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Single Family Rental Investing: Old Dog, New Tricks

Wewe

We’re likely all familiar with old adages like “think outside the box,” “imagine yourself in their shoes,” and “no need to reinvent the wheel.” Over-used and cliché, the underlying truths of these words of wisdom is often lost. Now seemingly reserved for the majority of marketing campaigns, these commonplace phrases have lost their meaning and relevance, acting more as punctuation in casual conversation than lessons and sources of inspiration. Much can be said for a creative change of perspective, especially in the dynamic industry of real estate investing.

As we opine on the opportunities presented by our modern markets, we look to the strategies and successes of our predecessors. We have the benefit from learning from their experiences, good and bad. In continuing the theme of clichés, “hindsight is 20:20.” We should take full advantage, adopting best practices in the hopes of bettering our processes and ultimate returns.

The combination of a fresh perspective and the invaluable context provided by the transactions and market of the past, puts the modern investor in a position of power with limitless opportunity. Our ultimate success—coupled with historically, self-regulating financial markets—is determined by our ability to learn from past experiences and apply new and creative perspectives to modern opportunities. As we can all most certainly attest, balancing the tradeoffs between creativity and efficiency in today’s markets is no simple task. Unconventional thinking lends to atypical returns.

Opportunities in the real estate space are often undervalued and overlooked. Perceived as static and illiquid in comparison to other asset classes, the majority seem opt for the excitement of the stock market or the stability of bonds. Generally regarded as a long-term and capital-intensive investment strategy, the inexperienced investor generally looks to limit their exposure to real estate, outside maybe a personal residence. Market players—namely institutional investors—generally stick to the major, commercial asset classes: multi-family, retail, office, and industrial.

Real estate, as an asset class, is misunderstood and under-explored. Traditionally, the real estate investment market has largely been focused on the commercial asset classes, neglecting many of the opportunities presented by the residential sector. As of recent, the residential investment space continues to grow, generating sizable and consistent returns for strategic investors. So much so, conventionally commercial investors are now delving into the residential space.

Thinking outside the box about the boxes we live in; early adopters of residential real estate investing are now reaping the rewards of strategic acquisitions and market timing. With likely a more manageable monthly payment than an office building, residential investment properties present investors the unique opportunity to benefit from both short-term rental income and long-term market appreciation.

Many took full-advantage of the large inventory of distressed assets available at the end of the last decade. The tragedy of the last financial crisis presented a great opportunity to creative, cash-rich investors who amassed large portfolios of residential rentals at a considerable discount to market. In the short-term, the rebound of the market has already handsomely compensated investors via market appreciation. Thinking creatively about residential investment assets, inventive investors have found ways to generate consistent and impressive terms in a marketplace once thought to be too small and disjointed to support long-term, institutional investment.

Thinking creatively about residential investment assets, inventive investors have found ways to generate consistent and impressive terms in a marketplace once thought to be too small and disjointed to support long-term, institutional investment.

Much of the recent success within the residential investment space is the result of creative thinking by some commercial players. The opportunistic investment in single family homes has become more attractive as it provides a diversified alternative to the volatility of the stock market. Savvy investors the lessons and strategies learned in the commercial space, to residential real estate investing. Playing to their strengths, these innovative investors have adapted commercial acquisition, management, and financing strategies to an

Savvy investors the lessons and strategies learned in the commercial space, to residential real estate investing. Playing to their strengths, these innovative investors have adapted commercial acquisition, management, and financing strategies to an under-serviced sector of the real estate market. Investors of all sizes have adapted real estate investment strategies as the demand for rentals continues to grow. Whether a publicly-traded residential REIT (like Colony Starwood; owner of 40,000 residential assets nationwide) or a localized mom ‘n’ pop investment fund, there is money to made in the residential real estate market.

Whether a publicly-traded residential REIT (like Colony Starwood; owner of 40,000 residential assets nationwide) or a localized mom ‘n’ pop investment fund, there is money to made in the residential real estate market.

