Tag Archives: operating expenses

Single-Family Rental Securitizations Here To Stay?

Posted on by

photo by David McBee

Kroll Bond Rating Agency has released Single-Borrower SFR: Comprehensive Surveillance Report. It has lots of interesting tidbits about this new real estate finance sector (it has only been four years since its first securitization):

  • Six single-family rental operators own nearly 180,000 homes. (3)
  • Of the 33 SFR securitizations issued to date ($19.2 billion), nine deals ($4.6 billion) have been repaid in full without any interest shortfalls or principal losses. (4)
  • the Federal Housing Finance Agency (FHFA), which regulates Freddie Mac and Fannie Mae, announced that it had authorized Freddie Mac to enter the single-family rental sector on a limited basis to provide up to $1.0 billion of financing or loan guarantees. Freddie Mac reportedly is expected to focus on small-scale and midsize landlords that invest in SFR properties that the GSE considers to be affordable rental housing, not institutional issuers such as Invitation Homes, which owns and manages nearly 50,000 SFR properties. (5)
  • The largest five exposures account for 39.4% of the properties and include Atlanta (11,822 homes; 13.0%), which represents the CBSA with the greatest number of properties, followed by Tampa (6,374; 7.0%), Dallas (6,199; 6.8%), Phoenix (5,780; 6.3%), and Charlotte (5,733; 6.3%). (6)
  • The highest home price appreciation since issuance was observed in CAH 2014-1, at 30.7%. On average, collateral homes included in the outstanding transactions issued during 2014, 2015, 2016 and 2017 have appreciated in value by 25.0%, 18.0%, 8.7% and 3.2%, respectively. It is worth noting that the rate of the home price appreciation on a national basis and in the regions where the underlying homes are located has slowed in recent years. (7)
  • Since issuance, the underlying collateral has generally exhibited positive operating performance with the exception of expenses. Contractual rental rates have continued to increase, vacancy and tenant retention rates have remained relatively stable, and delinquency rates have remained low. Servicer reported operating expenses, however, continue to be higher than the issuer underwritten figures at securitization. (7)

Analysts did not believe that single-family rentals could be done at scale before the financial crisis. But investors were able to sweep up tens of thousands of homes on the cheap during the foreclosure crisis and the finances made a lot of sense. It will be interesting to see how this industry matures with home prices appreciating and expenses rising. I am not making any predictions, but I wonder when it will stop making sense for SFR operators to keep buying new homes.

Cracked Foundation for American Households

Posted on by

photo by shaireproductions.com

President Trump’s budget claims to lay A New Foundation for American Greatness. Whatever else it does, when it comes to housing it leads down a path to ruin for many an American family.

Here is just some of what he proposes: cutting housing choice vouchers by almost $1 billion; cutting support for public housing by nearly $2 billion; and getting rid of the entire $3 billion budget for Community Development Block Grants (CDBG). These are all abstract numbers, so it is worth breaking them down to a more human scale.

Vouchers.  Housing choice vouchers help low-income families afford a home. Republicans and Democrats have long supported these vouchers because they help tenants afford apartments that are rented by private landlords, not by public housing agencies. Vouchers are effectively an income subsidy for the poor that must be used for housing alone. The landlord is paid the subsidy and the tenant pays the difference between the subsidy and the rent. These vouchers are administered by local public housing agencies.

Nearly half of vouchers go to families with children, nearly a quarter go to the elderly and another fifth go to disabled adults. The nonpartisan Center on Budget and Policy Priorities has found that voucher dramatically reduce homelessness. It also found that voucher holders were likely to be in the workforce unless they were elderly or disabled. While vouchers are a very effective subsidy, the federal budget has only provided enough funds for about a quarter of eligible households. Trump’s proposed cuts would cut funding for more than 100,000 families. That’s 100,000 families that may end up homeless as a result.

