How to give your investor clients the edge they need

Up against institutional capital and hungry homebuyers, investors need a financing tool that can put them ahead of the pack

How to give your investor clients the edge they need

Real estate investors have made a remarkable transition in the past decade. Starting as fix-and-flip gurus in a market full of distressed assets after the crisis, the slow shrinking of flip margins, rise of single-family rental (SFR) demand, and the entry of new competitors into the market has made these investors think more like business owners and portfolio managers. Their needs have shifted from individual loans and renovation know-how, to property management and leverage for their next expansion play. As successful investors function more and more like institutions, they need a financing tool that gives them institutional power.

Enter the portfolio loan. These programs, pioneered by a number of private commercial lenders, are able to take an existing portfolio of properties and refinance them as a unit, locking in better deals on low rates across the board and potentially generating a cash-out lump sum that an investor can use to buy their next big property set, and maybe make the transition from owning SFR properties to owning true multifamily buildings. Stephen Ballard (pictured), business development manager with RCN Capital, explained how his firm uses these loans and why today’s market conditions require investors to act like institutions.

“There are a handful of different pieces introducing competition into this market,” Ballard said. “The biggest one isn’t actually institutional capital, though that has been growing. The biggest problem is that the pricing of individual homes is rising fast. Prices have increased by as much as 50% in some markets in the past six months, and appraisers are starting to catch up with higher valuations. Investors have seen their entire portfolio jump by something like $30,000 per property, which means they have access to a lot of money that can be pumped back into down payments.”

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Those larger down payments, Ballard explained, are crucial for an investor in today’s market because they will need more capital to compete with house-hungry homebuyers. In a more relaxed market, investors usually didn’t need to compete with homebuyers for more distressed houses. Now, however, with tight supply and huge demand, many homebuyers are willing to put thousands worth of renovations into a property. Add to that the introduction of hedge funds and institutional capital in the SFR space and investors looking to buy single family properties have to deal with huge competition on offer day.

Ballard explained that for many of these investors, if their portfolio is big enough, the portfolio loan can provide them something of a release valve, freeing up enough capital that they can offer on four+ unit multifamily properties. That means investors are no longer going toe to toe with hungry homebuyers. However, these properties usually require around a 25% down payment on an expensive unit. That means the investor needs to free up capital from their existing portfolio fast, and that’s where their 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. Brokers need to ask their prospects how many properties they own, what kind of equity they have in them and what kind of expansion they’re looking to make. From there, the questions can get wider into five-year plans and long-term goals in real estate. When the answers get vaguer, a savvy broker will be able to educate and talk through how transitioning into a portfolio loan can create a platform for the next stage of growth.

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While the expansion of portfolio lending and SFR portfolio building has taken off in recent years, Ballard stressed that this is not some blip in the market. This segment is poised to grow and to keep growing and, with that knowledge in mind, brokers and their investor clients can benefit whenever they enter this market.

“This is the natural expansion you would expect as more investors switch to rentals,” Ballard said. “Once an investor has owned a rental property for five or 10 years, they’re going to want to start refinancing and take advantage of the equity they’ve built up. Brokers who think they’ve missed the boat in the past three years can still get into this market now and grow, they just have to be prepared for a savvier investor who has more information than they would have had before. But doing more in this market is about learning as much as you can about how the process works and knowing that these portfolio loans give you a lot of flexibility.”