In the Carolinas, fall is always one of my favorite seasons. We’re recharged from vacations and school breaks and feel some relief from the heat and humidity. The fall promises a change of climate, a change of colors from fall foliage and an optimistic outlook for opportunities ahead.
At Lima One Capital we’re seeing exciting new opportunities for real estate investors. We were originally founded as a fix-and-flip lender, and that continues to be a significant part of our national lending platform. However, we continue to see avenues to expand our product mix as our nationwide real estate clients take advantage of new opportunities within their local markets. We’re seeing exciting new opportunities in new construction for rental properties and in small-balance multifamily financing. We see both types of investment properties emerging in this new season of real estate investing. We believe the innovative financing options now emerging create a terrific compliment to the fix-and-flip market, which continues to show steady growth and good returns.
In addition, the new Opportunity Zones section of the recent Tax Cuts and Jobs Act legislation creates additional promising options for real estate investors. The purpose of this new investment vehicle is to help direct resources to low-income communities, known as Qualified Opportunity Zones, using tax incentives — a much-welcomed market-driven approach to economic development. These Opportunity Zone investments enjoy compelling capital gains tax benefits that are particularly attractive to multifamily and single family rental investors.
Opportunity is rising in both the single family rental construction and small-balance multifamily space for innovative real estate investors and lenders willing to adapt to the rising trends.
The Rental Market
The single family rental market continues to be promising for small and mid-tier investors. A recent ATTOM Data analysis of public record data detailed the growth in market share for these segments in Q1 of 2018. A 21 percent increase for owners of 6 to 10 properties, and a 20 percent increase for owners of 11 to 100 properties. These investors continue to innovate and venture toward the higher yield markets that have arisen throughout the country. Counties where rent has not been outpaced by rising home prices, like the relatively overlooked “second-tier markets”, those not in the top 20 metropolitan MSAs, remain a prime target for portfolio owners with very innovative mortgage financing available.
Median rent has continued on an upward trajectory for the past decade-plus. Even when the housing crisis caused median home values to fall, fair market rents continued to steadily gain. This steady return has attracted investors of all levels of experience who are looking for greater return on their real estate investment portfolios. Real estate investors are building secure, cash-flowing rental portfolios as complimentary alternatives to more traditional wealth building options. In addition, we are seeing true value-add projects within neighborhoods and communities. Our clients are buying properties needing meaningful structural improvement, making those improvements, allowing for a nice return to the investor and a renovated home for the ultimate renter or homeowner to enjoy.
In addition, for the first time, multifamily and SFR investors can compare return profiles on a true apples-to-apples basis. Now there are attractive and competitive private lending options for SFR portfolios and small balance multifamily properties. Investors can maximize the efficiency of both operations and capital by comparing the return -on-equity between an SFR portfolio and a multifamily project with equivalent financing packages.
The Multifamily Market
There is a similar story happening in the small-balance multifamily sector. Rent growth continued in Q2 2018, focused in the aforementioned secondary U.S. markets that can often be overlooked but have rode the economic growth of the previous years. These areas, just like our home market of Greenville, South Carolina, have attracted jobs from numerous domestic and international corporations. This job growth spurs rapid development of both single family and multifamily development to accommodate the influx of new residents. This combination of job growth, dropping unemployment, and rents continuing to rise nationally provide an opportunity for the stabilization of smaller multifamily developments.
The late ‘70s and early ‘80s saw the biggest boom for small balance multifamily new construction. In the last 20 years, small balance multifamily construction has decreased drastically while single family and large 50-plus unit building construction have increased. The timing of this new construction is important. There is a large segment of available small balance inventory in need of value-add renovation. Investors are finding outdated properties, taking out bridge financing, completing meaningful updates, and getting the property fully leased. At that point, the Freddie/Fannie small-balance takeout comes into play.
Roughly 85 percent, or $23.8 million, of the current small-balance multifamily stock (2 to 49 units) was constructed before 1990. Small and medium multifamily housing between 2 and 49 units account for 21 percent of the national housing stock. Small and medium multifamily housing between 2 and 49 units account for 54 percent of all rental units. That’s more than large multifamily (50-plus units), SFR (1 unit) and mobile home rentals units combined.
The focus on small-balance is not coincidental. We have seen success from our borrowers who have targeted existing 5- to 50-unit multifamily developments. Still-favorable acquisition costs paired with attractive cap-rates and consistent demand are a homerun for the savvy real estate investor. We view this as a prime growth space in the rental investor industry.
The Season of Opportunities
There has never been a better time to be a real estate investor. The expanding credit available for all levels of investors beyond the traditional community banks is allowing for amazing growth and return opportunities. Multiple lenders now offer investor-minded programs for single family rental portfolios, construction to rental, and small-balance multifamily. This access to capital has allowed investors to branch out to promising markets throughout the country. They are no longer solely reliant on documentation and guideline restrictions of local banks or large institutional lenders, as private lenders now are actively providing competitive programs that are more convenient to close.
As the leaves turn and the temperature moderates, we’re excited about the growing opportunities for real estate investors and see great promise for the seasons ahead. We’re in a great season of opportunity for our industry, and at Lima One Capital we’re looking forward to partnering with real estate investors to take full advantage of the many terrific opportunities.