions before getting too far along in the process. Your needs will shape the types of organizations you bring into your capital stack, from credit unions to banks, family offices to insurance companies. Understanding your key loan structure priorities will bring added efficiency to the lending process.
Know your lender and/or mortgage intermediary
It is essential to research your lenders, intermediaries and capital partners. In particular, your primary lender relationship is a long-term partnership, so you need to be as comfortable with them as they are with you. In today’s competitive market, there’s a lender for every niche. Mortgage intermediaries can help tailor various loan types and structures to your specific needs.
The right capital provider is an important ingredient for success in any multifamily deal. The savvy investors who enter the financing process armed with as much information as possible will be in a much better position to grab a larger slice of the multifamily segment.
John Ahern serves as a commercial loan underwriter with Alliant Credit Union.