If you are a real estate investor who buys single family homes, you should sit up and pay attention. This newly announced deal will affect the future of your real estate business and could even put you OUT of business.
Blackstone, the largest real estate private equity fund, just consummated a
$2.1 B loan via Deutsche Bank AG. Blackstone has already invested over $3 B into the purchase of single family homes since 2012 for use as rental properties. This new loan will allow the group to take down another $2 B of inventory over the next 2 years.
Particularly in the Southern California, Las Vegas, and Phoenix markets, Blackstone has created what many are calling an “artificial mini-bubble.” With so many buyers coming off the sidelines in 2012, combined with representatives of hedge funds bidding up properties to above asking prices, it’s no wonder that prices are continuing to rise in those markets.
Known to many real estate investors in California as “the Dark Side of the Force,” Blackstone may all but eliminate any opportunity for the small real estate investor to make money in 2013 and 2014. One Blackstone representative said to a real estate investor friend of mine in California that they were going to put, “all of the little guys out of business.”
Are you a real estate investor who buys single family homes in one of the markets that Blackstone will be targeting over the next few years? Because this information has not been disclosed or readily available, I suggest doing your homework and making sure you aren’t one of those who become a victim of Blackstone, the new “Darth Vader” of the real estate market.
Invest where they aren't investing. Smaller markets that just don't have the capacity to absorb the hundreds of millions of dollars the funds are throwing around. Be nimble and stay ahead of them.
The ant makes a pretty good life for itself right under the nose of the elephant (but he/she has to be nimble enough not to get stepped on).
$3B since 2012
$1B in 2013
$1B in 2014
Sounds like if we made it this far we should be OK.
I sell a lot of my buy and hold deals to private equity, and I still manage to find good ones to flip for myself.
The big money flooding the market creates some challenges, but it also creates some opportunity. My outlook is still positive.
Thanks for the info and the link. I will pass this on to fellow investor friends whom are focusing in those markets.
Thanks @Sam Craven for the positive perspective!
I wonder what their exit strategy is? Sell in 3 or 4 years?
There is always competition and outside forces working against you. Don't let this psyche you out.
In my mind, the biggest danger of inflated home prices is not to the person who buys as an investment, but rather to those individuals and families who buy homes as personal residences.
I do not believe a sustainable housing recovery will be possible without the participation of homeowners. As @Corey Dutton said, there is an artificial bubble in some markets. Sadly, new homeowners - or those who want to be new homeowners - are going to get caught up in this mess....either being unable to afford a home...or paying far more than the home will be worth when the bubble pops.
In my opinion, given the probable way this is going to end, if I currently owned rental property in some of these "hot" areas, I would be feeling pretty good about the mid-term rental market. Not sure this good feeling would compell me to make a new buy there now however.
At least they are not touching my market ... I'll keep on buying the $25K SFH and renting them out.
Sounds like a good plan Dawn! Just curious what are those 25K SFH's renting for in your market?
Even with $2B, Blackstone can only buy 13,000 $150K SFHs. I think that leaves like 80 million houses for the rest of us. And that doesn't include units or MHs. Isn't there anything else to buy? Like everything that doesn't fit their criteria? Like everything in areas where they aren't buying?
The funds buy mostly subdivision properties, with age and/or condition requirements, and rent return requirements. There is a known appreciation play in their strategy and that appreciation doesn't and won't exist everywhere. I doubt inner-city Dayton investors are shaking in their boots.
As for making money in places where funds are active (they are very active where I am), lots of us are trying to buy what they won't/can't buy and then selling it to them. The appreciation is scary though. 11% rise in appreciating in one quarter is very much like the (last) Bubble.
The only real victims, IMO, are the owner occupant buyers. Putting aside the escalating appreciation and affordability issues, the average owner occupant offer is loan contingent and appraisal contingent. Selling to the best and highest offer with no contingencies and a 20 day close is hard for most of us to pass up.
$24,900 (+ $10K rehab) - 2 bedrooms, 1 bath, 2 car garage, $800/month
$23,000 (+ $2K rehab) - 3 bedrooms, 1 bath, 2 car garage, $875/month
$24,000 (+$15K rehab) - 4 bedrooms, 2 baths, no garage, $1100/month
There are so many other properties out there around this price point but I am seeing some shift toward slightly higher prices. Rents are very consistent and a big demand for SFH in this area.
For all 3 of these properties I got private funding (not secured to the property, 3 year terms) to cover the majority of my purchase costs and in the last example, it was $30K which covered 100% of the purchase and 40% of the rehab.
I am finishing up a project now then looking to buy 2 more properties this year -- WITHOUT bank financing.
@Account Closed , I agree that there are only so many houses that the funds can buy. Also I wonder if their buying will be a very long term strategy or will they stop buying at some point. Maybe once they figure out a new "strategy" to manipulate the stock market?
