Nonbanks Target Single-Family Rental Investors
Financing options for real estate investors have been expanding as nonbank lenders step in to fill what they see as a lucrative void.
While investor interest in single-family rental properties has remained high, regulations have made it tough to obtain sufficient financing through Fannie Mae and Freddie Mac. But more private lenders are sizing up investment borrowers on their own terms, and extending higher-priced credit to landlords and so-called flippers alike.
“There are between 12 and 15 million single-family rental properties in the country,” said Jeff Ball, the president and chief executive of Visio Financial Services, an online lender for investors, in Austin, Tex. “It’s a very large market, currently underserved by the debt market, and very fragmented.”
Credit score and income documentation requirements can put traditional sources of credit off limits to some single-family investors. Borrowers who already own property, for example, may not be able to take on additional bank-financed debt without adversely affecting their credit status. But “private financiers are not typically reporting loans to credit agencies,” Mr. Ball said, “so these borrowers come to us for alternative financing.”
Likewise, investors with multiple income streams may be unable to document their income sufficiently to meet banks’ underwriting criteria. Private lenders may decide a property’s cash flow can support a loan.
These nonbank loans can demand a substantial premium over agency loans, however. Visio’s interest rates start at about 5 percent for an investor with an established rental portfolio, and can rise to as high as 18 to 20 percent for a short-term loan for someone who intends to fix and flip a property, Mr. Ball said.
Visio will also lend, with a minimum of 35 percent down, on properties in need of significant repair. Banks usually balk at providing such financing, not wanting to end up with a problem property in the event of a default. But because Visio was created by the top managers at Econohomes, which bought and sold some 11,000 distressed single-family homes during the recession, it has ready access to a large pool of existing home buyers in the 34 states in which it lends, Mr. Ball said.
LendingHome, another online lender to investors, based in San Francisco, taps a variety of data sources to more fully document each loan while also speeding the qualifying process, said Matt Humphrey, the chief executive. Founded around 18 months ago, LendingHome is tied in with large institutional investors, like hedge funds and real estate investment trusts, eager to reach this asset class, he said.
“The vast majority of folks in this space are small investors, people who own 10 or fewer homes,” said James Herbert, LendingHome’s president. “Our sweet spot is the person that has two, three, four properties, up through 25.”
Mr. Herbert described the company’s underwriting criteria as fairly conservative. The property income flow must “more than support” the mortgage, he said. The average loan-to-value is 62 percent (meaning financing for up to 62 percent of a property’s value). The company plans this year to expand well beyond the 13 states in which it currently lends.
Smaller investors can benefit over the long term from these financing options, said Don Ganguly, the chief executive of HomeUnion, which lists investment properties in 15 markets and helps buyers manage them. Leveraging, say, $100,000 to buy four properties in different cities, instead of one, can potentially bring a greater return 15 to 30 years down the road, when the loan is paid off, he said.
Source: NYTimes.com
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