Single-family rentals represent a potential goldmine in real estate. The next boom in the market could be no further than your front yard, but to capitalize on this emerging market you need to understand a few things first.
What are the facts about the single-family rental industry? How can you finance a single-family rental and what are the next steps after financing?
Understanding the basics about single-family rentals will better prepare you to make an educated investment.
Just the facts
Here are a few basic facts about the single-family rental market that show why it could be a potential boom for investors
Population factors: According to the United States Census data, the total U.S. population, from 2006 to 2016, has increased by 23.7 million people. Here is where things get interesting. The number of renters has increased by more than 23 million, which leaves 700,000 for home ownership and the rest renting.
Performance factors: If you measure the single-family home sector against all the other commercial sectors, such as lodging, industrial and office, you will see better returns with lower risk. As you can imagine, this is an investors dream. Industry prices skyrocketed by 9.0 percent versus all the other sections, i.e. office, retail, industrial, self-storage and multifamily. Also, SFR rentals stacked an 11.37 percent return, with a much lower risk factor.
People factors: According to Michael Finch, executive vice president at SFRhub Advisors, the people who are becoming renters are fascinating. People who are making $150,000 are trending as more likely to be renting. This demographic is much more inclined to rent for freedom purposes. Freedom from the drag of constantly spending money, and time, to maintain their property. Other demographics include Gen X, millennial’s and baby boomers.
Show me the money
Let’s get to the brass tacks of how we finance these projects. There are several pathways to obtain financing, so lets take a look at each one.
Pathway 1: local bank, fragmented portfolio
If you fall into the five to 20 properties range and have properties scattered around, this is the place for you. Lenders see these properties and realize they are a lot of work, but are maybe willing [to finance them]. The key is to find the right lender source and leverage that relationship. Their terms are going to range from 65 to 70 percent max. Your cash flow will need to show a 1.25 debt service coverage ratio. Pricing is going to range in the low 5’s on a five- to seve-year fixed mortgage.
Pathway 2: flexible lender, fragmented portfolio
If you fall into the same category, but need more flexibility, this is your group. They will do things to accommodate on different areas. For example, you might be able to get 75 percent loan to value, and pull some cash out. This type of lender will go to the extent of providing lines of credit for your portfolio. The only downside is you are going to pay for it. Rates are going to be about 1 to 2 percentage points higher than a conventional bank loan.
Pathway 3: long-term lender, enclosed subdivision
If you have a subdivision of homes all together, this is your pick. This program can offer long term fixed rates in the mid 4’s. The loan to value will be up to 75 percent, and they will offer non-recourse financing. It is really important that you are in a major metropolitan area.
If this is all true, then what are the next steps? This is a great question, and here is your answer.
- Prepare: Get your package of homes on a spreadsheet. Show the address, square footage, the loan amount, interest rate you have, who the lender is, rent and expenses you pay.
- Know your goal: Get clear about what is most important to you. Interest rate? Cash out? Long-term fixed rate? This will drive your decision points.
- Be flexible: SFR rentals are still in a fragmented market, so be okay with not getting everything you want. Decide what your one, or two, things are that are non-negotiable and let the rest go.
- Call an advocate: Contact a commercial mortgage broker who can help you navigate the best decision. They will provide you with relationship options and guide your steps.
- Keep growing: This is a huge space with tons of potential for the future. Make a business out of it and be patiently persistent to grow your portfolio.
David Kotter serves as principal of Integrity Capital, a limited liability company and commercial mortgage brokerage based in Scottsdale, Ariz. Kotter can be reached at (480) 219-1205.