Attention: Key Changes Are Coming for Single Family Buy-And-Hold Investors

by | BiggerPockets.com

If you are a buy-and-hold investor seeking to grow your portfolio to include 20, 30, 50, 100+ units, there is awesome news for you in the market place. As of last year, Freddie Mac decided to jump into the single-family rental (SFR) space and begin funding larger-scale rental portfolios. This is exceptionally exciting, especially considering the additional tools for a space that has been pretty void of institutional funding on the larger scale.

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Several Key Takeaways From the General Terms of This Lending Program

  • 50+ units to the portfolio
  • Minimum of $5M loan
  • 75 percent LTV
  • 1.25 debt service coverage ration
  • 30 year AM
  • 5, 7, and 10 year terms
  • Minimum of $50K value per door
  • Rates in the 5–6 percent range

Why is This so Exciting?

After speaking with several institutional players in this space, they were all extremely excited about this opportunity. The program is brand new. And only a handful of deals have been brought from opportunity, underwriting, and through to the closing table. But, there are many others now in underwriting, and these lenders are figuring out what these deals looks like, how to underwrite them more quickly and accurately, and how to help serve the clients in this space.

Related: Should You Invest in Five Single-Family Units or a 5-Unit Multifamily?

What Were The Details Around the Rental Criteria Component?

For the rental units themselves, there is a focus on being in the working-class neighborhoods — with specific focus on affordability. There is a strategic focus on units that are at or below the 80 percent mark of average median income. What does this look like? It is potentially section-8 units, and or the units that are on the lower rental rate in the market place. It did sound like there was some variance to the percentage of units allowed in the portfolio that exceeded this number, but the focus was on affordability.

To be clear, I am sure there are other additional details around the rent specifics. I’ll update and or write on this more in the future as I gain more clarity by working with colleagues, friends, and clients in these types of loan programs.

What if I Don’t Have 50+ Doors or a $5M Portfolio?

There is still great news for you. Many of the banks that are funding these deals also have programs that are geared toward putting deals of say, $500K, $1M, $2M together, and then transitioning them into Freddie Mac loans once the total units and value are within the criteria. I didn’t realize there were other programs for portfolio-type loans beyond those at the local community banks in each market. There is now a larger-type program that is well funded and underwritten, that we can look forward to being able to utilize in the future as the SFR space becomes more and more robust with the larger single-owner operators and institutional buyers entering the marketplace.

Why am I so Excited About This Program?

Plain and simple: after hearing about these programs all week, Freddie Mac brings attention, additional institutional money, and interest to the SFR space. Something I keep hearing over and over is now we (in the SFR space) have a “box” for these lenders to work within. Meaning, there is a loan type now for single-family units with a look and feel much like a multi-family product. For investors with less than the initial minimum set by Freddie, there is a larger focus for institutions to find ways to help investors finance these types of properties, and at scale. There has been such a void for lending beyond the 10 Fannie Mae doors you can currently personally finance — or the local community banks that typically don’t go beyond a 20-year AM. In addition, the community banks often have much lower lending limits on the portfolios they can fund.  The Freddie Mac program could run in the $100M-plus range for those investors with portfolios in that stratosphere.

RelatedThe 7 Vital Steps to Buying a Single Family Rental House

Final Thoughts

This is awesome news if you are a buy-and-hold investor. We finally have more options in the space, which will only continue to become more robust. Having more money and attention will bring more players to the lending side. Bringing more players will hopefully, in turn, make the products more and more dialed in for SFR investors — and better priced to bring your portfolios to scale.

Where have you had issue getting long term funding for your SFR portfolios?

What kinds of terms would be most important to you in your business? Share your thoughts below!

About Author

Nathan Brooks

Nathan Brooks is a dad, husband, worship leader, and real estate investor in the Kansas City market. Foodie. Coffee addict. Crossfit junkie.

14 Comments

  1. Johanna Fonseca

    I am not excited about a loan program that will never see a closing table.
    Maybe 1 or 2 of a thousand investors will qualify for this program.
    5 million minimum loan? Plus need 50 plus properties. How many investors fit inside that cookie cutter?
    Don’t waste your time and energy. Months and months of stringent underwriting and documentation on the Debt coverage and your personal and business tax returns. Must have impeccable bookkeeping and documentation and your tax returns have to match perfectly with the numbers or it’s a no close.
    Who has time to work a thousand loans to maybe get one or two closings.
    After all that you might save a half a point in interest if you are the one in a thousand investor that fits inside the cookie cutter.

