Like all types of real estate investing, multifamily real estate development moves in cycles. When it comes to unit size and mix trends, factors are driven by market dynamics, which includes location, demographics, and size of the development. Let’s look at some of these factors.
Baby Boomers Versus Millennials
The two largest living generations–baby boomers and millennials–represent two extreme ends of the spectrum. Boomers are aging and looking at retirement. The oldest members of this generation have already begun executing their retirement moves. That means they could be downsizing. In some cases, they’re moving from a single-family residence into a senior living or retirement community. While most grandparents aren’t raising their grandchildren, some are, and that means multifamily developments for seniors should take into consideration whether children will be involved or not.
On the other hand, many boomers are moving out of their single-family suburban homes into multifamily properties, and they’re looking at bigger apartments with nice amenities. They want apartment units with layouts similar to single-family homes, but they don’t want the responsibility of maintaining the property. Even if they downsize from a large single-family home, many baby boomers still want to live in a large apartment unit. They like the spaciousness.
By contrast, millennials are making major life decisions, such as marriage and home buying, at a later date than previous generations. Therefore, any multifamily development targeted at millennials should consider these factors, and millennials who aren’t married may be co-living or sharing space with other singles.
Multifamily developments targeting specific age demographics should consider the diversity of living arrangements you are likely to encounter and provide a unit size mix based on that diversity within your geographical market.
Development Size As It Relates to Unit Size and Mix
Large and small multifamily developments often differ in how they approach the unit size and mix. Large complexes, for instance, may sacrifice the number of units overall to include more shared amenities such as fitness centers, pet grooming stations, bicycle storage, larger recreation centers, and terraces. Upscale tenants have come to expect such amenities, so if that is your market, you should expect to build with fewer units and more shared or common spaces.
Another difference between large and small developments is in the number of bedrooms. According to Chandan Economics, 52% of large multifamily developments in 2014 had only one bedroom while 30% had two bedrooms, and only 6% had three bedrooms. Twelve percent included a studio. By contrast, smaller multifamily developments included more two- and three-bedroom units and fewer studios and single-bedroom units (44%, 9%, 7%, and 40%, respectively).
One reason for these differences could be that high-income singles prefer larger living spaces with more shared amenities, while lower-income families with more children may require more bedrooms. Interestingly, the same survey revealed that small multifamily developments increased the number of average bedrooms per unit from 1.4 to 1.6 from 2006 to 2014 while the average number of bedrooms per unit for large developments remained at 1.3 for both periods.
Other Trends Driving Multifamily development
Some senior living communities are beginning to develop properties with large front porches, two-car garages with plenty of space for shelving and storage, upscale kitchens, and open floor plans. Larger bedrooms and larger apartment spaces for seniors has developers including dens for a more comfortable living and to allow seniors more space for entertaining guests.
Multifamily developments that serve immigrant communities may want to consider how some families prefer to keep extended family closer together. That may mean more bedrooms per unit, larger bedrooms in some cases, or even larger living rooms and kitchens. When it comes to multifamily development and unit size and mix, the market dictates supply and demand.
Correspondent lenders can serve as an extra layer of business for mortgage brokers if you understand the business model. Unlike mortgage brokers, correspondent lenders originate and fund loans under their own brand. They typically have an underwriting staff and use their own money to fund the loan, then they sell the loan on a secondary market. This is where, as a mortgage broker, you can capitalize on another company’s efforts without needing an underwriting staff or a large bankroll for funding and originating loans.
The Benefits of Working With a Correspondent Lender
Correspondent lenders aren’t interested in holding long-term debt instruments. They don’t have a banking mindset. It’s true that ongoing debt repayments can be a good source of income for a mortgage lender, but the correspondent lending business model is not designed to manage that kind of portfolio. Rather, they are more like house flippers as opposed to landlords. They may build the loan “from the ground up”, but once the “construction” of the loan is complete, their interest is in selling it and recouping their investment plus their profit.
Since the correspondent lender is not in the business of taking mortgage payments, they want to unload a loan as soon as possible and reduce their holding costs. The longer they hold a loan, the less liquidity they have to fund new ones. Therefore, they are willing to sell the loan at a “discount” in order to profit from the investment in the short term and fund more loans.
