Loans to Mom and Pop Investors


Despite all the noise about large institutional investors turning single-family houses into rentals, it may be surprising to learn that investors owning fewer than 10 rental houses hold by far the lion’s share of these properties.

About 17 million units, or nearly a quarter of the nation’s total, are not occupied by their owners. Some are not actively advertised for rent, and some are vacation homes. But the 25 percent figure stands “as a fairly good proxy” for the total number of rental houses nationwide, says Daren Blomquist, chief economist of RealtyTrac, a real estate information company.

By RealtyTrac’s count, institutional investors – those acquiring 10 or more rental houses — have turned 632,000 or so houses into rentals, largely to take advantage of low prices coming out of the 2008 recession as well as the growing desire of people to rent rather than buy. But that leaves roughly 16 million houses that are owned by small investors, commonly known as “Mom and Pop” landlords.

Financing has never been simple for this group. Either they used cash to back their deals, emptying their bank accounts, or they lied to lenders that they were buying these places to live in themselves. Either that they told the truth and were forced to pay higher rates than owner-occupant home buyers qualify for.

But even then, they faced severe restrictions. Fannie Mae won’t buy more than four loans made to a single investor, for example, and Freddie Mac limits the number to 10. And when they still went that route, they faced tougher tighter secondary market guidelines than for other borrowers.

Now, though, several private firms are courting the market. Borrowers still need good credit and a hefty downpayment – for the most part, 25 percent. But if they meet those criteria and a few others, they might be in business. And a lot of those loans will one day find their way into securities, says Michael Frantantoni, chief economist at the Mortgage Bankers Association.

“We’re still in the early stages,” says Frantantoni, who led a panel session on Secondary Market Outlooks and Opportunities at a recent MBA workshop on the single-family rental market in Washington. “But eventually (small SFR loans) will be pooled together to create securities. It’s inevitable.”

To fill the Fannie-Freddie void, several big equity outfits have come to the forefront. Among them are B2R Finance, a wing of the Blackstone Group, Colony American Finance’s Colony Capital and FirstKey Lending from Cerebus. And all three have begun dabbling in the multi-borrower securities market.

“The next frontier for SFR securitization market will be the ability for smaller single-family rental investors to access the securitization market,” Richard Hill, executive director of Morgan Stanley Research, told the Co-Star Group, a leading provider of commercial real estate information and analytics. “Suffice it to say, successful issuance of a multi-borrower deal could serve as a catalyst for significant growth on the sector.”

According to Jason Hogg, CEO of B2R, his Charlotte-Based company is pioneering the first such bond, which he says will serve to increase the amount of capital for small investors.

B2R bases its lending decision mostly on the borrower’s cash flow from the underlying properties, as opposed to the borrower’s debt-to-income ratio, which, of course, is a key determinate when lending to people who are actually going to live in the properties they are buying.

Initially, the company lent from $300,000 to $3 million to what it calls ”entrepreneurial” borrowers who own at least three houses, townhouses or condominium apartments worth at least $50,000 each. The initial target also included folks who owned multi-family buildings with less than 20 units. But then, B2R introduced the Foundation Loan aimed at people who hold one property, or buy only one a time. Hogg says investors are “craving” one-property loans.

B2R’s loans have fixed payments for a five to 10-year term, but will amortize as if they were for 30 years. Colony American and First Key offer similar terms or lines of credit for “flippers” who buy run-down houses and foreclosures, fix them up and resell them in the matter of a few months.

In another interesting development, RE/MAX, one of the country’s largest real estate franchises, with more than 100,000 agents in nearly 100 countries, has made B2R an approved supplier to offer financing solutions for rental property investors. Toward that end, it has developed an exclusive agent portal through which agents can submit leads and track the status of loan applications.

According to the National Association of Realtors, individual investors made up 17 percent of all existing home buyers last year.

As an approved supplier, RE/MAX will support agents whose client base goes beyond owner-occupied borrowers. “Many of our (60,000) U.S. agents have close relationship with property investors and having information on the B2R financing products could provide more knowledge about the marketplace,” says RE/MAX Executive Vice President Mike Ryan.

For its part, B2R is “incredibly excited” about the deal, says Fiona Simmonds, the company’s chief development and administrative officer. “This agreement is a testament to the strength of our platform, the quality of our suite of products and the level of volume we can support.”

This article was written exclusively for GoRion.

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This article has been exclusively written for GoRion by...

Lew Sichelman

Lew Sichelman

In his weekly column The Housing Scene, Lew Sichelman provides consumer-oriented information on housing and mortgages that is essential reading in today's market. Dubbed "the consumer's real estate columnist," Sichelman uses plain English to give readers information they can use, making The Housing Scene easily understandable for even first-time home buyers. His column, which appears in the Los Angeles Times, Chicago Tribune and many other newspapers, addresses a wide range of topics. He has been covering the market for more than 40 years and also writes for numerous trade publications.

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