Funding Insights for Build-for-Rent (BFR) Investment Projects

BFR is an investment strategy that entails the construction of single-family residential properties from scratch with the ultimate goal of renting them out once they are finished. It is becoming increasingly popular amongst the real estate investor community due to the steadily escalating demand from renters for greater privacy, more square footage for telework roles and more outdoor space. This trend has fueled a significant evolution in new-development investing, prompting long-time multifamily builders to adjust their business model in order to align with the single-family rental (SFR) market to optimize their returns from a long-term perspective.

There are a number of varying approaches to the recent uptick in BFR activity. One model that is proving to be effective is the selling of recently constructed rental properties to institutional aggregators after receiving the certificate of occupancy. With more and more institutionally-funded investment entities flooding the SFR sector, properties are currently in high demand. In an effort to satisfy this demand, developers commonly forge partnerships with major investors. These relationships effectively mitigate the risk to builders as they are able to pre-sell SFR projects, and the investor receives multiple premium real estate assets at once, thus eliminating the time and finances typically required to buy each SFR property one-by-one.

For investors considering a comparable exit strategy or planning to acquire their first BFR asset class, the experts at Express Capital Financing have provided the following financing insights to take into account to assist you in doing so.

Watch Out for Early Repayment Fees

There are scenarios in which the lending entity’s and the borrower’s objectives become misaligned. For instance, the borrower seeks to resell properties and repay the outstanding mortgage balance as fast as possible, whereas the lender wants to maintain the loan in order to accrue greater returns in the form of interest payments.

This significant divergence of motivations prompts some lending organizations to include lockout periods in their loan programs. A lockout period is a timeframe in which the borrower is prohibited from repaying the loan balance ahead of schedule. Another similar mechanism commonly used by lenders to protect their interest profit margin is a prepayment penalty. These force the borrower to pay a fee in the event that they pay off the loan balance early. For investors planning to resell their properties right after they receive the certificate of occupancy, it is important to first check that your lender does not impose a lockout period or prepayment penalty that could significantly reduce your return on investment (ROI).

Beware of the Middle-Man

Who is your contact to coordinate draw requests, release of homes and other necessary tasks that arise over the course of the loan period? If your chosen lender uses a middleman in the form of a third-party servicing entity, there is a greater risk for inefficiency, communication gaps and delays in obtaining the funding you need to keep your project on schedule. To illustrate, suppose you need to redistribute certain funds from one subcontractor expense to another, the external servicer may be inflexible if the loan agreement does not explicitly provide for such last-minute adjustments. Working through such an impasse with your lender is inherently more complicated (and frustrating) when you have to do so indirectly through an outside party. The good news is that Express Capital Financing operates the entire loan process in-house and prides itself in maintaining a high level of transparency and open communication during all phases of investment projects. Successfully completing new construction investment projects requires flexibility and active involvement by both the lender and borrower—and the team of financial experts at Express Capital Financing are ready and willing to develop creative and effective funding solutions for all types of properties.

Contact us today to learn more about how we can assist you with all of your new construction financing needs!