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   ARTICLE   |   From Scotsman Guide Residential Edition   |   January 2017

Seek Refuge When Rates Rise

The rental-investment market offers opportunity and stability during uncertain times

Seek Refuge When Rates Rise

Residential mortgage originators have enjoyed the low interest rate environment in recent years that has provided healthy pipelines driven by purchases and enhanced by renewed refinance activity. At the time of this writing, however, it is anticipated that rates will start to rise in the coming year. Everyone hopes this will not materialize, but now is maybe a good time to consider what options will be available if it does occur.

In a market driven by rate sensitivity, any notable increase could have a great effect on traditional borrowers and their efforts to purchase new homes or refinance existing homes. Smart loan originators will both recognize this possibility and begin making plans to replace business lost to a rising tide of interest rates.

Conventional residential lending, of course, will continue as interest rates rise, but this will likely be at a slower pace. Refinancing production will get hit harder and may fade drastically as rates rise. And yet, homebuyers will still be out there, albeit in potentially fewer numbers. Higher interest rates have historically meant less conventional lending opportunity and lower loan volume.

As in the past, higher rates will cause some home-buyers to sit on the sidelines if they don’t like the monthly payment for the price range they want. Many of these potential first-time buyers may decide to just keep renting. Originators prepared for an influx of renters seeking refuge from higher interest rates can find an already thriving alternative market segment if they understand the various types of loans and know some of the lenders who are already flourishing in this vibrant lending space.

Lucrative niche

Many mortgage originators and commercial brokers already know about the one- to four-unit family rental space. Single-family rentals alone account for 15.1 million residences in the U.S., or 13 percent of all occupied housing stock, according to a 2016 report from RCLCO, a company that provides property-investment advice.

The real estate investor market has provided great opportunity through fix-and-flip and fix-and-hold loan volume.

Originators and lenders successfully providing funding in this space have seen increasing pipelines and compensation in recent years. For the last several years, the real estate investor market has provided great opportunity through fix-and-flip and fix-and-hold loan volume. Month after month, tremendous revenue is being created by originators and private money lenders who provide leverage for investors to purchase distressed homes and rehabilitate, or rehab, them with the goal of making nice profits from the resale.

There will always be a market for the fix-and-flip side of real estate investing. The demand for this loan product continues to be strong, and commercial brokers and residential originators have been capitalizing on this investment area for some time. Because of the complexity of the product and process, fix-and-flip investing has generally been a specialty of private money lenders.

The investor market has been evolving, however, with the fix-and-hold rental market seeing a significant increase in popularity and profitability in the last two years. It is predicted to rise even more in 2017. This has further encouraged real estate investors to expand their portfolios to capitalize on this growing opportunity, causing many to buy and rehab homes to hold for rentals instead of selling them.

Other investors are purchasing turnkey rentals that have already been rehabbed and are currently rented. In both cases, the objective is to provide rental housing for those who are veering away from buying and would rather rent instead, and to make a profit, of course.

This market has been great for landlords as well. According to a recent report from a webinar featuring Dennis Cisterna, chief revenue officer at Investability, rents have appreciated 15 percent and the demand for single-family rentals is steadily rising as well. The national vacancy rate is only 7 percent, meaning that 93 percent of single-family rentals are occupied.

If interest rates do rise in the coming year and keep first-time buyers out of the market, they will likely stay or become renters. The full circle of how this market holds opportunity when rates are high makes it a solid option to offset conventional pipeline reduction. Instead of lending to the renter who wants to become a homeowner, originators can lend to investors and landlords who will provide rental options to the increasing numbers of young families looking for affordable housing.

Investment funding sources

Fannie Mae and Freddie Mac both allow investment-property loans with adjusted terms. These loans require full documentation and follow standard conforming guidelines. This is usually the best direction for the lowest rates and payments; however, they both have limits on the number of properties that can be owned and financed. Fannie and Freddie also require the borrower’s income to be verified and qualified.

Community banks are an option where the bank has an appetite for real estate-investor business. Portfolio lending allows some flexibility to work with investors, generally offering good rates and terms and often having more generous limits on the number of properties owned. Because community banks usually lend the bank’s assets, they also can establish their own guidelines and requirements based on their appetite for this type of business and their risk tolerance. There are some community banks that will work with originators. The trick is to find one and establish a good business relationship.

If you aren’t getting traction with Realtors already, having expertise in handling one- to four-family rental loans can be a door opener.

As mentioned earlier, private money lenders have played a major role in the recent investor boom. Private money lenders specialize in lending to real estate investors and have provided hundreds of millions of dollars in leverage to investor-established entities.

Historically, the bridge-loan product for fix-and-flip, fix-and-hold, or buy-and-hold investments has been a major factor in helping landlords renew neighborhoods throughout the country.

A few of these private lenders also offer 30-year rental financing. Terms are mainly based on credit score and property cash flow because tax returns are not required. The experience of the investor also is a factor, and the transaction needs to make sense. These are commercial lenders by nature, so broker licensing is usually not required. As with community banks, it is important to establish a business relationship with one or more private lenders so you understand their processes and appetite for different types of deals before bringing clients to them.

Finding property investors

The only other question, then, is where do these clients come from? You may think your normal referral sources won’t aid you here, but you might be surprised.

If you aren’t getting traction with Realtors already, having expertise in handling one- to four-family rental loans can be a door opener. Even if you already have working relationships with a number of real estate agents, having another arrow in your quiver is never a bad thing. Because Realtors are on the front lines of the housing market, they know about distressed properties in their area that can be turned into single-family rentals. They may even have investor clients already looking at these properties

You also can go right to the source by seeking out local landlord and real estate investor associations. Treat these groups just like any other professional organization. Attend group meetings and network with them. Add them to your referral e-mail list. Offer to speak to their members about your expertise in investment financing. Originators will find opportunity through support of those organizations.

•  •  •

We all hope the interest rate forecasts are wrong and the low-rate environment continues, but the one- to four-family rental market should not escape the notice of residential mortgage originators who want to grow their businesses, especially when a rising tide of interest rates threatens to wash over them. The residential investment market is here and shows strong signs of continuing as a viable niche that can provide ongoing opportunity in almost any lending environment.


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