With time, the market rebalances. As these rental portfolios continue to grow and with new investors entering the marketplace daily, the need for creative financing solutions became more apparent. With ever increasing demand for financing, portfolio lenders entered the marketplace with unique capabilities tailored to the needs of the contemporary investor. Thinking outside the box, these lenders programs are strategically targeted to fuel the continued investment and successful within the residential rental space. Again adapting commercial processes, lenders have adapted to meet the needs of this growing segment of the real estate and investment markets. Playing to their strengths, these portfolio lenders provide for

Again adapting commercial processes, lenders have adapted to meet the needs of this growing segment of the real estate and investment markets. Playing to their strengths, these portfolio lenders provide for greater opportunity (via access to capital) for investors in an emerging class of misunderstood assets.

Savvy investors are now seeking financing—outside of ridged, government programs—for their existing and growing, creative residential investment portfolios. In response to a growing need, portfolio lenders have adapted commercial, blanket debt structure to residential rentals. In providing commercial mortgages and bridge financing for residential real estate investors, investors are able to grow their portfolios. Structured similarly to commercial debt, notes are secured by cross-collateralized pools of residential investment assets. These lenders benefit from operating in both the residential and commercial real estate markets; taking full advantage of both retail and correspondent channels. This hybrid role allows for both direct, investor relationships, as well as utilization of the existing infrastructure provided by the mortgage banking and brokerage industries. Two marketplaces. One financing solution.

Structured similarly to commercial debt, notes are secured by cross-collateralized pools of residential investment assets. These lenders benefit from operating in both the residential and commercial real estate markets; taking full advantage of both retail and correspondent channels. This hybrid role allows for both direct, investor relationships, as well as utilization of the existing infrastructure provided by the mortgage banking and brokerage industries. Two marketplaces. One financing solution.

These private lenders are also taking full advantage of the public market and an under-serviced asset class; providing both financing solutions for real estate investors and commercial-mortgage backed securities for bond investors.

Imagine yourself in the shoes of a real estate investor or market player. From a financial and general performance standpoint, the underlying fundamentals of real estate investment are relatively consistent across asset classes. Whether looks at office building or apartments, investors and lenders alike are looking at the cash flow and market value of potential investments. At the end of the day, rents are rent; income is income. Whether it’s for a five-year lease of an office suite or a month-to-month one-bedroom apartment, the underlying performance metrics are the same. A growing trend in rental investment and with an increasing amount of portfolios coming to the

At the end of the day, rents are rent; income is income. Whether it’s for a five-year lease of an office suite or a month-to-month one-bedroom apartment, the underlying performance metrics are the same. A growing trend in rental investment and with an increasing amount of portfolios coming to the market place has triggered a shift in thinking. In this circumstance, those quick to adapt and meet the demands of the marketplace have been the most successful. But again, the line between innovation and absurdity is blurred. Without risk, there can be no reward.

Without risk, there can be no reward.

From the perspective of the investor, the process remains the same. Why not apply your skill set to the widest possible arena? The value in residential real estate investment can be amplified when commercial investing practices are applied. As market players (investors, lenders, brokers…etc.), we must adjust our perspectives to remain competitive in an ever changing, and evolving market. In efficiently appealing to the widest audience possible, one can recognize the greatest return. That being said, it is understandably more reasonable for a seasoned real estate investor or broker to adapt to residential real estate investment than for a taxi driver to also pilot planes. Be strategic and cognizant of how and where your resources and skill sets are best utilized.

That being said, it is understandably more reasonable for a seasoned real estate investor or broker to adapt to residential real estate investment than for a taxi driver to also pilot planes. Be strategic and cognizant of how and where your resources and skill sets are best utilized.

No need to reinvent the wheel. With the ever-increasing demand of rental finance and new investors entering the space daily, real estate and mortgages brokerages are similarly sharing in the growth of the industry, collecting meaningful compensation via yield spread premium made available by many residential portfolio lenders. At the end of the day, the residential portfolio investment and corresponding finance programs are close cousins to the commercial investment and debt platforms we’re familiar with. In an effort to stay competitive, adaption to the changing trends and themes within the marketplace is essential.

In an effort to stay competitive, adaption to the changing trends and themes within the marketplace is essential.

Historically, the long term success of real estate investors has been contingent upon their ability to adapt. Whether a seasoned veteran or a novice, optimization of one’s time and skills sets lends itself to meaningful returns.

CoreVest is a leading provider of financing solutions to residential real estate investors. We provide attractive long-term debt products for stabilized rental portfolios as well as credit lines for new acquisitions. For more information about how CoreVest can help grow your rental and rehab business, please call 844.223.2231 or submit our contact form.

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