Funding for Real Estate

Mike: Hi, it’s Mike Hambright with FlipNerd.com. Welcome back for another exciting Expert Interview where I interview awesome guests from the real estate investing industry to inspire you and help you learn. Just a quick reminder of our upcoming REI Power Summit where we have over 50 speakers. It’s going to be a fantastic event, 100% virtual and online. Check out REIPowerSummit.com to learn more.
For today’s show, I’m joined by Joakim Mortensen. He’s a Managing Director of Colony American Finance, a leading provider of financing solutions to residential real estate investors. Colony American is also a sponsor of the show, so we’re very excited to have Joakim here with us today.
Today we’re going to discuss how the financing industry has changed recently to really dramatically benefit real estate investors, whether you’re fixing and flipping properties, or you’re buying and holding, or you’re looking to refinance your rental properties, if you’re not aware of how much easier it is to get financing for your business, you really need to watch this show. It’s always been a big hurdle for real estate investors to get access to capital and no longer is that an excuse. So we’re excited to have Joakim here with us today. Before we get started though, let’s take a moment to recognize our featured sponsors.
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Hey, Joakim. Welcome to the show.
Joakim: Thank you very much, Mike. Good to be here.
Mike: Glad to have you on. It’s really been interesting. I don’t know if you know much of my background but I started real estate investing in 2008 when financing was impossible to get. We’d literally go to banks and they would sometimes you would literally hear the word “evil” like, “No, we don’t do that anymore.” Real estate is evil. Over the years, these lenders came in that just loved real estate and so it’s a very different time today than it was even just a few years ago, right?
Joakim: Absolutely. It’s certainly interesting to follow how this specific asset classes, we like to call it, where you have residential assets whether it’s being acquired or its being held for long term, and obviously us as lenders have seen it more as an opportunity in the market that we’re then are providing liquidity to primarily residential investors.
Mike: Before we get started, maybe you could tell us your background and how you got into this space and then I want to talk about large institutions like yours that started as more of a hedge fund acquiring properties [inaudible 00:03:47] morphed into lending. But maybe you could start just by telling us about your background.
Joakim: So I’ve been in commercial real estate for most of my career and back in 2011 I had the opportunity to help a hedge fund get financing. They had acquired a significant single family portfolio in Florida and was in need of getting it recapitalized. That led me to Colony American Finance. I knew some of the senior people there and joined them in June of 2014.
Obviously, it was exciting to join the Colony brand, because Colony American Homes had just finished acquiring 20,000 single family homes that they are then renting out. And Colony American Finance was then a spin-off setting up a finance company to provide financing in the single asset, the single family space and provide liquidity to residential assets.
Mike: Sure. So there was this time, not that long ago, maybe a year and a half ago, when a lot of real estate investors were clamoring that the hedge funds are killing us, they’re buying properties, they’re driving prices up, things like that. Then all of a sudden, those very competitors, if you will, became their friends because they started to lend to them. Talk about that transition of going from buying homes to effectively lending to everybody else.
Joakim: Yeah, so what’s interesting about it is that as everybody got smarter about this asset class, [inaudible 00:05:28] actually did a study on some of the opportunity incurring this 15.4 million rented residential assets, and if you add up the 20 largest buyers or the biggest funds, it only controls 1% of this. Needless to say, this is an enormous industry with tremendous opportunity, and what we’re doing as lenders is providing equity and institutionalizing the asset class. So it’s very exciting to be part of this new venture.
Mike: Sure. So talk a little bit about how what’s happening right now is you guys and some of your competitors you see a lot of people that are effectively competing for real estate investors business now and what we’ve seen as you guys are moving closer and closer, and you may already be there, to a single home product, to lower rates, and things just appear to continue to get better for real estate investors over time. Can you maybe talk about what’s been happening and where things are going?
