Real estate investors have made a remarkable transition over the past decade. Starting out as fix-and-flip gurus in a post-crisis market full of distressed assets, the slow decline in flip margins, the surge in demand for single-family homes (SFR), and the entry of new competitors into the market have all driven these investors Rather, think of business owners and portfolio managers. Their needs have shifted from individual credit and home renovation expertise to property management and leverage for their next game of expansion. As successful investors function more and more like institutions, they need a funding tool that gives them institutional power.
Enter the portfolio loan. Developed by a number of private commercial lenders, these programs are capable of refinancing an existing real estate portfolio as a unit, getting better deals on low interest rates across the board, and potentially generating a flat-rate withdrawal that an investor can make use of to buy their next big real estate set and maybe make the transition from owning SFR real estate to owning real apartment buildings. Stephen Ballard (pictured), Business Development Manager at RCN Capital, explained how his company uses these loans and why today’s market conditions require investors to act like institutions.
“There are a handful of different pieces that introduce competition in this market,” Ballard said. “The largest is actually not institutional capital, although it has grown. The biggest problem is that the prices for individual houses are rising rapidly. Prices have risen as much as 50% in the past six months in some markets and appraisers are starting to get higher valuations. Investors have seen their entire portfolio grow by about $ 30,000 per property, meaning they have access to a ton of money that can be pumped back in down payments. “
These larger down payments, Ballard explained, are critical to an investor in today’s marketplace as they require more capital to compete with house-hungry homebuyers. In a more relaxed market, investors typically didn’t have to compete with homebuyers for more distressed homes. However, given the scarcity and high demand, many homebuyers are ready to do thousands worth of renovations. In addition, the introduction of hedge funds and institutional capital in the SFR area and investors who want to buy single-family homes are struggling with enormous competition on offer day.
Ballard explained that for many of these investors, if their portfolio is large enough, the portfolio loan can provide them with some sort of release valve, freeing up enough capital to offer for apartment buildings of more than four units. That means investors are no longer hanging out with hungry homebuyers. However, these properties typically require a down payment of around 25% for an expensive unit. This means that the investor must quickly free capital from his existing portfolio, and this is where his broker can step in with a portfolio loan.
Ballard explained that brokers can find the right investors for these loans by simply asking questions and providing answers. Realtors need to ask their potential clients how much properties they own, what type of equity they have in them, and what type of expansion they are looking to expand. From there, the questions about five-year plans and long-term goals in real estate can be expanded. When the answers get vague, a savvy broker can enlighten and talk about how transitioning to a portfolio loan can create a platform for the next stage of growth.
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While the expansion in portfolio lending and building SFR portfolios has increased in recent years, Ballard insisted that this is not a slip up in the market. This segment is ready to grow and continue to grow. With this knowledge, brokers and their investor clients can benefit from entering this market.
“This is the natural expansion you would expect as more investors move into rental properties,” Ballard said. “As soon as an investor has owned a rental property for five or ten years, they want to start refinancing and use the equity they have built up. Brokers who believe they have missed the boat in the past three years can still get into this market now and grow. You just need to be prepared for a savvy investor who has more information than before. However, to achieve more in this market you need to learn as much as you can about how the process works and know that these portfolio loans give you a lot of flexibility. “