@Dawn A. , Those sound like excellent deals! Sounds like you also got a great deal on financing since you were able to get almost 100% of the funds via private money. Do you plan to keep the private money loans or refinance into more conventional financing down the line (although it might be difficult on lower priced properties)? What types of rates are you finding private money at?
Since these loans are only 3 years, I will keep them. There is the option of refinancing after 1 year, but after 1 year, 33% of the balance will already be paid off and for the amount of the loans, they are really small potatoes.
The rates are between 7-9%.
Thanks for your response . Yeah that makes sense since the loan terms are short and they are smaller loans. 7-9% sounds pretty good...especially since you didn't have to put much of your own money in the deals.
I'll throw in my 2 cents. At one of my local Sacramento REI meetings last week, Invitation Homes was present with the 2 Local Principal investor guys.
Invitation Homes is the company that is doing the buying for Blackstone. I believe Invitation Homes is in several markets as well.
They told us they bought 1500 homes in 6 months and they are NOT just focusing on SFR. They are interested in SFR and MFR as well. Didn't mention anything about apartments but I took away that they aren't focused on that. In addition to Sac County, they are also ACTIVELY looking in the neighboring 6 counties. They were solicitating the investors in the room for business and provided some interesting comments (because there wasn't much of a conversation - they were nervous).
The broker-experienced gentleman said they only close about 20% of the deals they submit for. Also mentioned that they aren't going anywhere anytime soon because "real estate is hot".
Interesting food for thought regardless of what you do or don't read between the lines.
Blackstone has been a monster here in the Tampa Bay area over the last year buying up thousands of houses. Around here they pretty much just buy 3/2 newer construction houses that need minor rehabs for 100-150k. It's not the same thing I buy but it has effected every aspect of the market forcing the people in the middle either up or down. I buy a lot of rentals in the lower end of the market and the increased competition and lower inventory has been a challenge. Instead of REO's I've been dealing with long short sales and bidding in the tax deed and foreclosure auctions. There's always going to be deals, unfortunately they're just getting harder to find for the moment.
It is too early to talk about bubble.
Sit tight on what you have bought.
Don't sell! Let hedge funds drive the market to the sky first.
This is a time period in which your thinking doesn't make you money; your sitting does.
This Cyprus contagion will drive even more
foreign money into our real estate market.
If @Sean Moen is correct and Blackstone is doing business as Invitation Homes, in checking their site http://www.invitationhomesforrent.com I see that here in So Cal the areas where they are focusing are those hardest hit, like Riverside, Temecula, Murietta, Corona, etc. Areas like Orange County, have a market that is growing again, and homes are appreciating, so it wouldn't make sense for them to come here. The question is, even with all those displaced by foreclosures, if an area doesn't have an economy, who is going to rent all the houses?
Places like Murrieta and Temecula were once bedroom communities, and people working in San Diego etc. commuted to their jobs because real estate was so expensive in San Diego, now, those same people find housing closer to work, and many of those that had homes foreclosed on left those communities for greener pastures, so ... who rents all the homes?
There's a home for rent out here by one of these hedge funds. It was bought the same time as I bought mine. There home was twice as big, lot newer house, nicer schools, & a 2-car garage. It took them 2 months later than me to rehab but here's the catch...
It's STILL for rent so I called the ph#. Went to some answering service which was for the property management company.
It was terribly managed.
So there you have it.
Thanks for that insight @Patrick L. with regard to what Blackstone has created in your corner of the market. I know many real estate investors in CA that are getting squeezed out but I also know many experienced flippers in CA that are doing quite well. I think it's all about adapting as you said. In Utah we are not as affected by the movements of the private equity funds as in other areas of the U.S.
@Scott W. , good point. That's been a popular topic among those that have criticized hedge funds for entering the prop mgmt business.
---" It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change." - Charles Darwin ---
Regarding who will rent the homes in the bedroom communities like temecula etc ... Maybe " invitation homes" will have to get acquainted with the Section 8 program . Would anyone be surprised if they went this route ? It could have an impact on communities since they probably own many properties in the same area .
There's a good blog about this exact same discussion here:
I think people are overreacting to this. You can still swim with the sharks you'll just have to pick the bones and if there is no meat on the bones move onto a different part of the ocean and get meat there.
Here is the thing...
Like someone else mentioned who is managing these things.
The lowest bidder managment company that got beat up enough on their rate to get the contract.
Sounds like a real good long term plan that should have no problems.....
There was a blog post recently ... those that were looking to get gold in the gold rush were not the ones getting rich -- it was the ones selling the pick axes, gold pans, etc. Being a provider of some service the hedge funds need, might be better than trying to get in on the same crop that the hedge funds are buying.
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