Lender and originator explains how he outcompetes institutional capital
Single family rental (SFR) is a market segment that was gaining steam into 2020 and has taken off over the course of the past year. Growing millennial demand for single-family housing, coupled with an extremely competitive purchase market, means renting a house is the only viable option for many. With that interest, investors who were already in the space are rapidly expanding their portfolios and new institutional players are buying up or building whole neighbourhoods to turn into rental housing. For brokers and originators, that space is looking increasingly attractive as a means of filling their pipeline with volume lost from refinances.
Attractive as the space is, originators should know they’re entering a tight market when they step into SFR lending. Institutional players are running rough-shod over some markets, and housing inventory is still tight. Many landlords are worried about eviction moratoriums and speed is of the essence. To find out how mortgage pros can get ahead in this challenging market, MPA spoke with Darel Daik (pictured), CEO of Noble Mortgage & Investments in Texas. His company, which specializes in hard-money lending for investors, has been in Texas’s white-hot SFR market for the better part of two decades. He believes that opportunities abound in the SFR space, for those who can outcompete the big guys.
“There’s certainly been a bigger influx of competition into the investment side, whether it’s hard money or these no-income lenders that are being put together by hedge funds,” Daik said. “They’re trying to take market share, but they just can’t compete when it comes to customer service and the amount of speed that it takes on a lot of these deals.”
Daik explained that the shortage of housing supply in Houston and Dallas, his two key markets, allows a private lender like him to out-compete. With only 1.6 months-worth of housing stock in Houston, and even less in Dallas, sellers want a deal that can be closed extremely fast. As a hard-money lender, Daik explained he can close loans in under a week, far faster than these hedge funds can move.
In addition, Daik’s model doesn’t require serious down payments from the borrower which, unlike some more institutional players, allows him to act with greater speed. His experience in the market, too, allows him to reassure worried clients.
The extension to eviction moratoriums that were initially announced at the start of the pandemic, for example, has some investors and landlords nervous. To Daik, there’s very little reason to be. His SFR clients have seen minimal issues with tenants unable to pay, and while he believes there may be some market-specific causes behind that, he notes that there isn’t a shortage of good tenants able to pay solid rent right now.
For originators and brokers that want to start working in the SFR market, Daik explained that a somewhat different skillset is required. The particulars of qualification, for example, get more complicated as an investor adds to their portfolio. Underwriting, too, requires an element of complexity tied to the nature and business outlook of the portfolio. While competition abounds in the space, Daik believes that a savvy originator can follow his lead and move more nimbly than the big players.
In the end, one of the key things purchase originators will find they have in common with work in the SFR space is a single endemic problem: supply.
“The market is really good, but there’s not enough inventory,” Daik said. “We’re dealing with less than two months [of inventory] in Houston and less than one month in Dallas. So, a lot of investors have turned to new construction to compete with that. The biggest problem that we hear complaints from borrowers about, is that they have a hard time finding a viable property and the prices have just gone up astronomically over the last year.”