For a mortgage broker, working with a correspondent lender means not having to find loans on the open market. If you develop a relationship with a correspondent lender that regularly underwrites and funds mortgages, you can have a steady source of ongoing income and reduce your marketing expenses.
Tips for Working With Correspondent Lenders
Scotsman Guide conveniently has a search engine you can use to find a correspondent lender in your state. What do you once you find a lender/sponsor? How should you evaluate potential correspondent lenders who want to warehouse the loans to you? Follow these tips to make the most of your relationship with a correspondent lender:
- What is the Lender’s Specialty? – Every correspondent lender is different. Some may specialize in subprime lending while others stick with prime. You want a lender who specializes in the same or similar types of loans that you deal with at your brokerage. For instance, if your mortgage brokerage specializes in commercial real estate, then you should look for a correspondent lender that does a fair amount of business in that niche. Otherwise, you may find yourself not buying many loans from that source.
- How big is the lender? – Some mortgage brokers have transitioned their businesses into mini-correspondent lenders. Ideally, your correspondent lender should be larger than your mortgage brokerage. At the very least, they should be large enough to supply you with enough loans to make your relationship with them sustainable. Remember, you’re looking for a steady supply of capital.
- How long have they been in business? – If you’re a new mortgage broker, you might benefit from establishing a relationship with a new correspondent lender, but your best bet is to develop a relationship with a company that has a track record of success.
- Don’t forget about risk assessment – Yes, a correspondent lender will perform a risk assessment on every property investment they fund as well as the borrower, but you should do your own due diligence. Take a look at the underlying investment and ask if the asset is worth the purchase price of the loan. Consider the loan-to-value in light of the cost of the debt instrument to your brokerage. You may get the loan at a discounted price, but if the underlying asset is overvalued for the loan amount, then it’s a risky venture.
It’s perfectly acceptable to develop a relationship with more than one correspondent lender. Make sure to properly vet each lender, as well as the individual loan, appropriately. If you are looking to learn more about correspondent lending and how it can benefit you, please contact Shareline today (212) 201-0750.
Residential construction and development projects are very complex and offer many challenges. There are numerous opportunities throughout a project for delays, cost overruns, and costly mistakes. As the project manager, you’ll need to figure out ways to avoid these problems and focus on completing the project on time and within budget, and while adhering to the quality standards of the profession. If you are being financed by investors or working with borrowers to facilitate a new residential development, these considerations are key to rewarding investors with a return on investment and borrowers with quick repayment of their loans.
Construction Issues for Residential Development Projects in Hot Markets
While issues in construction can occur in any market, the time when major developmental delays and costly mistakes can happen in residential construction is during a hot market climate. It’s in these times when residential developers are investing in properties, projects are getting started more rapidly, and there is a higher demand for residential properties, that time factors can put additional pressure on the project manager. Great care must be taken to plan each project with as much detail as possible before the project begins.
Some of the more common construction issues residential developers face during this time include:
- Cost overruns
- Delays in the development schedule
- Inefficient coordination between development teams
- Regulatory and compliance issues
So what can residential developers do to mitigate these challenges and ensure projects are completed on time, within budget, and with fewer headaches?
How to Avoid Mistakes, Delays and Cost Overruns
The key to avoiding costly mistakes, delays in project management, and cost overruns in any residential development project are in the planning stage. Long before you begin the development, and even before it is funded, project managers must plan each stage of the development project with as much detail as possible and commit to adhering to the schedule and budget of the project.
How to avoid cost overruns – Cost overruns lead to frustration and disappointment when investors lose money and borrowers run out of funds. The surest way to avoid cost overruns is to over budget for the project. After accounting for material and labor costs, plus regulatory fees and other project expenses, add a “fudge factor” of at least 10%. Many residential developers add 15% or 20% of expected expenses to the budget to account for unexpected expenses or a rise in the cost of materials between the planning stage and the building stage.
Developmental delays – Just as you over budget for expenses, you should over budget for time. Allow for an additional 10% to 15% in time for each stage of the construction project. Also, work out your workflows during the planning stage and make sure the project management team adheres to these workflows throughout the development project.
