Is Blackstone’s B2R Finance Good For The Market Or A Sign To Get Out?

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Blackstone Group has jumped into the mortgage finance field, targeting small to medium-sized borrowers of single-family rental properties, a market generally considered to be underserved.  Known as B2R Finance, the company will originate loans ranging from $500,000 – $50 million, with a minimum requirement of 5 properties, minimum loan size of $500,000 and minimum eligible property value of $50,000.

John Beacham, president of B2R Finance was quoted as saying, “This is a very large market with a lot of opportunity to make a significant volume of loans.  It has the potential to be north of $1 billion within a relatively reasonable amount of time.”

Eligible properties listed on the B2R Finance website  include: Single Family Residences, Condos, Townhomes and 2-4 Unit Properties.

The loan products currently provided have terms of 5 and 10 years at floating and fixed rates, amortized over 30 years.  Maximum loan-to-value ratios range from 60-75% and the minimum DSCR (debt coverage ratio) is 1.25x.

B2R’s nationwide lending program could really open up the doors for smaller investors  who want to expand their holdings but have traditionally had limited borrowing ability.  Fannie Mae and Freddie Mac limit the number of mortgages to one investor at 10.  Alternative sources of funding like portfolio lenders, with a healthy appetite for lending to individual investors who are looking to build up their real estate portfolios, aren’t always easy to come by.

So, why would Blackstone create B2R Finance to fund their competition?

First, consider that the six largest institutional investors like Blackstone have collectively poured upwards of $15 billion into the single-family home rental market, buying at least 90,000 homes in the past few years, according to Deutsche Bank.  A drop in the bucket when you consider that the US has approx 14 million single-family rental houses, the majority owned and operated by mom and pop landlords, but still a sizable stake for these firms that was big enough to potentially move the market according to some experts.

Second, this institutional buying soaked up massive amounts of excess inventory and repositioned these properties as income generating assets at a time when most investors were on the fence.  There is no doubt this helped to stabilize some local markets and even propel them forward.  Main Street always follows Wall Street and eventually re- entered the market en masse when the general consensus ruled that it was safe to get back in the game; ergo buyer demand went up as did prices.

Now, we have what appears to be a somewhat healthy real estate market, or at least one on the mend when you consider double digit rates of appreciation over the past year.  But how much of the recent recovery is due to overall market demand versus hyper institutional buying?  And do the opportunities that attracted the early money still exist?  Some of the first institutional entrants into the market are paring back or getting out all together, citing high prices and inadequate returns to incentivize continued investment.

Blackstone’s Invitation Homes unit is beginning to cash out too.  Invitation Homes 2013-SF1 is an REO-to Rental securitization backed by one floating rate loan secured by 3,207 single-family rental properties.  A $500 million deal.

Related: The Future of Real Estate Lending

What’s next for Wall Street?  How about giving the little guy the means to expand his portfolio?

The real estate market is solid in most US cities.  Overall demand is up.  Prices are continuing to go up.  Enter B2R Finance.   Without question, it looks like a brilliant move to offer this type of financing to the market, especially when you consider the potential demand and somewhat strict LTV loan requirements to qualify.  But a prudent investor has to question the timing and who’s offering it.  The move on Blackstone’s part clearly signals the coming end to their binge on Main Street USA .  But, should that even matter to local investors and homebuyers?

As previously noted, the US has about 14 million single-family rental houses.  This is a huge market for acquisition and refinance lending.  The small investors in my market are still very active, scooping up every decent opportunity.  It seems that most buyers are no longer concerned with what they could have paid one or two years ago.  Instead, they are looking at a glass half full and questioning how much more they will have to pay if they wait 6-12 months to buy.  Sounds eerily familiar.

It makes sense for Blackstone to transition out of buying single-family homes and into lending at this point in the cycle.  By providing essential funding to an underserved market, B2R Finance can supplement smaller investors demand for cash which will in turn help to keep the market moving forward as they plan their exit.  To be fair, Blackstone’s Invitation Homes is still in the market acquiring single-family assets, so it’s not like they are cutting and running at this point.

Will the market crash without demand from institutional buyers?

When institutional buyers do fully exit the single-family rental business, I’m hopeful that stronger and more established markets across US cities will see sufficient buyer demand to stem a potential pull back in overall demand, whether that be from small investors or owner-occupy buyers.

In the Chicago area, Blackstone’s Invitation Homes appears to be buying up a lot of  “starter” type homes clustered around solid, working-class and middle-class neighborhoods and suburbs.  If hedge funds gradually or all together at once, stop buying these homes because the prices get too high, any retrace in home prices is not going to suddenly bring down the overall market.
Photo Credit: Ben Husmann

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About Author

Brent Hall specializes in sourcing unique buying opportunities for his client base of real estate investors, rehabbers and residential developers. Brent is a licensed broker associate with Jameson Sotheby's International Realty in Chicago (IL).

18 Comments

  1. To confirm, B2R will provide loans to individuals who currently control at least 5 units, and NOT those who want to buy at least 5 units?

    • On their web site, the words are past tense (properties owned, renovation put into properties, etc.) which implies the financing is for an existing portfolio.

