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Leveraging the Millennial Rental Market

This feature originally appeared in the January issue of MReport.

In 2020, real estate will be a top choice to invest in. Rental demand is soaring, allowing real estate investors to start making money right away. After the purchase, thanks to tight rental inventory, properties should rent immediately, generating rental income and a solid return on investment. 

It is a great time for any beginner to get into the market, too. With a favorable market in place, brokers only need the right lender and loan products for their beginning or seasoned investor clients. Lenders are excellent resources and have loan products specifically created for property investors to build their portfolios. 

 

Current Market Conditions 

Homes—and in particular, entry-level homes—are getting more expensive and inventory is still tight. According to the Federal Housing Finance Agency, home prices increased 4.6% between August 2018 and 2019. The same is becoming true for rentals. The supply of rental homes is decreasing, making rental prices rise. This is a stark difference from just a few years ago when foreclosures where plentiful as a result of the housing crisis. 

From 2010–2016, investors rushed into the market and bought up thousands of discounted foreclosed properties and turned them into rentals. While inventory has dwindled, the demand remains strong, making for a lucrative real estate market for investors. Seasoned real estate investors know that while increasing prices pose a challenge, there are still viable options across the country. Investors who are just entering the market need not be concerned as finding cheap properties is still a possibility, and an experienced broker can help them. The lack of affordability is isolated to certain markets. 

In fact, the greatest challenges are mainly in high-cost markets where it is harder to find a deal. Otherwise, great deals are plentiful coast-to-coast, making real estate a great investment strategy in 2020. It is projected that rental growth for lower-priced homes could outperform the rest of the market. 

 

2020 Projections and Trends 

Investors are now looking at single-family starts as builders are putting up more entry-level homes. Many builders will cater specifically to the investor market with brand-new rental communities. The build-to-rent market is exploding, and builders want in. The homebuilding sector has underperformed in the past few years, and this is an area set for growth. The build-to-rent market could become an ongoing investment strategy where homes are built and sold in bulk. One new trend is developers building cohesive, single-family rental communities for renters looking for a lifestyle and community they can’t find in apartment complexes. 

The current economic climate is perfectly timed for single-family rental market success. Credit markets are still fairly tight, many people have lower credit scores and less money for down payments, and home prices keep going up. Realtor.com revealed that investor activity was up 5.6% in Q2 2019, which accounted for 7.1% of all home sales. This is the highest Q2 share since 2013, confirming that the investment market is hot. Who might be interested in renting still? In a word: millennials. The largest generation in American history is now ready for the single-family market. For this demographic, renting single-family homes have become the new starter home. This makes for happy property investors as the demand for single-family homes for rent has increased and rent growth accelerates. It is predicted that 2020 will be the year that the millennial generation will enter the SFR market in full force. 

Single Family for rent is the fastest-growing segment of the U.S. housing market according to the Urban Institute. The Urban Institute’s Housing Finance Policy Center issued a report in 2018 that estimated that 3.4 million millennials do not own homes, preferring instead to rent. That doesn’t mean they aren’t moving, though. They are moving from urban areas in apartments to the suburbs, looking for homes to rent with enough room to start a family. Student debt and rising home prices are still forcing many millennials to wait longer to purchase.

These projections and trends should make any real estate investor confident in the potential for positive ROI in 2020. Now they just need the right originator to align them with a trusted lender and mortgage loan product to get it done. That could be you!

 

A Powerful Tool for Brokers and Investor Clients 

An Investor Cash Flow loan allows cash flow on the property to be used to qualify for the loan. Tax returns and employment information is not required. This means that borrowers can use the projected rent payments even if the home is not rented. Guidelines are not as strict with these loans, making it possible to seize an opportunity regardless of your borrower’s income status. Talk to your lender about other benefits to the Investor Cash Flow product. 

The right loan option and a trusted lender is crucial in growing a property investment portfolio. There are many lenders that offer investment property loans, and their guidelines vary. Choose a lender with a unique and innovative Investor Cash Flow mortgage loan product that provides the most favorable position to get qualified and approved. Make sure that diverse property types are eligible, including 1-4 unit properties, warrantable and non-warrantable condos, among others. It is also important to know that some lenders require that borrowers maintain a minimum debt service coverage ratio (DSCR). DSCR guidelines vary by lender since there are no regulated guidelines and many lenders have different tiers of DSCR. 

There are lenders who have lower DSCR requirements, which make applying for a loan less frustrating. For anyone concerned of the risk associated with not taking into account DSCR, take solace in knowing that times are different, and the majority of real estate investors today are able to almost immediately use rental income to repay their mortgages. A lender you trust can explain the benefits of an Investor Cash Flow loan and help you market this product to your borrowers. Let your real estate investor clients know that they can build their portfolios without the typical challenges in the loan process. 

 

The Right Lender Makes It Happen 

An investor with a great deal on a property has already accomplished a huge step in the process. Competition can be fierce, and the loan process needs to be quick and easy. A go-to lender known to be an expert in the space with an innovative loan product makes for a satisfied investor client. 

These clients will stick with brokers who get them to the closing table quickly. A long-term investor client can be a dream come true for a broker. Who doesn’t want a client with continuous repeat business? The goal of property investing is to amass as many properties as financially feasible. That’s a lot of loans to close.

The challenge of working with an investor—which is a great one to have, by the way—is to be ready at the spur of the moment to get it done. The quicker the deal closes, the better, because the client knows they can count on you to secure a deal. Once a client knows their lender’s requirements for financing and that they have a solid product that works, a long-term relationship is easily established. Earning commission from the same lead every few months (in some cases), or even a few times a year, is a great win in the mortgage industry. The key is to have a lending partner and product ready to roll. The mortgage industry has experienced a transition very beneficial to anyone involved. The success of non-QM, still the largest growing segment in the space, has made a huge difference to borrowers and broker’s business growth. 

With rental demand increasing, the focus on prospecting for real estate investors is a smart strategy for any broker. It looks like 2020 will turn out to be the year to buy a house to rent. That means 2020 could be the year you are the go-to broker for property investors. The more homes they buy equals the more loans you close. So, if a property investor should ask you if 2020 is a great time to buy real estate, you can say, “Yes, it is! Let’s get started.” Here’s to a prosperous New Year! 

About Author: Tom Hutchens

Tom Hutchens is the SVP of Sales and Marketing at Angel Oak Mortgage Solutions, an Atlanta-based wholesale and correspondent lender leading the non-QM space for four years and licensed in more than 35 states. Tom has been in the real estate lending business for nearly 20 years.
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