Optimizing Investment Returns in Single-Family Rentals Through Servicing (Sponsored Content From Planet Loan Servicing)

Patrick Couture, Senior Vice President, Planet Loan Servicing – Commercial. He can be reached at pcouture@planethomelending.com.

Investors in Single-Family Rental (SFR) mortgage portfolios are encountering new challenges, from inflationary pressure on household budgets and falling rents to rising business bankruptcies. As these challenges grow, it’s imperative to examine the role an expert commercial servicer can play in reducing risk and maximizing investment value.

Challenges Facing Today’s SFR Market

Property owners have had a nice run in the post-COVID era. Household formation continued its upward trajectory as some people who doubled up during the pandemic have returned to solo living. 

When interest rates and home prices rose, many would-be homebuyers continued renting.

Still, SFR borrowers have begun to experience some headwinds:

Rising borrowing costs: With interest rates at relatively high levels, SFR borrowers can no longer turn to low-rate cash-out refinances to pay for repairs or renovations.

Weakening rental performance: Retention rates for expiring leases are trending downward and rental price growth has decelerated over the past year.

The Spillover Effect

Inflationary pressure on household budgets may cause renters to miss or delay paying rents. Property owners who can’t turn to reserves or low-cost borrowing may skip or delay paying their SFR lender.

This is the inflection point at which an experienced SFR commercial servicer, rather than a residential servicer, can influence results. There’s a significant difference between merely collecting mortgage payments and complete servicing of SFR loans.

Unlike many competitors in the market, Planet employs a robust commercial platform to service SFR loans. Planet’s commercial platform skillfully navigates SFR lending challenges, ensuring that investors can focus on optimizing returns. This includes comprehensive compliance measures, a dedicated legal team, proficient recruiting of expert staff, and workflows adhering to best practices. In essence, we don’t just offer a service; we offer an infrastructure.

Planet’s high-touch commercial servicing team routinely handles common SFR challenges, including:

Delinquencies: If SFR borrowers’ reserves become stressed, rent collection challenges may lead to mortgage payment delays. Communication is crucial, especially with delinquent borrowers. Planet maintains open channels, ensuring that even in cases of delinquency, the lines of dialogue remain open.

Missing Financial Reporting: Smaller operators relying on manual systems to track income and expenses – whether in Excel or a notebook – may only calculate profit and loss at tax time. This may cause them to miss early indicators of worsening financial results. Planet ensures borrowers submit quarterly financial filings, ensuring investors stay abreast of red flags.

Escrow Administration: Due to the unique SFR origination process, insurance and tax payments due at closing are sometimes overlooked. It is essential to correct these oversights promptly to prevent the risk of an early payment default. Planet’s commercial platform tracks and manages property tax and insurance for SFR loans and ensures borrowers fully fund escrows.

Proactive Tax Monitoring: Navigating the labyrinth of taxes on single-family properties—from property to school district levies—requires a vigilant approach. Implementing a rigorous tax tracking system and stepping in when necessary to advance tax payment protects the underlying properties, securing SFR loans against potential government liens.

Diligent Insurance Oversight: Effective management of hazard insurance for an SFR portfolio is pivotal. It’s not just about ensuring coverage but verifying the accuracy of the policy type—confirming landlord policies over primary residence ones, which are distinctly different in protection and liability terms. When Planet’s proactive surveillance identifies lapses in coverage, we promptly force-place insurance. This decisive action maintains coverage and mitigates risk.

Releases, Substitutions, and Early Payoffs: Some SFR borrowers are taking advantage of increased property values. They’re selling off properties and paying down the loan’s balance by the release price. Proper handling of property substitutions and releases is critical. Collecting prepayment penalties, even for partial payoffs, generates fee income for investors.

Disciplined risk management: Borrowers have no incentive to report risks, like rising rates of non-renewing leases or missed rent payments. Planet tracks and reports on financial trends.

Customer Retention: One of the strongest testimonials to Planet’s servicing effectiveness is the number of borrowers who return to our private clients for additional loans. This speaks volumes about the customer experience delivered by the Planet commercial servicing team.

Maximizing SFR Portfolio Value

For SFR investors, success boils down to consistent cash flow. Planet is not just a servicer; it’s a partnership, dedicated to ensuring investors realize their goals. In an SFR market that remains active despite challenges, partnering with a servicer that understands the unique demands of this niche is paramount. Planet offers reliability, efficiency, and profitability. For SFR investors, the choice is clear.

(Sponsored content includes material submitted independently of the Mortgage Bankers Association and MBA NewsLink and does not connote an MBA endorsement of a specific company, product or service. For more information about sponsored content opportunities, contact Bill Farmakis at bill@jlfarmakis.com or 203/834-8832.)