I think everybody knew it was a matter of time until somebody stepped in and created a lending product that the market has been dying for. With an unprecedented number of investors scooping up distressed properties over the last several years, the demand for non conventional financing for non owner occupied property has been at an all time high.
I’ve worked with many investors over the last few years who were willing and able to buy more properties, but were at a loss having hit the max allowable limit set by Fannie Mae. In previous market cycles, many local and regional banks stepped into this roll, but even their ability to lend on single family properties has been limited (due, mostly in part, to the huge losses these banks incurred during the downturn).
But here were, at the beginning of 2014, and Blackstone’s B2R finance has just become available to investors. While somewhat untested, I think they will be the first of many players that get into the portfolio financing space.
Having only just begun the conversation with B2R finance, I’m by no means far enough down the road to form an experienced opinion, although I do have some initial thoughts, based on my conversation with their rep…
An Assessment of Blackstone’s B2R Finance
Loan Size – Based on my conversation and what is advertised on the website, the minimum loan size they would consider is $500,000 and the max is $3,000,000. With the kind of money Blackstone has been able to raise, it doesn’t surprise me that the minimum portfolio they would consider would be in the neighborhood of a half million. Not only is it more efficient for them to bite off bigger chunks, it also elevates the caliber of the investors that they will work with.
Interest Rate – Considering the fact that there aren’t really any other major players with this loan product, I think their interest rate is actually pretty fair. As of this week, I was told the interest rate would vary between 5.5% and 6.25% (based on a particular swap index and adjusted based on their internal risk calculation). One very important thing to note however, is that this rate is locked for the entire term of the loan.
Loan Term – The current offering is either a 5 year loan or a 10 year loan (balloon) and up to a 30 year amortization. In my opinion, the ability to lock in a 10 year loan for around 6% is very strong. I doubt many people would bank on having access to these kinds of rates 5 to 10 years from now.
Down Payment – The loan program allows for 75% LTV if the properties have been owned for over a year. Thus, there is some ability to cash out if you’ve got considerable equity in the properties and you’ve owned them over a year. If the package is a new purchase or refinanced within that first year of ownership, the requirement is 75% loan to cost. Thus, you are going to be required to keep your 25% equity in the deal.
Costs - Origination isn’t too bad at 1.5%, but you will pay for an appraisal and due diligence fee on every property. In addition, they charge a flat $5,000 legal fee for each portfolio ….. which is easier to swallow if you can spread it over a larger portfolio of properties. This legal fee does not include normal title charges, so you would need to include your local title charges into the closing costs as well.
Penalties – I would guess that much of their ability to lock in a fairly favorable interest rate has to do with locking in money on their side over the same period of time. Thus, the prepay period is essentially the length of the loan (4.5 years on the 5 year loan) and any property that is sold before the period ends will owe the balance of the interest that would have been paid had the property stayed in the portfolio.
Knowing this, investors that consider using this financing should really go into the transaction with a true buy and hold mentality. It doesn’t make sense to put this financing in place if your intention is to sell properties out of the portfolio during the life of the loan.
Ownership – Another benefit to this program is the ability to own and finance all of the properties in a corporate entity. Unlike conventional loans where title is held personally, this allows for corporate ownership and limited liability for investors. That said, there is still a small amount of underwriting done on the individual (primarily just a 680 credit score) and a personal guarantee is also required.
Related: Blackstone Beats Back the Bears
Keep in Mind…
This isn’t a comprehensive assessment of this loan program, but at initial glance. I think it’s going to be a tremendous product for buy and hold real estate investors. I’m in the process of putting financing on a portfolio of mine right now and will report back in a few months with my experience.
What are you hearing about this new portfolio financing for investors? Let’s discuss…B2R Finance from Blackstone: A Primer by Ken Corsini