Joakim: Yeah, absolutely. Again, it’s being part of this has driven liquidity any time you can drive liquidity to a relatively inefficient market and I think largely before that, it had been what we defined as mom and pop ambassadors and very local markets is now that it’s becoming a new industry. Then you’re seeing bigger players, you’re seeing more liquidity, and obviously, I keep on using the term institutionalizing it, but it’s part of driving this new asset class to a recognized commercial real estate industry.
Mike: A lot of folks don’t realize and you may know the statistics better than me, but I think around this is including multifamily and single family as well, but around one in three homes in America I believe is actually owned by a real estate investor. Does that sound about right?
Joakim: Yeah, probably. I would hate to be the statistician, but it does sound accurate because this industry has been around forever. It’s just historically been very, very local and it’s been pretty much the mom and pop of the local investors who have been active in this space.
Mike: So can you talk a little bit about how with Colony American coming in to the mix and lending to investors. Just talk about how you benefit real estate investors these days.
Joakim: Sure. Part of it is if you look at the historical guys, who would buy and renovate, or buy, fix and flip, as we define it, is now we’re giving them two options. We give them the option that if they want to hold on as a long term investment, we can provide them low cost meaningful debt that will allow them to not having to go out and sell it in order to realize their profit. If they believe in meaningful appreciation and rent growth, then that would suggest that they should hold on to that investment. From that perspective, we have opened a brand new avenue for the traditional investors.
On top of that, our second line is what we call acquisition line of credit or our bricks loan, which is basically a line of credit that allows the investor to level up their acquisition, and obviously getting more buying power from having access to credit.
Mike: Maybe you could take a few minutes to talk about what kind of trend that you’re saying, because I know it’s very market specific. But in a lot of markets , like I’m in Dallas, there’s a lot of markets, California markets, a lot of people feel like the markets are getting overheated right now in some areas. Particularly for, let’s say buy and hold investors.
Joakim: It really depends what your objective is. If you’re a long term holder and you believe in, as I’ve said long term appreciation, not necessarily having to hit it out of the ballpark, but if you believe that real estate will appreciate and that there’s going to be rent growth in the market, that’s again something that would suggest that you should hold on to this long term. If you don’t believe in that thesis, then obviously, you’re probably better off selling it.
Mike: Are there any certain parts of the country that you see that are overheated more than others right now?
Joakim: I’m located down in South Florida and obviously there’s been a lot of talk about South Florida was one of the markets that got hit the hardest. You’ve also seen great appreciation in the South Florida market, but you also have a huge influx of foreign nationals, foreign buyers and a lot of Americans still like to have a second home while they still visit the South Florida or Florida in general.
Mike: Can you talk about how you differ from other types of lenders that are out there. There are obviously hard money lenders, there are local and community banks. Just talk about how specifically Colony American is different than other types of lenders that are out there.
Joakim: Sure. The senior management team all came from either the residential or the acquisition space and finance space, a nice combination. I think we have a very pragmatic approach to how we underwrite and look at deals. We are asset-based lenders, so our main source of repayment is going to be the rental income from the properties. Again, I’m talking about term.
We have a good way of looking at our underwriting, where we apply meaningful expenses and obviously to generate an NOI. But we have less interest than the sponsor and their ability to pay back, where we just, again, asset based lenders, so cash flow from the properties is going to be key and that’s pretty much what we solely focus on.
Mike: Comparing to community banks, I’ve done a lot of work with community banks, they usually bump up against some lending level. If they like real estate, if you find them, then they usually have they’re usually smaller banks, where you walk in and you may talk to the president, but they’re limited to how much they could lend you, so they’ve got a lot of restricted resources.
Joakim: Absolutely. We are defined as a non-regulated institution, so we don’t have some of the same restrictions that banks have. So we don’t have a legal lending limit that we can bump up against and certain regulatory requirements is also something that we don’t, necessarily are running into as well.
Mike: Can you share where do you think where do you, the institutional players, where do things go from here over the next couple of years?
Joakim: I still think we’re very early into the cycle, if you will, where I feel that there’s still going to be great buying opportunities for investors and let’s remember also that many of these investors that we actually provide financing to are all very local. So that means that they don’t necessarily, I mean obviously, the larger investors buy but they tend to be very local specific markets that they know very, very well. That’s obviously one of the key drivers that we want to see that they have great property management experience and that they understand the market that they’re buying in.
