A Blog from Angel Flores (BIO)
The terms of a loan are one of the most important driving forces for the value of any investment. This I especially true for investment real estate, Fannie Mae and Freddie Mac have very good financing terms for multifamily projects and it has helped fuel the price increases seen for Multifamily in recent years. Non-Recourse financing, low interest rates, 80% leverage, and a 30 year amortization schedule are very attractive terms to investors because it dramatically increases the rates of return and lowers their risk versus if the investor were only able to secure bank financing for investment real estate.
Single Family Rental (SFR) investing has traditionally been dominated by “mom and pop” or individual investors. In 2012, Warren Buffet famously said “I’d buy up a couple hundred thousand single family homes if it were practical”*1. Single family rentals are typically not right next to each other but scattered around town(s) and therefore need to be managed differently than multifamily. In the past, if they are not contiguous (parcels that are not joined), they have not qualified for the same attractive debt terms as traditional multifamily. That is, until recently.
Earlier this year, Blackstone’s Invitation Homes was able to secure Fannie Mae Financing for $1Billion of debt as part of its IPO offering.*2 There was a huge outcry from housing advocates and legislators asking why such a large landlord needed such low cost financing, the GSE’s (Government Sponsored Enterprise) mission is to support affordable housing and this pilot program did not appear to achieve that goal. Despite this outcry, it does make sense, policy-wise, for GSE’s to enter the SFR space. The main goal of the GSEs’ multifamily business is to enable the financing of rental housing for families with annual income up to the median income in the areas where they live. Although multifamily properties are a critical source of US rental housing, there are less multifamily than single family units as rental stock. As a matter of fact, 57 percent of the US rental housing stock is single-family, and 43 percent is multifamily.*3
As the US population moves towards renting vs buying, it makes sense for GSE’s to offer stable, long-term financing that allows SFR landlords to purchase, hold, and run the stabilized properties as a business. With the Fannie program focused on one large institutional investor, how can mid to small sized investors compete? Freddie Mac is now hashing out details to provide tens of millions of dollars in financing to midsize landlords, not to giants like Invitation Homes….The size of the sponsor is less important than affordability”*4
What does this mean for you and me today? Currently the FHFA (Federal Housing Financing Agency) has approved the Freddie program on a trial basis. Greystone Investment Sales Group specializes in brokering the sale of SFR portfolios and we are currently working with a local DUS lender to obtain financing using the new Freddie Mac program. The minimal requirements for these loans are as follows: at least 50 homes, $5,000,000 minimum loan value at 75% leverage, there must be an affordability component (affordable rents), experienced operator (management company), and the borrower will need to qualify with a net worth at or above loan value and liquidity of 12 months of debt payments. The rates are higher than what is being offered for a multifamily property (290 bps above the ten year treasury vs 222 bps if it were a multifamily loan).
For more information on this new loan program or if you would like to discuss you SFR portfolio please contact me at 972-232-2325 or firstname.lastname@example.org
1 CNBC. ‘I’d Buy Up ‘A Couple Hundred Thousand’ Single-Family Homs If I Could’ – Alex Crippen (2/27/2012)
2 WSJ. ‘Blackstone Wins Fannie’s Backing for Rental Home Debt’ – Ryan Dezember and Nick Timiraos (1/24/2017)
3 Urban Institute. ‘Fannie Mae’s Financing of Single Family Rentals: Good Pilot, But Plenty To Think About’ – Laurie Goodman and Karan Kaul (2/2017)
4 The New York Times. ‘Freddie Mac Follows Fannie Mae to Rental Market, with Affordability as Goal’ – Mathew Goldstein (7/19/2017)