Coordination between development teams – Engineers, contractors, architects, construction foreman, and other professionals working together on a residential development must be able to coordinate between the phases and make smooth transitions in order for the construction project to be completed on time and within budget. Any delays in communication and coordination can hold a project up unnecessarily. One way to fix this is to assign a coordination liaison to work with each team to ensure a smooth transition from one professional to another throughout the project.
Regulatory compliance – Few things are as frustrating as getting into the middle of a construction project and finding out that your residential development fails to meet some code. When possible, take care of any regulatory compliance requirements prior to the start of your residential project. Otherwise, begin coordinating with the appropriate regulatory body far enough in advance that delays in the inspection are held to a minimum or avoided entirely.
If your residential development project manager is efficient, your project will go more smoothly and borrowers can pay back their loans quickly while investors maximize their returns. Keep these tips in mind when planning your next project.
When it comes to financing your investments, whether it be your real estate projects or your other business investments, your options are growing by the day. Business owners and project sponsors are no longer tied to the bank loan. In fact, with the number of marketplace lenders on the rise, there are plenty of investment financing alternatives. Here are five that are easier to obtain, often present better terms for the borrower, and most effective in improving your financial position.
5 Alternative Real Estate Financing Options
- Cash out refinance – If you own real estate properties now, instead of taking out a bank loan for your next investment property, take one or more of your existing properties and refinance them, extracting equity you have built in those properties. This can be beneficial in a number of ways. For starters, you may be able to refinance at a lower rate, especially if you are combining two existing mortgages into one. Secondly, you can take your equity from existing properties and acquire your new one, or lower your financing by using your equity as down payment on a new project.
- Hard money – Hard money lenders have their own criteria, but these make great loans for short-term projects. They are often high interest, so make sure you pay them back on time, but the benefit is you can fund a project using hard money, then refinance the project and pay your hard money loan back upon completion of the project. Hard money lenders usually fund projects they believe in without making the borrower jump through a lot of hoops.
- Get a partner – If you get the right partner, you get a lot more benefit than funding for your real estate project. You could get a valuable partner with experience that you don’t have. A mentor who believes in your project and comes to the table with capital to see the project through to completion is a real estate investor’s dream. Tap into your network.
- 1031 exchange – A 1031 exchange allows you to sell one property and purchase another one of equal or greater value as long as you follow a few simple rules. The big benefit to these exchanges is you can defer your capital gains on the sale of your investment property. Then you can take those gains and buy a bigger property that will provide you with bigger returns. This is a great option to bank lending if you are a rental property investor who wants to grow a portfolio while increasing passive income.
- Marketplace lending – Marketplace lending is another option. With this funding vehicle, you list your real estate project on a platform that allows individual and institutional investors an opportunity to invest in it. There are two types of investments that make this option good for both the capital seeker and the funder. Equity-based investment allows real estate project sponsors an opportunity to fund a project while giving up some of the equity in that project to the investors. The benefit is you do not have to pay back a loan in the event your project does not succeed. Debt-based investments mean that investors lend you the money and you pay back the loan over time, which means you get to keep all the returns on the back end of the deal.
There are plenty of ways to finance a real estate deal in today’s fast-moving market. Be sure to perform your due diligence on any lenders, funders, or platforms you intend to work with.
Today’s real estate companies, whether we’re talking about real estate crowdfunding websites, brokerages, mortgage companies, or developers, have no choice but to adopt the technologies that make their businesses more efficient, more effective, and more competitive. The companies that adopt today’s technology will be the leaders of tomorrow. Those that don’t will relegate themselves to irrelevance.
The future of real estate is predicated upon three primary technological initiatives:
- Replacing manual paper processes with automated digital workflows
- Leveraging data to improve results
- Focusing on cybersecurity
Let’s take a brief look at each of these initiatives.
Automated Digital Workflows
Some areas of the real estate business still rely heavily on shuffling paperwork. Mortgages come to mind as one part of the industry still stuck in the past. In order to move ahead, real estate companies in every corner of the sector will need to digitize processes in order to make them more efficient and cost-effective. Innovative mortgage providers are beginning to provide home buyers with a faster way to apply for and get approved for a mortgage. Different technology platforms have managed to streamline the process for banks and non-bank lenders to reduce the time it takes to underwrite a loan from an average of 5-6 weeks to just a few days. Real estate companies must maximize the use of technology to make the mortgage process easier and faster in order to meet the “on-demand” generations’ increasing expectation for more speed and transparency.
