The 2022 rate volatility presents financing challenges and uncertainty to single-family rental (SFR) sponsors. Will rates continue to rise, or will the Fed pivot? Will market rents keep pace with increased financing costs, or will they lag?
Bridge financing is an efficient solution for sponsors waiting out today’s rate volatility for potential lower rates in the future. Learn more below.
Interest Rates: SFR Permanent Loans vs. Bridge Loans
Investors have seen firsthand that interest rates have risen significantly from the unusually low interest rates they enjoyed in previous years. However, that shouldn’t be enough to prevent investors from expanding or refining their SFR portfolios.
SFRs are still an attractive, low-risk investment strategy with promising potential for a high ROI. That said, SFR investors should stay abreast of the way interest rates are evolving and remain flexible in order to maximize their profitability.
In the past, permanent loans typically offered much lower rates than bridge loans, motivating sponsors to secure permanent financing solutions if at all possible. However, bridge loans are worth considering now that the gap between permanent and bridge interest rates has narrowed.
Generally, the current interest rate environment is volatile and expensive, but many investors expect to see rates come down within the next two years. In fact, a recent survey of fund managers found that 79% believe inflation will fall over the next 12 months, which could lead to rate cuts.
Therefore, many borrowers would like to avoid getting locked into a permanent loan now that comes with a higher interest rate. For any investor who finds themselves in this predicament, bridge financing is an excellent solution to consider.
When to Consider a Bridge Loan
Bridge financing can be useful for a variety of scenarios and business plans. As the name suggests, bridge loans provide an interim solution to bridge the gap between a sponsor’s current situation and needs and a more permanent funding solution.
Considering the many scenarios where bridge financing is accessible and strategic, it makes sense for sponsors to consider this option—especially if they’re hoping to wait out the current rise in permanent loan interest rates.
Bridge loans can provide temporary funds to help stabilize a portfolio or can simply serve as temporary financing between two long-term loans. Sponsors can even take advantage of bridge financing for a stabilized portfolio, which helps avoid being locked into a permanent loan should they feel interest rates will fall in the near future.
It can also be apparent in the terms of the loan. For example, bridge loans often come with a less rigid prepay structure compared to a permanent loan, with options such as the SFR Portfolio Bridge Loan from Verus Commercial Real Estate Finance (VCREF) having no prepayment penalty at all.
Why is this important? Having no prepayment penalty means that should rates fall, the sponsor can refinance with no penalty. Contrast this with the alternative: If a sponsor used a permanent loan instead of a bridge loan, they would have to pay the penalty to refinance to a lower rate.
Options Upon Bridge Loan Maturity
Some borrowers may be concerned that interest rates on permanent loans could still be too high when their bridge loan matures. After all, it is notoriously difficult to predict with accuracy exactly how interest rates will evolve—even in the near future.
So, what if interest rates are still high? Sponsors should consider their short-term and long-term business goals to determine the best financial strategy to get them there. Should this situation occur, the borrower has the option to extend the loan to avoid permanent financing.
Where bridge loans come with possible extensions, a sponsor can take advantage of these terms to delay the end of their bridge financing. For instance, VCREF offers 2-6 month extension options.
Learn More About SFR Bridge Financing from VCREF
Bridge loans can be a valuable option for SFR real estate investors in a variety of circumstances. Investing in real estate at this time means contending with higher interest rates, which provides another reason to consider bridge financing.
VCREF has extensive experience helping SFR investors achieve their business goals with flexible financing options. Learn more by visiting our SFR Portfolio Bridge Loan page. Learn more about financing options for SFR portfolios by viewing our resource, Financing Single-Family Rental Portfolios Through a Private Commercial Real Estate Lender vs. a Bank.