    • Nathan Brooks

      Johanna – I totally hear how you are not feeling excited. There aren’t a ton of investors that will qualify for this program … RIGHT NOW. However, I do think the fact these guys (Freddie) are now in the marketplace for these loans, our entire SFR space will be able to get more potential programs that help the smaller players with similar type program terms at lower dollar amounts.

      On the bookkeeping and tax returns side … it would make sense as businesses and investors get larger, and more savvy, you need to be tight with your bookkeeping anyway. So now there is just more reason to have your operation dialed in, able to scale up, and have tools like these financing programs to grow!

    • Michael Temple

      @Johanna Fonseca Freddie has another program that may be more interesting to smaller investors. When I first started looking for new properties a couple of years ago all the lenders were telling me it was a minimum of 25% down on investment properties. Many still say that. As you might imagine that is a pretty good chunk of coin for a small investor trying to grow.

      I have since learned that many lenders are now working with Freddie and will do loans on investment properties at 15% down payment, which is a much easier amount of cash to come up with. My understanding from talking with them is that it is some type of program through Freddie that they are doing this. I don’t know what it is called, but check around with lenders and see who is doing it. I have had good luck with local community banks and credit unions for finding this.

      One caveat I also learned using this process is that the rates are definitely higher than if you were buying a house for yourself to live in. Most were 1-2% higher, but the flip side is you have to come up with less money upfront.

    • Nathan Brooks

      Chris, that is true sir. However, Freddie folks were talking about several deals not in the $7m range, but in the $50m and $100m+ ranges being underwritten as we speak. That is why its so exciting … most of the local community banks couldn’t play in the $20m portfolio range because it was beyond their lending limit per client. So if you are looking to lock down or refinance a large portfolio this is an incredible tool to take that refi out at once rather than trying to find 2,3,5,10 banks … to do that.

  2. John Barnette

    I see the real benefits in the eventual trickle down of Fredie backed packed loan products for the 11-50 financed property investor. Also hopefully cash out refinance as that has a limit of 4 financed properties. I did cash out refi almost 2 yrs ago on 7 little houses. Bought another (number 11 in total portfolio) last December. Options pretty limited. Bay Area so much larger numbers. Was able to secure both cash out and purchase financing with First Republic Bank. About as local community Bank as you get in a place like SF. Had to go 60% LTV , significant cash deposit account with them, 10 year ARM on 30 yr am. Looking forward to hopefully have future options for purchase financing especially. Possibly like the programs you talk about. Crossing fingers.

    • Nathan Brooks

      John, this is exactly my feeling on it. I do believe it will have a trickle down opportunity for investors JUST like you and I. We need a place to refinance these deals and not have such limited options to do that. With what I was hearing from the institutional lenders, we now have a “box” they can check or work within for the SFR space … SO, it’s not perfect for the lower portfolio values such as a $1m, or $2m … BUT, everyone I spoke with sounded very excited about the future of having programs that either were Freddie programs at a lower portfolio amount, or bridge programs that make sense that can be rolled into Freddie programs once they cumulatively cross that initial $5m threshold. Good luck!

  3. Toby Mathis

    Folks – I closed on one of these when Freddie was just rolling them out. They used other properties which I owned outright as part of the transaction to get us to the minimum threshold. I used A10 Capital as my lender and they were excellent. Caveat – I do not believe you can prepay these loans. You do have the option of going up to 10 years from what I know.
    I used one loan for properties in NC, IN, OK and TX. If you want to lever up using the Freddie Mac Affordable Single-Family Rental pilot program, consider getting together with other investors or raising the funds in a private placement. The numbers do seem to work in several markets.
    Thank you for the article, Nathan. It seems very genuine – and God knows we need more people who care to enter the landlord ranks and provide housing for the working class and Section 8 recipients. Hopefully this helps attract non-institutional investors into the space.

    • Nathan Brooks

      Toby – Much appreciated your input sir. I’d love to do a call with you and chat about your experience with it and maybe I can do a follow up post on this? I love that you were able to go across several markets with the loan … does seem to show a serious upgrade on the lending side in this space. Thank you for sharing Toby!

    • Nathan Brooks

      Thank you Blaine for taking the time to comment here sir. It’s SUPER exciting … what a huge impact this will make in the next several years bringing such a big player in this space. And like you said, to really bring this opportunity to scale. Incredible opportunity!

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