Other companies making strides in automating digital workflows are real estate crowdfunding platform with programmatic investment options that match investors’ specific real estate investment criteria. Several RECF platforms are using automated investing tools to help investors get into deals faster, and more efficiently.
When the Multiple Listing Service (MLS) got its start in the mid-1970s it was cutting edge. But the world has changed since then, and consumer expectations have changed. Not only that, but professional expectations have changed for those inside the industry.
While the MLS is still a great tool for real estate brokers, it does have its limitations. Today’s real estate professional demands more robust technology and deeper insights into relevant information. Home buyers and sellers, real estate investors, developers, and real estate service companies all want real-time data that is accessible 24/7 from any touchpoint and on any device.
The nature of the data that consumers and professionals are looking for goes beyond comparative listings. For that reason, real estate firms that want to service their customers better and more efficiently need to rely on multiple data sources and tap into those sources with a continuous stream of information that is accessible at any time. Application Programming Interfaces and artificial intelligence tools provide companies the ability to leverage data in powerful new ways, and they allow for easier access to that data to more people with fewer limitations.
Real estate companies that want to compete in the new economy must use these technologies to leverage more granular data on properties, buyers and sellers, brokers, investors, developers, and their partners and competitors.
Keeping Data Secure
As more data is accessible through digital access points, the more important it is to safeguard that data. Data breaches like those at Experian and JP Morgan illustrate the vital importance of cybersecurity. In July 2014, hackers broke into JP Morgan servers and gained access to information on 76 million households and 7 million businesses. No damage occurred as a result, but the hack gave criminals access to key personal data that could have led to long-lasting financial trouble for millions of consumers.
While no major data breaches have affected the real estate industry yet, it’s just a matter of time before consumer data is exposed. Real estate companies must take measures to secure and protect sensitive consumer data. Considering how fast companies are moving to the cloud, compliance has become increasingly important. The real estate technology companies that compete in the future must take cybersecurity as seriously as they take marketing initiatives. Compliance oriented firms should meet requirements developed by the American Institute of CPAs, such as SOC 2 and SOC 2 type II certification to ensure their system is designed to keep sensitive client data secure. When it comes to working with the cloud, such certifications are essential and increasingly required by regulators, and auditors.
The real estate industry is very competitive and getting more so. Companies in every sector will need to ensure they are effectively managing their workflows and protecting consumer data. Leveraging technology is the key to increased competitiveness and survival in the 21st century.
It’s tempting for investors to hear about 8%-12% returns that real estate crowdfunding has been delivering and rush in to get their piece of the action. However, it is important for investors to take the steps necessary to ensure their investment is solid.
Real estate crowdfunding (RECF) platforms have changed the way people can invest in real estate. The opaque world of private real estate deals has been upended by a digital transformation that brings with it a deluge of data and its own set of issues. RECF platforms perform investment due diligence before offering it to the crowd of investors, but who is vetting the platform?
The following is a list of three due diligence questions for real estate crowdfunding investors to ask before making an investment decision.
1) How Does the Real Estate Platform vet Their Borrowers?
Every platform is different. Firms will generally perform a FINRA broker check, which, among other things, offers intelligence on the borrower’s credentials, affiliations, and registrations. Some firms consider organizational structure in their vetting process as well as online research. Some of the pertinent information that a firm will usually seek on a borrower is:
- What is their borrowing history, including total volume and rate of success?
- How much experience does the borrower have?
- What is their credit score?
- Do they offer a personal guarantee?
2) How Does the Real Estate Platform vet the Properties?
A lot of what goes into vetting a property is the vetting of a borrower, but factors concerning the actual structure of the deal and the property are considered as well. Some of those considerations are:
- Loan-to-value (LTV) ratio: Traditional bank lenders may not service a loan with an LTV above 59 percent, whereas private non-bank lenders have more flexibility to lend with an LTV of 80 percent.
- Lien position: A property with a first lien might be as attractive to the underwriting process as a large borrower with an impeccable track record, while a second lien is less attractive in the event of foreclosure.
