STRATEGY
SINGLE-FAMILY RENTALS
G O I N G V E R T I C A L
GOING VERTICAL
Don’t Let “NewNormal” SlowYou Down WHY SINGLE-FAMILY RENTALS HAVE A TREMENDOUS UPSIDE
by Bruce McNeilage, Kinloch Partners
• What hasn’t changed? Residential properties seem to be holding their value.
urn on any newscast and one of the phrases you are likely to hear is the “New Normal.” There is an expectation that the COVID-19 crisis has permanently altered just about everything we know to be true and that we should accept our fate. T I take a slightly different view, especially when it comes to changes in the Single- Family Rental home business. The world is always changing. That was true before COVID-19 and it will be true long after we find a vaccine. What was commonplace when I got into the SFR business 15 years ago has evolved over time. For example, building an entire subdivision with just rental homes didn’t exist 15 years ago. Today, it is an emerging trend. There is a better way to view the pandemic’s impact. Instead of lazily assuming there is a “New Normal” take a look at how things have changed: Some existing trends have accelerated. For example, video conferencing and working from home were already growing trends pre-virus. Post-virus, working from home and video conferencing growth has exploded. • Some things have been altered temporarily; I’m willing to bet that standing six feet apart at the grocery will fade out as soon as there is a vaccine. • Some things have barely changed at all. People still need a roof over their head. • Now, apply that same line of thinking to SFR investing: • What’s accelerated? Renting will likely continue to grow, but at a faster rate. • What’s temporary? Lenders are pulling back on deals that would have been approved just two months ago.
ECONOMIC CHALLENGESWILL DRIVE MORE PEOPLE TO RENT First, let’s take a look at how COVID-19 is likely ac- celerating the percentage of consumers who will rent. Pre-virus, Millennials were getting older and looking for a home with four walls and a yard. Unfortunately, many Millenials have amassed significant student loan debt. This was already hampering their ability to buy a home and pushing more of the largest generation into rentals. The financial fallout from COVID-19 will put even more stress on personal financial situations and likely will take homeownership out of reach for even more people. Ultimately, this will accelerate the number of people who want — or need — to rent. Next, why is the pull-back by banks a temporary phe- nomenon? Most lender strategies swing back and forth like a pendulum. When economic conditions are positive, lenders begin to loosen the reigns and take on more risk. When the economy starts to contract, lenders naturally become more risk averse. With current economic condi- tions pointing toward a recession, lenders are steering clear of high-risk customers and asking for more money down from even those with pristine credit. We are seeing loans at 70 percent LTV/LTC today, where they were 80 percent LTV/LTC just two months ago. LENDERSALWAYS GETMORE RISK-AVERSE IN DOWNTIMES This does not constitute a “new normal.” It’s simply a normal reaction by lenders in the face of trying times. As
72 | think realty magazine :: july 2020
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