Craig Fuhr, Senior Loan Officer at Dominion Financial and co-host of the Real Investor Radio Podcast wrote the following blog after attending IMN’s SFR Forum in early December.
Members of the Dominion Financial sales and marketing team just returned from the IMN Single Family Rental Conference in Scottsdale, AZ and now I know why Fred Lewis and Jack BeVier, owners of The Dominion Group, consider the semi-annual conference a “must-attend” event.
Real estate investors come in many flavors, from there-to-there level of experience to the asset classes they trade in. I’ve attended many events and masterminds over the past 18 years across the country. What I saw at IMN was a different level of investor. IMN has established itself as the arena for intermediate and seasoned operators who want to gain exposure to institutional-level discourse. The keynote speakers, the panels, and the breakout sessions were all top-notch – filled with pertinent, timely, and thoughtful insight.
On Episode 24 of Real Investor Radio, Jack BeVier and I spent an hour discussing our takeaways from the conference.
Economically, this is a pretty interesting time. We have come through 20 years of historically low-interest rates. The abundance of easy capital has created a palpable distortion in expectations.
It was interesting to see the speakers and attendees going back and forth, debating different strategies while attempting to read the tea leaves for 2024 and beyond. It’s clear some were playing it safe – sort of sitting on the sidelines – wary of a recession in 2024. On the flip side, the overwhelming majority of attendees I spoke with were, “full steam ahead.” I was quite frankly astonished as one investor after another described their pipeline of deals.
Jack’s Take: “I think the overall sentiment was one of cautious optimism. There’s obviously some bias to who shows up to a conference, right? The guy who is on the sidelines playing golf is not going to bother showing up to IMN. Everyone is there because they’re active and they want to see where the cheapest debt is. You want to be able to compare notes with other operators to make sure that you’re not the idiot who is missing something that everybody else understands to be true.”
Asset Class Resilience – Investing in SFR Stability
A bullish or bearish sentiment regarding single or multi-family investments is a hot take on your investment horizon.
Whether you are an investor or a lender, you’re constantly asking yourself at this point, “Will there be a soft landing or a hard landing? Will the FED successfully decrease inflationary pressure with higher rates without producing a stifling recession?”
The answers to those questions remain to be seen (perhaps in 2024).
If, however, you’re a believer in American real estate for the long haul, you might be thinking, “Hard landing or soft landing… I’m investing with a 10-year horizon – so while the next couple years may be a sideways slog – I’m bullish on my ability to produce returns over a much longer term.”
Economists, lenders, and investors gave us a full dose of both sides of the argument at the conference.
It’s clear that no one is having a blast right now buying homerun deals but for those who are still in the game, and who have their ears to the ground, there was an undercurrent of optimism. We spoke with several investors from around the country who are starting to see a bit more seller capitulation and a bit less competition, which was an affirmation of what we are seeing here in Maryland as well.
Jack’s Take: “There’s not a whole lot of folks saying we’re undersupplied in luxury, but in the affordable component, that tailwind is something that I think is driving a tremendous amount of investor interest on a going-forward basis. It’s not a question of whether residential real estate is a good place to invest. Everyone agrees with that. It’s, how do you get involved right now with interest rates as high as they are?”
Rebalancing Investment Portfolios – Short-Term Gain for Long-Term Growth
The most commonly used word at the conference was, “Pivot.” (in our unofficial poll). Operators have clearly shifted from building their rental portfolios as the cost of debt has gone up. We spoke with many who pivoted in 2021 to flipping or wholesaling for income – and by all accounts, they crushed it. They may have given a chunk of those gains back in the late quarters of 2022 and early 2023, but they kept their shops open, and they got better and leaner as operators.
There was still some concern about low transaction activity amongst the vendors in the room as that issue specifically hurts them, but investors and lenders are pleased with the way the asset class has performed – even in some stress-tested environments. Single family real estate remains one of the most resilient asset classes in a downturn environment.
Over the past few years, Build-To-Rent has been one of the hottest investment strategies – so it should come as no surprise that it is a major topic at IMN. This year’s discussions were more geared towards, “How to survive in a negative leverage environment?”
Last year’s transaction volume in BTR basically came to a standstill. When you’re buying at a 6-cap, and debt is at 7-7.5%+, you must find creative debt or patient equity,
This year it seemed as if things were opening up again in the BTR space. The conversation around equity had a much longer horizon. If your equity wants to be in the space, and they’re comfortable that they’re not going to get much of a return for a couple of years – you can create a 10-year proforma and feel fairly confident that you’ll make up for low current returns on the backend – in future rent growth and appreciation.
Jack’s Take: If the leverage is expensive right now, just don’t use as much of it so you can continue to produce a dividend to your investors. The conversation should be: ‘We’re under-supplied in housing and we’re buying at replacement cost. If anything is going to go up, we’re going up – and, we’re downside protected in this asset class.’ I feel like that’s what equity investors are accentuating right now.
State of DSCR
Jack sat on a panel of lenders and note buyers where the topic was the state of DSCR loans.
We’ve seen some DSCR providers exit the market, so the discussion was about the state of the market, interest rates, where the securitization market is for DSCR, and what all of that means for borrowers moving forward.
The members of the panel tried to look into their crystal ball to predict where they thought the risks and the opportunities were.
Jack’s Take: We all agreed that we’ve seen a bit more aggression from the securitization market. The DSCR market has taken a lot of market share away from the local lenders and credit unions because the rates have become much more competitive.
As rates have decreased a bit, credit spreads in non-QM securitization have started to come down a bit as well. And frankly, mortgage buyers and mortgage lenders are trying to keep volumes up – so DSCR has been a kind of a bright spot for new market share for the broker market. As they’ve gotten educated on non-QM products, including DSCR, the distribution mechanism for DSCR loans has become much broader – which for the average investor, is generally a good thing.
Panelists agreed that borrower demand is still remarkably robust, but there has been a notable uptick in loan requests with lower DSCR ratios – below that 1.2 sweet spot. As lenders get more aggressive, we’ve seen loan requests over the past 60-90 days at or below 1.0 DSCR.
That could be a canary in a coal mine – but DSCR is still the best-performing of the non-QM loans.
Product offerings have gotten a little bit more aggressive over the past couple of years because DSCR performance has been so strong.
As an aside – IMN has not given us a penny for this content.