- Location and occupancy: Core urban markets with high occupancy score more favorably than suburban markets with moderate occupancy, which fare better still than rural properties or emerging markets with lower occupancy.
- Phase of development: Stabilized properties, which are existing assets with leases and cash flow, measure more favorably than value-added properties, which are existing properties that are being improved upon. The lowest rated of the three development phases is the ground up phase, where a completely new asset is being built without a rent roll to support the balance sheet, yet.
3) How do Investors vet the Platform?
To start, investors should only work with a firm that has good leadership. How long has the platform been in business? Who are its main players? How successful have they been, and what are their notable associations or accomplishments? One of the biggest considerations for the investor when vetting any RECF platform is whether deals are debt-based or equity-based investments. Debt-based investments mature after a shorter hold time and offer steadier income at lower risk while equity-based investments charge lower fees and offer better tax benefits, but they also have longer hold periods and pose more risks.
Investors should also find a platform with a proven track record. What is the value of the firm’s underwriting history, and what percent of those loans have defaulted? Have investors lost money as a result? What percent of the firm’s transactions is senior debt vs. mezzanine or lower positions on the capital stack? What origination terms does the platform tend to seek? Is the platform only available to accredited investors? What is the required investment minimum?
Investment Due Diligence for Safe Returns
There is money to be made in real estate crowdfunding in the current investment market, but that money is there for those investors who perform the necessary due diligence on the platforms in which they wish to entrust their money. Don’t assume that all real estate crowdfunding platforms were created equally. They vary greatly in terms of the types of deals they offer, their management teams and their track record of success.
Real estate crowdfunding (RECF) benefits the real estate market by helping those in need to raise capital for property acquisition and specific project goals. It also opens the real estate investment space to smaller private investors while expanding opportunities for large private and institutional investors. Direct lending no longer lies in the hands of banks and traditional financial institutions. RECF makes capital available to project sponsors and helps individual investors access opportunities previously closed off to them.
How Real Estate Crowdfunding Benefits Developers, Flippers, and other Real Estate Pros
The benefits of online capital fundraising for real estate projects include:
- Borrowing Speed – Bank loans can take several months to clear, while online direct lending takes place in days or weeks. Online platforms also give borrowers access to capital through phones and other devices. Loan applications are often approved the same day.
- Favorable Terms – By eliminating middlemen (bankers), crowdfunding platforms can offer higher rates of return to investors and lower interest rates to borrowers. Technology adds value to parties on both ends of the process while cutting costs.
- Ability to Fund Various Project Types – Real estate debt instruments make investment opportunities available in a variety of residential and commercial projects from corner cafés to skyscrapers.
- Ability to Lend and Borrow without Intermediaries – Online direct lending puts investors and borrowers together in the same “room.” Institutional and private investors can find deals through the marketplace while borrowers can speak directly with their funders. Also, they don’t have to meet all of the exacting criteria imposed by banks and traditional lenders, and crowdfunding platforms more readily supply rehab loans for “flippers” than most traditional lenders.
The Online Lending Model’s Benefits to Lenders
Online lending makes the real estate investing process easy. Technology streamlines many of the processes that keep it simple for the borrower and lender alike. It also offers a greater potential borrower pool, a quicker return on investment since many of the opportunities are short term, and the ability to choose which types of projects the investor prefers. Lenders also benefit from better returns and lower fees.
The Online Lending Vetting Process
- Borrowers vetting the platform
Vetting investors involve due diligence and are often the responsibility of the platform, but borrowers exercise some control over how they structure projects when presenting them to the platform. Borrowers should spend some time performing due diligence on the platform itself. What are its underwriting procedures? Does it work with accredited or unaccredited investors or both? What kinds of projects does it accept? Does it add its own money to an investment or simply as a marketplace? These are a few of the questions borrowers should ask before choosing a platform.
- Platforms vetting borrowers
One metric a platform looks at is the ARV (after repair value). Some real estate investing platforms sign loans for no more than 80 percent of the ARV, but others might go with the industry standard of 70 percent ARV. Other platforms bypass ARV for LTV (loan-to-value) loans, which consider only the present value of a property. Platforms generally look at borrower experience, track record, and credit, as well as whether or not the borrower can back their own projects and put “skin in the game.”
