TRADITIONALLY, RENTAL PROPERTY VALUES were constrained by the amount of rental income they are capable of bringing in. Government-sponsored entities Fannie Mae and Freddie Mac will only write mortgages on multifamily properties that generate rental income equivalent to 1.25 times the cost of servicing the debt. Banks lent funds to investors looking to renovate apartment buildings in hot areas under the assumption that they’d be able to increase rents, but only if underwriters assumed the landlords would achieve the 1.25 debt service coverage ratio required to finance into an “agency” loan by the time the loan matured.
But Yieldstar proved landlords could grow their rental revenue without making any improvements whatsoever. One client with 20 properties grew its revenue 21 percent in the first year it adopted the software, according to one of the class action lawsuits against RealPage and 50 landlord co-conspirators. Especially when interest rates were near zero, that kind of unprecedented revenue growth supercharged apartment building valuations, at a time when unprecedented irrational exuberance was fueling speculative bubbles across the economy.
In conferences, seminars, YouTube videos, and on real estate investment platforms like BiggerPockets, small-time real estate gurus crowdfunded down payments on apartment buildings, generally targeting affluent individuals in fields unrelated to finance like engineers, surgeons, and, in the words of a short seller who attended a multifamily investment conference held by the ultra-finfluencer Brad Sumrok last year, “soooooo many dentists.” Thirtysomething WindMass founder Mitchell Voss, who opened up shop in a Dallas office adjacent to Sumrok’s and bought the Chronos portfolio in Dallas and more than 30 other complexes following stints at Goldman Sachs and UBS, was relatively experienced compared to many of his fellow real estate syndicators; nevertheless, he told a podcast in 2020, “I shouldn’t really be able to do what I’m doing with the limited track record that I have.”
But he was assisted by an aggressive new generation of lenders that was increasingly willing to throw traditional debt service coverage standards to the wind. The debt fund MF1 Capital, which was the favored lender of prolific multifamily flipper Tides Equities, and the REITs Arbor Realty Trust and Ready Capital, which financed WindMass’s Chronos purchase along with $10 billion in other loans in 2021 and 2022, were some of the most famously aggressive. But many commercial banks like The Bancorp, a Delaware-based branchless bank best known for catering to fintech startups that counts WindMass and many even greener multifamily investors as clients, also got in on the party. Nearly $700 billion worth of multifamily properties changed hands in 2021 and 2022, the vast majority of it financed by non-agency lenders.
