SFR Financing in an Evolving Market

The market for single-family rental financing over the last few years has evolved significantly, with experienced lenders and institutional capital bringing sophistication to the industry, panelists noted at the recent IMN Single-Family Rental Forum (West) in Scottsdale, AZ.

“This industry has changed radically, it’s become much more institutionalized, and I think it’s really for the benefit of the borrower,” said panelist John Beachem of Toorak Capital Partners, an investment manager.

Investors Shifting Strategies

With more lending options available in the market, investors have been able to take advantage of the new SFR financing products to support their changing strategies. While many borrowers executed the traditional “fix-and-flip” investment, which involves buying distressed assets, doing a light improvement and selling, they are finding that the margins on these deals are smaller than they used to be.

Beachem added that most investors that were looking to fix-and-flip properties weren’t obtaining financing because the short-term lending products weren’t as efficient. Today, more consistent and reliable funding is available and the percentage of investors obtaining financing has increased.

Investors are now seeing the benefit of a “fix-and-hold” strategy. By buying lower-priced assets and doing a more in-depth rehab, investors are recognizing the benefit of holding onto the assets, bringing in high-quality tenants and earning steady, long-term rental income.

Panelists noted that investors had traditionally only rented out a property if they couldn’t sell it. Now the fix-and-hold approach is more intentional and even the primary strategy for many investors.

Lenders Developing New Product Offerings

Several panelists noted that as the fix-and-hold approach gains ground, they are reevaluating and adjusting their loan products to fit the market demands. Changes to SFR financing options include offering longer terms and changing how they underwrite deals. Lenders are now considering both a sell exit and a hold exit for borrowers, and they expect that a loan could be on their books for a longer period.

New construction loans are also becoming more in demand among investors who are finding success doing build-to-rent SFR projects.

Another product several lenders said they’re looking to create is a one-time close loan that takes the borrower from the construction financing to the permanent financing to lower transaction costs and make the loan process more seamless.

Panelists noted, however, that because abundant capital is available in the SFR market, the competition among lenders is intense. As a result, the lending environment has been more aggressive, with higher leverage points than they were a few years ago and with lower pricing.

Because of increased interest in rental financing, lenders are also able to be more prudent in working with high-quality, experienced borrowers. For a buy-and-hold deal, lenders need to review borrowers’ ability not only to own but also to manage SFR properties effectively and have a high-performing portfolio. They’re also offering risk-based pricing, where more experienced operators can get better terms.

Technology to Improve the SFR Financing Experience

As in other aspects of the real estate industry, technology is having an impact on the lending process and borrower experience. Panelists noted there is certainly room to improve, but some lenders are ahead of the curve in refining the loan process. Several lenders allow borrowers to view their loan status and documents through an online portal.

Internally, panelists noted they are also working to implement better technology platforms to capture more data and improve their outreach efforts to clients. Lenders lack access to data on credit performance on a scale basis, so panelists noted they are finding creative ways to mine data. Strategies include getting feedback from originators to identify trends and what loans are performing well.

Overall, panelists noted that the SFR financing space will continue to morph, and technology and data will be critical for lenders to remain competitive in the space. They emphasized that 2020 will be an exciting year for the further evolution of the single-family rental financing market.

For more insights on the SFR market, visit our SFR research page. Interested in SFR finance and investment opportunities? Contact Arbor today to learn more about our SFR portfolio loan program.