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