Mike: Do you see in terms of an institutional movement, not just from the lenders side but from a buyer’s side, whether it’s a retirement account, or retirement funds, or other people, do you see anything going on there in terms of individual buyers, individual investors…
Joakim: Yeah.
Mike: …like me moving into the space that would continue to drive prices up or cause more competition, or what do you use there?
Joakim: I think that a lot of people like this real estate as a long term investment, we obviously look at the stock market and it’s incredibly volatile and I think a lot of people got burned, a lot of people got scared about the volatility. We don’t necessarily have that in the residential real estate, and people like that, the brick and mortar aspect of it.
What’s also interesting is that we do finance foreign nationals and a lot of foreign nationals have looked at residential real estate as a safe place and also have a [inaudible 00:13:39] denominated investment. So from that perspective, we are also providing liquidity to foreign nationals, which in certain markets have been very big for us.
Mike: Okay, can you clarify again? So you fund both are you typically set up where you’re providing, with folks getting financing through lines of credit? Is that typically how you’re set up?
Joakim: Yes, so we have what we called the bridge, so the acquisition lines of credit, which is typically to increase people’s buying power. A lot of them buy, then rehab, and then stabilize them. What I mean by stabilize is that they actually rent it out. Then once they have a meaningful pool, they will then come to us and get what we call a term or permanent financing, where we can provide fixed rate, 5 or 10-year term on a 30 amortization. That allows them to build out their rental portfolio. So it’s a two-punch, if you will. We have the bridge, where we provide the acquisition. Once they stabilize, then we allow them to recapitalize, take out their money, and then go do it all over again with the lines of credit.
Mike: You also provide financing for folks that simply want maybe already have a large portfolio that if they want to effectively refinance that, is that right?
Joakim: That’s right. Within the first 12 months of me joining Colony, everything was pretty much a refinance. What you are seeing now is you’re actually seeing a trend, where people have aggregated a portfolio of 20 to 30 homes, and we’ve actually seen pools start to trade now, where we see consolidation in the industry and I think we’re going to continue to see that going forward.
Mike: Do you see and some of the institutional players that bought a lot of property, some of the hedge funds, some of them have actually been selling off, right? Some of the smaller ones?
Joakim: Yep.
Mike: What do you think is going
Joakim: You’ve also seen of the bigger ones where they have just bought a tremendous amount of properties and they’re now starting to make strategic dispositions.
Mike: What are some examples of those things that you’ve seen that are going on? Is it selling out of specific markets? Is it certain price points? Or, what does that really [inaudible 00:15:47].
Joakim: Yeah, since property management is key to this, I think you see what people have great concentration. They can get management efficiencies or they feel like they have too much exposure, or there are in areas that doesn’t necessarily fit into their investment profile, or they feel like if they’ve got the appreciation. So there’s a whole variety of things or reasons why you would trade out or sell. But it’s interesting to see how we are seeing pretty big uptick in consolidation and now we are actually financing acquisitions as well as refinancing.
Mike: You talked a little bit about how you’re more asset based. Can you talk about for folks that are listening right now that may think, “I don’t know if I qualify or
” can you talk a little bit about I know you don’t look as much at the person you’re lending to as the asset as well, but can you talk about the types of folks that you’d like to work with and maybe who qualifies and who doesn’t typically?
Joakim: Yeah, we’re very easy to work with and I wouldn’t want people to be intimidated by not qualifying. So basically what we’re looking for are guys, if we talk about term loans is that you have a portfolio that you’ve aggregated and want to recapitalize, take out some equity. Basically, we want to see that they know what they’re doing in terms of property management or that they have a third party property manager in place.
Then what’s the next step? Do they want to go ahead and acquire more properties, then we can offer them the line of credit. Basically, we want to make sure that the assets are good assets then good locations, and that they produce a meaningful income so we can give them a good loan to value and to give long term solution for the financing.
