Considering a Value-Add Investment? Green Financing May Be a Good Bet
If you're considering a multifamily value-add investment property, you might want to consider (or are already looking into) a “green loan” or so-called “green financing.” A recent piece in National Real Estate Investor (NREI) online shed some light on how popular this type of financing has grown in recent years and how it can benefit the value-add investor. Even including some tighter restrictions to tighten down green loan lending, this avenue of financing doesn't show any signs of slowing and may be a great opportunity for the value-add investor in an already competitive market.
Green Loans Have Grown in Popularity
According to the NREI information, green financing has seen a surge in popularity in the past couple years. One real estate firm director is quoted as saying that almost half their Freddie Mac and Fannie Mae business is green at this point. The green loans can cut almost a third of a percentage point off interest rates offered by government sponsored entities like Freddie and Fannie, making these green loans desirable for their lower interest rates. The NREI article notes that these loans have been very useful for value-add investors who typically look to renovate an investment property, intending to increase the income it creates.
“Almost Too Popular” - Leading to New Guidelines
The NREI article goes on to say that almost a quarter of the green loans qualified in 2017, leading Fannie Mae and Freddie Mac's governing body, the Federal Housing Finance Agency (FHFA) to tighten up regulations a bit. If investors want to qualify for the lower interest rate of the green financing in 2018, they'll need a solid plan to reduce energy or water consumption at the property by a minimum of 25%. This changes the rules set by both Fannie Mae, which was a reduction of 10% and Freddie Mac, a reduction of 15%, in 2017. Despite the tougher guidelines, NREI points out that the properties still will not have to qualify as a green property such as with a LEED (Leadership in Energy and Design) designation. Another bonus? The renovations that will bring your property into compliance have dropped in cost, making it easier to renovate your property to meet these green standards.
Benefit for Value-Add in a Tougher Investment Climate
By adding the incentive of a lower interest green loan, Freddie Mac and Fannie Mae have offered a way for value-add investors to improve their properties and increase the property's income. As the NREI piece notes, this is a tremendous benefit to value-add investors who are looking to renovate a property, increase operating income, all usually with a plan to sell within a few years. They also note the tougher value-add climate we've mentioned before, as many properties have gone through a renovation this cycle. One expert quoted says there's still a lot of interest in these loans and he expects to see that continue. The NREI article goes on to say that there's a range from short to long-term financing available with green loans, and the interest rate discount averages about 30-35 basis points less than those offered by Freddie and Fannie to similar properties!
While these loans may be facing some slightly tougher regulations to qualify for the impressive lower interest rate, there's a definite benefit for the value-add investor who can meet the energy or water standards – and who can reap the benefit of a popular finance strategy that's proving successful.