REO-to-rental was white-hot after the recession, as investors such as Blackstone and Colony American scooped up countless foreclosed single-family homes. But the trend completely bypassed affordable rental properties, particularly in low- and moderate-income neighborhoods. Today, REO-to-affordable rental offers an intriguing opportunity, especially with single-family rentals surging 27% since 2008 and becoming the fastest-growing household type.

However, long-term financing for REO-to-affordable rental has been largely non-existent—until now.

John "Jack" Markowski

A pilot program in Chicago is financing bundles of affordable one- to four-unit properties in targeted neighborhoods. This offers intriguing development opportunities—and a model that can be adopted around the country.

The 1-4 Unit Rental Redevelopment Program

Community Investment Corp.’s (CIC’s) 1-4 Unit Rental Redevelopment Program consists of a $26 million loan pool that provides long-term financing to help responsible investors own and operate bundles of small rental buildings in concentrated areas. Over the next three years, the program will finance approximately 200 buildings and 400 apartments in low- and moderate- income neighborhoods.

With more than 50% of the rental housing in the United States located in buildings with one to four units, CIC’s program is helping responsible developers make sound investments to improve neighborhoods.

Responding to Vacancies

Low- and moderate-income communities across the country were devastated by the foreclosure crisis. As already challenged neighborhoods struggled with numerous abandoned single-family homes and two-to-four unit flats, homebuyer interest all but disappeared.

Today, strong rental demand and lower prices in these areas offer investor-owners with experience in scattered-site management an opportunity to make promising investments, strengthen neighborhoods, and provide badly needed affordable housing.

There’s only one catch: Credit. Long-term financing is the key to making REO-to-affordable rental work.

Filling the Financing Gap

In the Chicago area, there has been no long-term financing available to help investors manage and lease groups of small properties in low- and moderate-income neighborhoods.  

Historically, one- to four-unit buildings have been owned by an occupant with a wide variety of financing available to homebuyers.  However, commercial and government financing for multifamily properties generally applies to large buildings. Even CIC’s Multifamily Loan Program is designed for five- to 49-unit buildings.  

The lack of long-term credit meant investors had to finance vacant one- to four-unit buildings themselves, which tied up cash for other investments and made it difficult to achieve scale. CIC’s program was created to fill this gap.

It provides long-term financing for ownership and management so responsible developers can buy groups of one- to four-unit buildings (a minimum of nine units), which must be concentrated in small geographic areas to maximize impact.

Financing includes a 10-year term loan with up to 30-year amortization and loan-to-value (LTV) as high as 120% with 1.25x debt-coverage ratio. Allowing such high LTV helps the program address low appraised values that result from a distressed sales market and inhibit redevelopment.

The pilot program consists of a $26 million shared-risk loan pool capitalized by 11 investor banks, a program-related investment from the MacArthur Foundation, and a grant from the Illinois attorney general’s foreclosure settlement funds.

A number of investor-owners have used the 1-4 Program since its 2014 launch. These are mostly small- to mid-size developers who see 1-4 as a way to grow their portfolios and invest in neighborhoods.

Marblestone Property Group recognized that buying vacant homes in South Chicago was a smart investment that would strengthen the community. Today, its quickly growing portfolio consists of 50 properties with 70 units.   

Marblestone used CIC’s 1-4 Program for takeout financing on 20 of these properties, which frees up cash that it can invest in more small buildings. The group takes a holistic approach, rehabbing properties while working with other investors, brokers, community groups, and local politicians to improve the neighborhood.

Paragon Investment Properties is also working in the one- to four-unit space. It has over 90 units under management in one- to four-unit buildings, a number of which were financed through CIC’s program. 

Paragon typically buys small properties on Chicago’s south and west sides and believes strongly in combining community development with sound investment. “We provide safe, secure, well-maintained properties to families in challenging neighborhoods. Our goal is to improve the city, one property and one block at a time,” says CEO Scott Allbright.

Build on Success

CIC’s 1-4 Program is a modest pilot, but its approach can be used in other areas and at a larger scale.

The foreclosure crisis and disinvestment in low- and moderate-income neighborhoods are not unique to Chicago, nor is the stock of vacant one- to four-unit buildings that can be rehabbed into quality affordable housing. There is also no shortage of affordable housing developers and investors who are committed to “doing well by doing good.”

In CIC’s experience, public-private partnerships that include municipalities, foundations, and local banks are important elements of an effective 1-4 Program. Starting discussions with these groups is a good first step in seeing how REO-to-affordable rental could work in your area.

In particular, local banks respond positively to a sound, well-managed lending pool that offers Community Reinvestment Act credit while also sharing risks and rewards with other institutions. Complementary “soft” investments from government or foundations will also help private financial institutions overcome potential regulatory restrictions that could otherwise inhibit their participation.

It may also be helpful that REO-to-affordable rental is gaining traction in the policy community. A recent Urban Institute article argued that changes to federal programs could encourage the acquisition and rehab of quality affordable single-family homes and small buildings to provide much-needed rental housing. 

As CIC’s 1-4 Unit Redevelopment Program shows, REO-to-affordable rental can work. With more communities, developers, and policymakers looking for strategies to address bank-owned and vacant small properties, a program like CIC’s offers tremendous potential: Expanded portfolios for developers, more stable neighborhoods, and a new supply of quality affordable rental housing.

John G. (Jack) Markowski is president of Community Investment Corp. He is also chairman of The Preservation Compact, chairman of the board of the National Association of Affordable Housing Lenders, and serves on the board of the Chicago Housing Authority. Markowski is also a former commissioner of the Chicago Department of Housing. He can be reached at