  2. This is definately a game changer. 2014 will be an interesting year for this product. I worked as an account executive for a residential wholesale hard money lender. If i were in the same frame of mind, i would promote this product without a doubt. The issue is other players will want to “Copy” and get in the game. Buyer Beware! This does have the potential of creating another bubble if they are not careful. Remember, You will have vacancy factor that they will have to deal with at the same time.

  3. I’m both encouraged and discouraged. They’re targeting smaller, assumabley buy and hold type investors – which sounds great. But why only 5-10 year terms, esp if they’re targeting buy and holders?! (Which btw likely means 5 years unless you’re one of the biggest of the smaller fish). At year 5, you’re probably really clipping along on said rentals (several), making decent cash flow with solid tenants, and now you have to refi or sell. For a long term type investment such as a rental property i want to lock in the longest term possible right at the beginning. No thanks. I can see a lot of other short term investment uses though. And i guess it’s better than the other options out there right now .

    • If you want a 15-yr or 30-yr fixed rate, your option is FNMA. Fannie only lets you have ten financed properties and only four if your credit is below 720. Standard bank terms are 5, 7 ad 10 years. You can dislike it, but it is what it is.

  4. I was under the understanding that Freddie or Fannie only allow 4 financed properties including your primary residence, you mentioned a limit of 10? Could you clarify. Thanks.

  5. Not too many details on the B2R website. It looks like it is an adjustable rate short term loan indexed to the 5 year swap rate. A rate which has doubled in the past year.

    If I planned on keeping my mortgages for 20 or 30 years I’d much rather lock in historically low interest rates than take a gamble on refinancing in 5 to 10 years. However if I was pursing an aggressive mortgage pay down strategy or was close to having my SFRs paid off then this could be a very attractive product. Assuming that the quoted rate is low enough compared to the 30 year fixed.

    Does anyone know what kind of premium they are asking for A+ borrowers over the 5 year swap rate?

  6. I actually thought this might be good news for us little guys.
    I submitted a “data tape” or loan schedule of real estate and got a term sheet today.

    The rates are poor (6.2 for 5 yr and 6.7% for 10yr).
    The requirements are extensive (must be managed by a prof
    property manager, separate accounts that they can access, escrow accounts
    for everything, etc). And the real kicker is they want 10k up front for “out of pocket expenses” with no mention or detailed info on what that covers.

    This was for a loan at roughly 63% LTV.
    Their site claims they go to 70% LTV but apparently not.

    There is no way this is going to work for someone like me. The rate is too high.
    The up front 10k is ridiculous. And all the accounts and escrows plsu the requirement
    of the professionally licensed property manager.

    To me, I think that 5 property thing is completely disingenuous. This may be more for the bigger outfits that are running 50 to 100 or more homes and that already have professionally licensed property managers (although there are probably some smaller investors that are either licensed themselves our outsource that so maybe they would have no problem with that requirement).

    I just believe that this lending product, as it stands, is completely unusable. They’re essentially asking me to pay a higher rate plus deal with all their additional hoops that cost me more money and more trouble as well.

    If anything, I think what this may do is get some of the medium to larger local lenders opening up a bit to blanket loans instead. I actually think Blackstone has missed the boat completely on their offering and they’re going to end up with more competition if that does happen. And they won’t be getting a piece of any of the pie at all given the terms they put out there.

  7. This is a very interesting option for folks (like me) who have taken 10 mortgages and have run out of the conventional path. I hate that the product is so much inferior than conventional mortgage – but what are other alternatives?

    Has anyone actually successfully used the Blackstone product who can share their experience?

  8. Bad deal in many ways. High interest rates, hard to cash flow with small buildings, no guarantee they will refinance you in five years. You want to invest in real estate? Just go buy a building in a core area where you are confident the neighborhood will be the same or better in twenty years. If you can meet Chase apartment building criteria for lending, probably a real winner. If you can, stay away from the small local lenders, these are the idiots that called in loans during the crisis.

  9. It is brilliant move for Blackstone. Create a bunch of leveraged landlords that must charge higher rents than Blackstone properties they’ve paid cash for. At 63% LTV and 6% interest rates, forget cash flow and pray for rapid appreciation. Meanwhile Blackstone uses gullible Joe Landlords interest money/fees and buys more cash properties, giving you little chance to compete for them.

  10. This is becoming a hot issue for local banks. A typical local bank (go to a small suburb or small town within 30-60 minutes of a small metropolitan area) and check your options. I have two options from local banks right now that are much better than any of what was shared from B2R Finance. Option #1: 7 year fixed rate; 4% interest; subject to appraisal or Option #2 (my favorite): 3.75% interest; 5 year fixed; under $250k they do in house appraisals for little or no cost. Approximately $500 to originate the new note.

    As I was told recently…..anything under 5% interest is a ridiculously low interest rate and makes a common sense investment very attractive.

    • @Mike – Are these local banks giving you such great rates on a commercial/portfolio loan or is it a conventional product?

    • Mike , can you share the information on your Bank. I have 10 properties looking to finance two of them one is my primary residence. Thanks

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