- Platforms vetting investors
Securities laws require investment platforms to distinguish between accredited and non-accredited investors. Depending on how the platform is set up, they may only accept accredited investors, while other platforms may be open to both accredited and non-accredited investors. In some cases, platforms are limited in the number of non-accredited investors that can get in on an opportunity.
- Investors vetting the platform
Investors, too, should perform due diligence on the platform. How many successfully-funded projects has it funded? What is the average ROI? What about fees? Are the investment long-term or short-term? Does the platform offer residential, commercial, or industrial opportunities, and how are they selected?
As traditional real estate lenders pulled back in the last decade, legislation and innovation led to crowdfunding as an option. As real estate crowdfunding opportunities grow, online direct lending will continue to offer capital raising opportunities for project sponsors ready to borrow. Whether you are a borrower, broker or lender, Sharestates offers a program for you.
Traditionally, real estate investing has been considered an alternative asset class. That changed, however, in 2016 when the Global Industry Classification System (GICS) was revised to give real estate its own asset classification.
While this change didn’t affect the fundamental nature of real estate investing, it did provide a new perspective on asset class allocation. Real estate could be considered a major asset class along with stocks, bonds, and cash equivalents. As a result, more investors started diversifying into real estate.
Another development that gave fuel to this new perspective on asset class diversification was the passage of the JOBS Act of 2012. Giving birth to new fundraising models like real estate crowdfunding (RECF) and marketplace lending, the JOBS Act opened up new opportunities in debt investing that, when coupled with real estate investing, gave many investors a new outlook on their portfolios.
What Is Debt Investing?
When traditional investors think about debt investing, what often comes to mind is bonds. Mortgages are another vehicle investors have used for debt investing. When the stock market is down, debt instruments are often a good hedge against losses and, in some cases, can even turn a portfolio around.
One reason investors turn to debt instruments is the risk factor. They’re not as risky as equities, but they also don’t produce the same returns. Since 1926, stocks have earned investors an average of 10 percent while government bonds have returned between 5 and 6 percent. Interestingly, real estate crowdfunding has been earning investors between 10 and 11 percent. This asset class is still relatively new and untested in all economic conditions, but one reason RECF and marketplace lending platforms are able to deliver these kinds of returns is because the technology that facilitates the transactions cuts down on costs allowing investors to save on fees and earn higher rates of return.
Diversifying Portfolios With Debt Investing
While higher returns are nice, the real benefit of marketplace lending platform investing is asset class diversification. The new method of investing opens up opportunities that investors might never find any other way. The platforms bring together real estate developers and project managers who are looking for capital to fund their projects and investors who want to diversify their portfolios beyond traditional stocks and equities.
The GICS system distinguishes between two types of real estate investments: REITs and real estate management and development projects. The latter consists of four subcategories:
- Diversified real estate activities – Includes sale and development, management, and other services.
- Real estate operating companies
- Real estate development
- Real estate services – Generally includes agents and brokers, appraisers, inspectors, and related services.
While real estate crowdfunding is not explicitly mentioned in the classification, RECF does often include opportunities that involve new real estate developments, fix-and-flip properties, and even long-term rentals. These deals can be in the commercial, industrial, or residential sector. Bottom line, the JOBS Act has provided a new way of diversifying portfolios for the average investor through real estate debt investments that didn’t exist a decade ago. These investments are powerful portfolio growth opportunities for investors ready to diversify their assets.
There are two ways to diversify an investment portfolio with these new real estate debt instruments.
- An investor may allocate a portion of their traditional investments into this new asset class, which means the total asset allocation of the portfolio doesn’t increase but the real estate asset class increases as other asset classes within the portfolio decrease. The benefit to doing this strategy is to reduce losses in underperforming asset classes while increasing the gains offered through real estate debt investing.
- Another way to diversify a portfolio is to add the real estate asset class to the investor’s portfolio without reducing any of the other asset allocations. In this case, the portfolio grows by the amount of the new investment, but if there are underperforming asset classes within the portfolio, then those won’t change.
Real estate debt investing through marketplace lending offers investors with all risk sensitivities, new opportunities to grow, and diversify portfolios by spreading risk and opportunities for returns across the entire portfolio.
