Understanding the private client market can be crucial to capturing new opportunities
As a private client lender working exclusively with the most affluent client base, PCMA Private Client Lending has a unique insight into how the well-heeled are shaping real estate markets across the country. As more and more originators look to enter the lucrative single-family rental (SFR) space, PCMA CEO John Lynch (pictured) has shared a key dynamic that they need to be aware of: the sheer purchasing power exerted by a smaller group of affluent investors. Capturing a relationship with them, he explained, can make or break an originator’s foray into SFR lending.
“Because we operate within the private client space exclusively, we were taken aback by one common theme among the affluent,” Lynch said. “As we transacted our clients on their primary and secondary residences, we found that their portfolio of rental properties was a primary or major part of their overall financial plan. The people that own all of the rental properties are the private client community.”
While hedge funds and institutional capital are entering the SFR space, Lynch estimates that around 90% of the total volume is held by affluent individuals and families who tend to own between one and six units. Those homes are key planks in their overall investment portfolio as they use maximum leverage and steady rents to accrue both equity and cashflow that can facilitate their total financial independence.
Lynch and the PCMA team regularly facilitate these portfolios for their clients. He explained that the typical model for starting would be to lock in a long-term mortgage at a low rate and a roughly 80% LTV such that the client can maintain the property at a relatively low monthly payment. Even if they charge a rent exactly equal to that payment, Lynch said, shifting cost of living, inflation, market rent increases and purchasing power will eventually mean they’re actually making more on the rental cashflow which can be put towards the underlying equity, facilitating greater wealth accumulation and portfolio expansion.
Understanding these deals and the people who want to make them, Lynch said, means originators can capture an enormous opportunity. Lynch claims that in 25 years of working in this space, he’s never seen these investors so focused on maintaining liquidity. That means that if originators can forge relationships with prospective affluent investors, or existing portfolio holders, they can set up deals to construct or restructure debt ensuring liquidity, cashflow, and portfolio growth. Doing that, to Lynch, wins you long term business from a serious client.
“Once you become that guy that they lean on to assist in getting more capital to work, you get a huge business opportunity as an independent professional,” Lynch said.
Capturing this market does take serious work. Lynch noted that the agencies have recently pared back their willingness to provide liquidity in lending for larger investment portfolios. Originators will have to look towards private capital as a means of facilitating these deals and prove they can structure the right loans by studying this space and its unique requirements.
Lynch noted that PCMA has developed its own lending program, called Zenith, specifically designed to serve this community. He explained that Zenith is designed to look at the property rather than the person, discovering how the property is set to generate cashflow and lending based on the business opportunity that deal represents.
He added that this investor class is not a monolith and many affluent investors want to seek different strategies. Short-term rental properties, for example, are increasingly popular among some investors. Understanding the eccentricities of that market, Lynch said, could help an originator stand out as they compete for affluent investor business. It can also be a means of establishing a relationship - by connecting with property managers who handle short term rentals for these investors, an originator can secure that crucial introduction to a serious investor.
Lynch believes that those originators who want to capture this business should do so soon, as the confluence of low rates, house price appreciation, SFR demand, and capital market appetite create the perfect conditions for mortgage professionals to shine.
“You have unlimited investor appetite, and you have massive market opportunity from the size and scope of the market itself,” Lynch said. “You also have an opportunity from a lifetime value related to the client. You get with a client who has 30 assets, you become their preferred choice for financing them. It’s a great way as an independent mortgage professional, to really move away from a transaction-based environment to more of a relationship-based environment because now you’re working as part of the team and helping the client strategize their investment portfolio long-term for retirement.”