The rental housing market today isn’t what it was 30, 20, or even 10 years ago. Student loan costs and rising real estate costs are turning young people into lifetime renters instead of first-time home buyers. Millennials (18-29-year-olds) make up about a quarter of the country’s population and represent a significant number of consumers. But many of them say they’ll never be able to afford a home.
So who will be on the receiving end of that rental income? Overwhelmingly, the answer is private landholders (a.k.a. landlords and landladies). The Pew Research Center’s statistics for 2018 (the most recent available) show there were 14.1M private owners of rental properties that offer 1-4 unit rental units per property. Compare that number to 3.4M real estate management firms that own similar-sized rental properties.
How much income is generated by privately-owned rental properties? You might be surprised to learn that, in 2019, that number was $353.7 billion. To get started renting, private individuals use a combination of financial tools. They leverage hard money loans, SBA funding, redevelopment funds, and long-term financing.
While large companies and corporations tend toward massive apartment complexes instead of single-family homes, new construction and acquisitions are helping them capture more of the rental housing market. There remains, however, plenty of opportunity for individuals to protect revenue and build wealth via rental housing.
The majority of private landholders these days are early retirement age married couples looking to build post-employment wealth. Whether repurposing their old property, renovating formerly distressed homes, or buying new buildings, there’s a financial tool that can help them do it. The strategies below can be used individually or in combination to provide a starting point for generating rental income.
Hard Money Loans
Landholders, new and experienced, look to add value through future value hard money loans to upgrade and capture market rates on formerly distressed properties. To get a fix-and-hold loan from a bank, underwriters examine personal credit and financial history. Hard money lenders instead focus on the projected future value of the home once it’s renovated. That means a potentially higher loan value upfront.
Hard money loans are well-known for speedy application processing and funding, with less headache when it comes to getting approved. Close your loan fast, upgrade property, and capture the best market rates from renters – it’s a formula known for its success. Either pay off the loan with cash or roll it into long-term financing, depending on your business plan.
Landholders that rely on long-term financing may find that the process of securing a loan can take up to 45 days. The approval process for these loans typically takes several weeks to a few months. Once past the approval stage, there’s a waiting period before the lender transfers the funds. The more attractive a real estate property is, however, the faster it’s off the market. The sooner a buyer can act, the more competitive they’ll be.
Bridge funding can be approved nearly immediately, allowing landholders to acquire new units while securing long-term financing. The landholder gets the property they want today. When the next stage of financing arrives, they’ll use it to replace the bridge loan. Bridge loans also provide time for borrowers to stabilize cash flow, raise their credit score, and improve DTI. Bridge Funds are leveraged off of existing property or assets, helping you to utilize funds otherwise locked up in equity.
If they’re renting property as an LLC, landholders can qualify for SBA funding. Landholders use SBA funding to lower interest rates and ultimately manage costs for lessees while retaining margin. The landholder is also eligible to apply for emergency relief funding from the SBA, in case of disaster.
However, the SBA’s funding programs can be tricky to navigate. Strictly speaking, SBA loans can’t be used for real estate investing, unless the owner occupies 51% or more of the property. There are ways to leverage SBA funding as an LLC landholder that make property management more cost-effective. Applicants can’t go directly to the SBA for funding as these loans are managed by SBA-certified private lenders. This is where a knowledgeable broker becomes an indispensable resource.
Equipment is often thought of in terms of construction vehicles or machinery like jig mills and roll formers. But, equipment is essentially any tool you need to get a job done. Landholders use equipment financing to add energy-efficient appliances and to modernize amenities. Not only do appliance upgrades and improved amenities make a rental attractive to potential tenants, but they also have a multitude of additional benefits.
First, being energy efficient reduces utility expenses. Secondly, tax incentives and grants are available (depending on the location) from municipal and non-profit sources for sustainable property upgrades. Landholders can add equipment like exercise machines, washers and dryers, air conditioning, and cost-saving refrigerators to the amenities on their property. Both equipment loans and equipment leases can be structured for the landholder’s advantage.
As the landscape of the rental housing market changes, it’s important to stay on top of who renters and landholders are in terms of goals and demographics. The needs of both groups change depending on the broader economic climate. Recent events have shown us that, even in industries that seemed predictable, nothing is certain. Reliable financing has become more vital than ever in helping small business owners like private landholders succeed.
Interested in exploring the opportunities to generate cash flow with investment property? Call our brokers today to start the conversation.