Public Housing. Public housing has been starved of resources for nearly forty years. While some believe that public housing has been a failure overall, it remains a vital source of housing for the very poor. Trump’s proposed cuts to public housing operating and capital expenses means that these tenants will see their already poorly maintained homes descend deeper into decrepitude. Unaddressed leaks lead to mold; deferred maintenance on boilers leads to no heat in the winter – every building needs some capital repairs to maintain a baseline of habitability.

We must ask ourselves how bad will we allow this housing stock to get before we are overcome by a sense of collective shame. If a private landlord provided housing that was as poorly maintained as much of the public housing stock, it would be on a worst landlords list in local newspapers. The fact that the landlord is the government does not redeem the sin.

CDBG. The Community Development Block Grant funds affordable housing and anti-poverty programs along with community development activities engaged in by local governments. CDBG has broad support from Republicans and Democrats because it provides funds that allow local governments to respond more nimbly to local conditions. Local governments use these funds for basic infrastructure like water and sewer lines, affordable housing and the soft costs involved in planning for their future.

While these expenditures are somewhat abstract, recent press stories have highlighted that CDBG also funds Meals on Wheels for the elderly. While this is not a big portion of the CDBG budget, it does make concrete how those $3 billion are being allocated each year by local communities seeking to help their neediest residents.

*     *     *

Trump’s budget proposal is honest in that it admits to making “substantial changes to the policies and spending priorities of the previous administration . . .” Members of Congress from both parties will now have to weigh in on those substantial changes. Are they prepared to make Trump’s cuts to these housing and community development programs that provide direct aid to their neighbors and local governments? Are they prepared for the increase in homeless that will follow? In the increase in deficits for state and local governments? If not, they should reject President Trump’s spending priorities and focus on budget priorities that support human dignity and compassion as well as a commitment to local responses to address local problems.

Valuing Rental Property

Posted on by

cincy Project

Money quoted me in Here’s How Much You Should Pay for a Rental Property. It opens,

Q: I want to invest in a rental property. Is there a formula I can use to determine the value of a building based on the rent it takes in?

A: One useful calculation to use is the capitalization (or “cap”) rate, which is the ratio of net rental income to the purchase price of the property, says Brooklyn Law School professor David Reiss.

Start with your gross rental income, which is simply the total of one year’s worth of rents for all of the units combined. Subtract 5% or so to account for occasional vacancies throughout the year. It’s safest to use existing rents, but you can conservatively increase the amounts if you are planning to improve the units and raise rents.

Then add up the yearly operating expenses — property taxes, insurance, utilities, plus at least 5% of gross income for a maintenance/repair fund — and subtract that from the annual income. To get your cap rate, divide that number (the net operating income) by the purchase rate.

Run the Numbers

Let’s say you’re buying a five-family house and anticipate gross annual income of $100,000. If you calculate your total annual operating expenses at $30,000, you end up with $70,000 in net operating income. For a property that cost, let’s say, $1 million, that equates to a 7% cap rate.

But is 7% a worthwhile return on your investment for the work and risk of being a property owner and a landlord?

“That depends on the building,” says Reiss. “For a brand new, fully rented, high-quality building in a prime neighborhood, a reliable, low-risk 4% to 10% return might be reasonable.

“But if you’re talking about a rundown building, in an borderline neighborhood, with a several vacant units that you’re planning to fill after you undertake major improvements, you might reasonably hold out for a 20% cap rate,” he explains, because you’ll have renovation costs on the expense side, perhaps a higher vacancy rate while you fix it up — and you’re taking a bigger risk with your money.

Using a Mortgage

Also, the cap rate assumes a cash purchase. When you take a mortgage to buy an investment property, lenders will likely demand a down payment of 25% or more, says Reiss.

So in that case, he suggests also calculating your return on upfront costs.

In our example, if you invest $300,000 in upfront costs (down payment plus other initial expenses like closing costs and renovations) and expect to earn $20,000 a year (after $50,000 annual mortgage payments), that’s just under a 7% annual return on your money.

Again, you need to consider the relative risk of the particular investment property to determine whether that payback rate is high enough. Look at several properties to get a better feel for how the risks and rewards compare.