If you want your business to continue without any hindrance from local and federal government agencies, it’s best to keep any eye on regulatory compliance issues and your operations to maintain adherence to administrative policy. Penalties for non-compliance can range from fines to injunctions that have the potential to put your business on hold, or worse. Here are some of the most common concerns that our investment partners ask us when considering the legal and regulatory status of their own investment holdings and businesses.
Consumer Financial Protection Bureau & Dodd-Frank
What is the CFPB and how does it affect my investments?
The Real Estate Settlement Procedures Act (RESPA), passed by Congress in 1974, is intended to protect consumers from unscrupulous financial practices. The Act applies to residential properties with 1 to 4 units and created new disclosures to help borrowers fully understand the terms and true cost of financing. The legislation also imposed restrictions on referral fees, kickbacks and any other compensation that is not earned. RESPA’s regulations are now superseded by Dodd-Frank and the Consumer Financial Protection Bureau (CFPB). The authority of the Federal Reserve to create regulations was transferred to the CFPB in 2011 by the Dodd-Frank Act. Truth in Lending Act of 1968 (TILA) regulations were also replaced by CFPB rules.
What is the law regarding land contracts and making private/seller loans?
The regulations are complicated, but the key purpose is to protect borrowers. In recent years, the CFPB began investigating investors that were using the land contract and seller financing models. The investigation was prompted by complaints that investment organizations were using these financing models to sell overpriced properties to homeowners that would most likely default. The new regulations restrict the terms under which these forms of financing can be employed. Regulations consider loan to value, loan to income, and other potentially predatory tactics. Before proceeding with seller financing or writing a land contract, consult with a real estate attorney.
Zoning and Code
How does zoning affect my investments?
Zoning is a police power that is afforded to local governments under common law. Zoning is a tool used to control the usage of land within a subdivision. The primary intention of most zoning regulations is to create favorable economic and environmental conditions. Zoning helps eliminate nuisances that disrupt the quiet enjoyment and use of a property. It also supports the economic benefits of grouping similar types of usages and business together.
Will re-zoning force me to sell the property or change the current usage?
In most cases, new zoning will have limited impact on current usages under the concept of ‘grand fathering,’ a practice recognized in most jurisdictions. In the event that zoning changes threaten the current usage, appeals can be filed with the zoning board to request an exemption or repeal. This is important to consider and investigate during the due-diligence phase of pre-investment research. It is unlikely to prevail against changes in zoning, and over the long-term, obsolete usages will lose value. In these cases, it can be best to pursue an early exit strategy to avoid further losses.
How do green/sustainability/safety codes affect investments?
When you’re acquiring, renovating, and reselling income properties, numerous water, energy, fire, and disaster safety codes will apply to your project. These regulations protect the environment and human health by ensuring the safety of the structure, both in terms of construction to withstand natural disasters, and in the use of low VOC and sustainable materials. A particularly important regulation for residential investors is the Lead Based Paint Act that requires the disclosure of the potential presence of lead paint in properties built before 1978.
Equal Housing and Credit
What equal/fair housing and credit laws apply to residential investment properties?
The Fair Housing Act of 1968 passed anti-discrimination laws that applied to the sale and rental of residential properties. It includes protections for homeowners and renters on the basis of ethnicity, nationality, religion, gender, and familial status. It provides severe civil penalties for violators and had a tremendous positive effect on discriminatory housing practices. To maintain compliance, it’s vital to provide proper training to all employees and third-party property managers. A lack of proper training can result in a claim of negligence that can potentially support civil proceedings.
What are the penalties for discrimination?
When discrimination occurs, the injured party can file a claim with the Department of Housing and Urban Development (HUD). After HUD approves the claim, an investigator is assigned to collect information and review the facts of the case. If cause is found, civil charges can be brought in the U.S. District Court. If the court rules in favor of the plaintiff, fines can range from 20k to 100k depending on the number of previous offenses. The best way to avoid claims is through discrimination awareness training and policies instituted at all levels in the organization.
More Regulatory Compliance Questions?
This is a deep topic that can raise many questions. For direct assistance with your most urgent questions, reach out to our team of experienced real estate investment and finance professionals that can provide answers or direct you to the guidance of the appropriate professionals. With the high-dollar and operational ramifications of regulatory violations, research and pre-planning for proper education and organizational policies is critical.