Mike: Could you share some trend information on what… I know this if going to differ greatly by market, but what you’re seeing just generally speaking with rents? For the past couple of years, I know with my portfolio we’ve seen them going up, up, up. Every time we renew a lease we’re raising their rents. Where do you see things going from here?
Joakim: Yeah, so it’s interesting because obviously we keep on hearing we are record low home-ownership, meaning the people actually owning the home. Then we’ve also certainly seen some reluctance from young people when we talk about the household formation that people are much more likely to rent right now than to actually buy because obviously there was a lot of people, who, during the crises certainly lost their home and had a really bad experience owning a real estate. Again, that’s probably trickled into us seeing that there’s tremendous demand for renters.
The other thing I always like to point out as well is if you give a young family the option of renting a house or living in an apartment, I think most people want to live in a house.
All of those things actually point towards that you are going to probably continue to see meaningful rent growth whether it’s 1, 2, or 3%, but if you look at that over a 5 or a 10 year trend, if you can bump it a couple of percent a year, that actually turns into real value at the end of the long term.
Mike: Especially if you are able to I believe you said you offer rates, fixed rates, maybe for as long as 10 years, right?
Joakim: Correct.
Mike: That’s another huge change that’s happened in the past few years. I know a lot of the local lenders that I’ve worked with, they were at maybe five-year fixed and then most of them moved down to three even. So to be able to lock something in for 10 years is awesome.
Joakim: A lot of these guys view this as their retirement just because it’s something… again, it’s an asset class they can relate to. They believe in this and the second we refinance them, then they’re going to go buy more properties. I mean that’s the interesting part about these investors that they’re very loyal to this asset class. We see that the second we recapitalize them, they’re going to go deploy their capital again. It’d be great for us because we set up long term relationships with all these investors.
Mike: Joakim, can you talk a little bit about how maybe Colony American is different? There’s obviously some competition in the space. How are you guys different?
Joakim: I think we take a very pragmatic approach to underwriting. We are cash flow lenders, so our key driving is going to be the rental income in the properties. I also think that people work with us can attest to that we have a very streamlined underwriting process. We’re very accessible. It’s the same underwriting, we’ll work with you through the whole process. Typically, our originators are also heavily involved in the underwriting and the investors have access to the whole team at all times. We’re very focused on that and try to create a very easy good experience for the borrower.
Mike: Awesome. So what have we not talked about yet? Maybe you could take a couple of minutes and just wrap things up and tell us what investors should expect going forward, and how they would benefit by working with you?
Joakim: Yeah, listen. This industry is going to continue to evolve and we’re going to see, 5, 10 years from now, we’re going to be just as recognized, and just as efficient as multifamily or office or hospitality. So I’m excited about being part of this creation of a new asset class that’s still very, very young in its infancy. And, obviously, as an industry becomes efficient then we’re also going to see more competition, we’re going to see more loan products, and it’s exciting to be part of.
Mike: Great. Great. Well, if folks want to learn more about you guys or maybe inquire about lending, we’ll add a link down below here. Of course, you have some ads on our site because of your sponsorship. But maybe you could just tell the listeners out there where they can go.
Joakim: Yeah, obviously, we have a really great website, ColonyAmericanFinance.com, where you can plug-in your contact information and in 24 hours we’ll have someone reach out. There’s also an 800 number, where you can call in and describe the loan product and what you’re looking for. Then immediately, we will assign you to a regional originator and then start helping out to see if there’s any way we can work together with those investors.
Mike: Fantastic. Thanks for joining us on the show today, Joakim. Thanks for being the sponsor of the show. We definitely appreciate you. For those listening, we’ll add a link, you can go check out Colony American Finance and fill out a form to start the process to see if there’s a fit there for you to refinance your products, or maybe help fund some of your upcoming growth. So Joakim, thanks again for joining us today.
Joakim: Mike, thank you very much for having me. I’ve really enjoyed it.
Mike: Good to see you. You, too.
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