There is money to lend in the real estate market, and the nation’s financial institutions are making that fact known loud and clear. The question remains, however, just who are they lending it to?
The answer was basically “nobody” after the Great Recession hit. Between the burst of the real estate bubble that many experts said didn’t exist in late 2007, and the nation’s largest-ever stock market crash in 2008, the appetite for lending definitely changed.
All of a sudden lending standards became a vice on the flow of funds, making qualifying for a loan an almost insurmountable obstacle for both investors and potential home buyers alike.
It has taken a lot of time, but the spigot to funds has begun to open up again, despite the Federal Reserve’s zero interest rate policy that has contributed to historically low interest rates.
“Credit availability remains tight, five years into the housing market recovery, making it difficult for home buyers to get a loan. Most banks are focused entirely on conventional loans backed by the GSEs or jumbo loans to ultra-qualified high net worth borrowers,” says Rick Sharga, executive vice president at Auction.com, an online real estate marketplace which has sold over 200,000 properties –mostly to investors — since 2007.
“But as traditional lenders continue to be incredibly risk-averse, a new cohort of lenders has emerged with products and services tailored to meet the needs of real estate investors. In many ways, today’s investor has more options than ever when it comes to financing a real estate acquisition.”
Risk Factors Point to the Same Conclusion
The tide has turned when it comes to risk – which is always a key factor in determining whether a loan will be made or not. Recent analysis of historical loan origination activity by RealtyTrac suggests that lending to real estate investors is less risky than it was just a few years ago.
Based on tax assessor data over many decades, key factors were revealed that – taken separately and together – help explain why it is easier for real estate investors to get funding now than it has been for quite some time.
“This is based on all residential properties with a loan nationwide, broken down by properties that are owner occupied versus those that are non-owner occupied,” said Daren Blomquist, vice president of RealtyTrac.
For one, the number of absentee owners (non-owner occupied properties) with a loan has grown to its highest level (18 percent in both 2014 and so far in 2015) since its last peak back in 2008 (24 percent non-owner occupied properties). According to Blomquist, those absentee owners are most likely real estate investors whose numbers are growing.
Another important factor to lenders is the loan-to-value ratio, a key component when it comes to evaluating risk for lenders.
“Lenders appear to be willing to take on more risk with investor loans based on average loan-to-value. The good news may be that these new loans are not as risky in terms of LTV compared to the worst of the housing bubble,” Blomquist noted.
Likewise, the RealtyTrac data show that the average loan amount has risen faster for loans on non-owner occupied properties than for owner occupied properties.
So far between 2014 and 2015 the average loan amount is up 13 percent on non-owner occupied properties versus a 3 percent rise on owner occupied properties. Since the market bottomed out in 2012 the average loan amount has increased nearly 19 percent for non-owner occupied properties compared to 13 percent for owner occupied properties.
Blomquist also noted that the analysis pointed to a lower foreclosure rate on non-owner occupied properties than for owner-occupied properties. RealtyTrac’s numbers show that 0.50 percent of all loans on non-owner occupied properties are presently in foreclosure compared to 0.69 percent of all loans on owner occupied properties.
A New Breed of Lender
As more investors continue to shift away from the volatility of the stock market and into real estate – lenders are recognizing the need to service this influx of potential new customers. As a result, this shift in investment strategy has spurred a whole new breed of lenders directly focused on servicing the needs of investors.
“If you take a look at the broader macro environment, you continue to see high stock market volatility and few options for generating consistent income into retirement. Single-family rentals are one of the few asset classes that can provide this benefit for investors looking for inflation-protected assets where they can leverage debt to create attractive returns,” said Anthony Cazazian, SVP at B2R Finance based in Charlotte, North Carolina.
Long-time real estate investor Bruce Norris is also a hard money lender who is keenly aware of the changes going on in the industry – particularly when it comes to funding investor deals.
“There’s been a lot of private money raised for the investor to get funding. I get emails every day from somebody who is now funding investors for either buy and sell or buy and hold,” said Norris, president of The Norris Group based in Riverside, Calif. “The difference is the interest rates have come down. My company buys and holds loans at 6.9 percent. For a hard money lender that’s about half of what it was three years ago.”
Reduced interest rates puts smaller hard money lenders like Norris in direct competition with banks. Accordingly, hard money lenders are moving to counteract this trend by partnering together to make deals.
With increased competition in the investor space, hard money lenders like Norris are also moving into financing investors who are getting into the new construction business.
Bigger players are also entering the investor lending space. One major example is Blackstone, one of the nation’s largest hedge funds which – with funds managed by its Blackstone Tactical Opportunities – established B2R Finance, its lending arm which focuses exclusively on residential buy-to-rent mortgages for single-family real estate investors.
“Interest in the single-family rental market remains very strong,” said Cazazian. “We continue to see steady interest from borrowers in financing rental investments and our model of asset-based lending – where we are primarily evaluating the cash-flow of the property.”
Other large players in the investor funding space include FirstKey Lending and Colonial Capital, along with crowdfunding sites such as RealtyMogul.
“You’re going to see newbie investors – the less seasoned guy – may have to pay a premium,” said Tim Herriage, CEO of 2020 REI Companies in Dallas, Texas. “A couple of the large institutions are disposing of assets as turnkey rentals. The growing trend is investors buying on an income valuation basis instead of a resale valuation basis. They’re not buying as much for equity in the property as much as for the income – cash on cash.”
That is not to say there is no place for novice investors in the marketplace even with low to very low inventory levels in many markets around the country, and bidding wars for the few properties coming to market.
Formerly with B2R Finance, Herriage said that entry into the business may be harder for new investors today, but a lot of these new finance companies have entered the fray to help prop up the small mom and pop investor.
“It’s a market segment long ignored,” Herriage noted. “The next segment to grow is the first-time or new investor.”
Veteran investors will have an advantage over those who are new to the business, but that does not mean it will be impossible for someone new to obtain funding, just more expensive.
“The lower rates are for seasoned investors. To get one of those loans you have to be doing one or two a month. The little guy doing one or two deals a year is probably paying north of 10 percent. You can expect to pay more when you are less experienced because it truly is risk based pricing,” Herriage explained.