By Red Capital Group, LLC (MultiFamilyExecutive.com Article) — A confluence of favorable market conditions has made ownership of 5–50 rental units a near-irresistible value proposition for growing numbers of small private investors. Consider this partial list of factors now working in the small multifamily owner’s favor:
- A continuing affordable housing shortage;
- The widening rental-rate gap between largely institutionally owned, Class A properties and Class B and C properties;
- Fast lease-up and typically lower turnover; and
- A stable workforce demographic.
Yet, life for this ownership group is not without risk. Asset overpayment, rising interest rates, timely financing executions, and a shortage of qualifying properties are among many challenges. Scott Croul understands the issues as few do. His 30-year background in solving multifamily financing challenges includes senior leadership positions at RED Mortgage Capital, Freddie Mac Multifamily, and John Hancock. Croul recently offered these insights:
What kind of financing challenges does a small multifamily owner face?
Financing options for small multifamily owners (SMOs) have never been better with Freddie Mac and Fannie Mae continually enhancing their small-loan programs and banks, life companies, conduits, and private funds all seeking to compete or fill the gaps.
With capital plentiful, the greatest challenge is often execution. Finding a capital provider that will guide the SMO to deliverable terms and seamlessly execute on those terms can be a big challenge when faced with so many options.
Are government-sponsored enterprises doing enough to assist SMOs?
Up until four years ago, SMOs were largely neglected by Freddie Mac and Fannie Mae.
That changed when Freddie Mac rolled out its Small Balance Loan (SBL) program to cater to the SMO. The program has been highly successful and has already funded over $18.4 billion worth of SBL loans. Though that may seem like enough, both Fannie Mae and Freddie Mac are continually seeking ways to provide more assistance to SMOs. Most recently, they’ve modified their parameters to allow more flexibility in qualifying contiguous properties for their products.
What financing strategies do you suggest for SMOs? Why?
SMO financing strategies should be tailored to meet SMO investment objectives. An SMO with a long-term hold strategy will find that Fannie Mae offers the best execution with fixed-rate terms available up to 30 years. One of the best features of the Freddie Mac SBL is the automatic rate hold at loan application. This feature is very appealing with today’s rising interest rates.
We signed up a Freddie Mac SBL on April 13, 2018, when the 7-Year Treasury Note was 2.78%. That rate held, while 7-Year yields climbed to over 3.04% in mid-May. Sixty days after application, we rate-locked with Freddie Mac and closed the loan the same day through our parent, ORIX Corporation USA, without using a warehouse line to accommodate the investor’s accelerated closing schedule. At rate-lock, the 7-Year was up 12 basis points from the application date. The investor saved money with a lower, locked-in rate.