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Want to be a landlord? Financing is available for apartments

By Jeff Lazerson

2/15/18

What I think: I get to share with you what I learned earlier this week attending the Mortgage Bankers Multifamily Housing Convention in San Diego.

Pick your poison. Financing is available for everything from apartment purchasing, refinancing, rehabilitation, construction, senior living, student housing complexes, mobile home parks and even commercial-residential mixed-use investing.

Multi-housing or commercial loans are defined as five or more units. Residential lending is defined as one to four units.

Done right, investing in apartments can earn you more real dollars than investing in single-family homes.

There is an economy of scale when revenue is coming in from many tenants to cover one commercial mortgage. If one tenant in a building moves out and you lose rent for that period, you still have the other tenants covering. If a tenant moves out of your single-family rental, you are burdened with covering the entire payment until you get a new tenant in there.

Let’s talk rents.

When the rental market first seemed to stabilize in 2010, landlords were asking $1,579 for a two-bedroom Orange County apartment, according to Joshua Ohl, senior market analyst at CoStar Group.

Fast forward to the current market, landlords are asking $2,117 for that same two-bedroom unit. In less than 8 years, rents climbed a staggering 34 percent based on CoStar’s figures.

“Current effective rates (with concessions) come in at $2,094,” said Ohl.

Twenty-five percent was the smallest down payment financing I could find as I walked through the exhibitors hall. One particular investor largely ignores traditional cash-flow requirements (which most lenders use to calculate the minimum down payment), usually called debt service coverage.

Having paid for college housing for two of my kids and paying for kid number three now, I was most fascinated with financing facilities for student housing.

These can be apartments, frat houses and even large homes sliced up to accommodate individual tenants. Tenants pay a room premium (which means investors might make a higher profit), but it’s still cheaper than renting an individual apartment.

Honorable mention goes to Freddie Mac as it re-enters the low-income housing tax credit, or LIHTC, market. Designed to make rents more affordable, particularly for those earning 80 percent or less of area median incomes, Freddie will provide up to $500 million in tax credits.

The LIHTC program infuses cash equity into low-income housing properties, reducing the debt burden for the development of new properties or rehabilitation of existing properties.

The benefit to the tenant restricted rent charges. For example, based on 2016 U.S. Census data, Orange County rent was $1,608 (census figures tend to be lower than CoStar shows for rents). The projected restricted rent would come in at $1,069 or 50 percent lower, according to Freddie Mac spokesman Chris Spina.

A note of caution. Some folks at the convention candidly told me rent control – currently sought in a number of California cities – could be devastating for apartment investors.

If you have questions or comments, please contact Jeff Lazerson by clicking here. For more great insight make sure to check out Jeff Lazerson’s Mortgage Grader Radio Show on Sundays at 10 am on AM830 KLAA.