Merely generating revenue is insufficient to build the value of your property and improve the cash flow of your portfolio. It takes a variety of strategies and constant refinement to maximize the returns from each of your rental properties. When you apply these ideas across an entire portfolio, it will transform an under-performing set of assets into star performers. The strategies we’ll highlight here include rental rate increases, tenant management, reducing expenses, and onsite services. These aren’t all innovative ideas, but they are proven strategies in the investment business.
Increasing Rents & Tenant Management
The first and most obvious way to generate additional revenue from your rental properties is by increasing rents. Though not the favored approach of tenants, rents must be increased on a periodic basis to ensure that the property achieves its maximum potential given the market conditions. To reduce tenant rejection and high turnover rates, limit rental increases to 1-5% per year. Additionally, include a clause in the rental agreement that ties rental rate increases to a consumer price index. The drawbacks in relying on rental increases to generate additional income are the long time-frame for significant changes and the purchasing power limiting effects of inflation, making the actual increase in income marginal.
Effective tenant management also has the potential to boost income. The quality of tenants, vacancy rates, occupant turnover, and re-leasing costs play a significant role in the income and value of a property. Diligent tenant screening practices help avoid breach of contract and will reduce your headaches further down the road. Stable tenants with strong employment or business histories are the least likely to vacate prematurely and will typically leave the property in better condition than tenants of last resort, meaning lower re-leasing costs to prepare for the next tenant. When possible, give preference to tenants seeking longer lease terms. Longer leases provide greater stability, indicate the commitment of the lessee, and reduce vacancy and renovation costs.
Reducing Rental Property Expenses
Maybe increasing income isn’t feasible, or a priority, due to the state of the market or the condition of the property. In these cases, reducing expenses is always a viable option. If any budget is contemplated thoroughly enough, opportunities can be found to optimize, consolidate, and eliminate expenses. As expenses decline, net income grows inversely. This is one of the most expedient ways to improve positive cash flow in the short term. This potential for improved NOI underscores the value of proper budgeting and expense tracking. Without a clear understanding of the financial status of an operation, it is impossible to make informed decisions regarding expenses, or even determine what is excessive.
What expenses are necessary? Which contribute the most to the value of the property?
Consider how each individual expense and expense category affects the income, value, and desirability of the property. If excessive funds are allocated to a particular category, marketing for instance, to the neglect of maintenance, it can lower the value, appeal, and inherent value of the rental. Expenses should be allocated to achieve the overall objectives of the owner through regular maintenance, budgeting for capital expenses, and sufficient marketing to stimulate demand. Even if the property has a positive cash flow, and other revenue sources are present, it is still prudent to actively monitor, evaluate, and optimize expenses.
Onsite Services for Rental Properties
Income producing properties can derive revenue from sources other than rent. By isolating the needs of your tenants and providing them with useful benefits, you can generate supplementary revenue streams from onsite facilities including laundry, vending machines, phone and internet service, preferred parking, housekeeping, landscaping, fitness centers, event facilities, renter’s insurance, upgraded finishes and more. This strategy can work well for residential and commercial properties and is only limited by the imagination. Offering additional services and amenities is a low risk initiative that can also increase the appeal and demand for your property, increasing the effective value without increasing rents or optimizing expenses.
A novel approach that is suitable for many property types is advertising revenues. Ad placement opportunities for well-located properties include building-side billboards and promotional murals. Even where the property doesn’t provide marketable views from the highway, ad placement and revenue potential exist in the form of ad space in newsletters, tenant portals, email campaigns, and printed materials distributed to tenants. Some savvy real estate entrepreneurs partner with local restaurants to sponsor ‘pizza nights’ and other similar events for which property owners receive a portion of the revenue.
As you can see, the possibilities for generating auxiliary revenue from your rental properties are multitudinous. Regardless of property type or location, clever investors can and will find ways to reap the maximum economic potential from a property. This is just part of the appeal of real estate investment as a long-term vehicle for wealth generation and stable passive cash-flow. Partnering with an established real estate investment and funding platform will help you identify, fund, and optimize the best and most diligently researched opportunities.