BlackRock Inc. is the latest company planning to finance investors who buy single-family homes, capitalizing on soaring rental demand as the U.S. homeownership rate sits at a five-decade low.
BlackRock, the world’s largest money manager, will buy loans from a network of partners that offer financing to the firm’s specifications starting as soon as next month, said two people with knowledge of the plans, who asked not to be identified because the information is private. Its lending partners also will offer funds to renovate homes that will become rental properties, one of the people said.
Tara McDonnell, a spokeswoman for BlackRock, declined to comment on the investment.
BlackRock joins Cerberus Capital Management, Blackstone Group LP and Colony Capital Inc., which have been competing to finance smaller landlords of the 14 million rental houses across the country and bundle the loans into bonds to juice returns. The new type of debt may make even more money available to single-family home landlords as many Americans struggle to get mortgages and opt to rent instead.
“The market could certainly bear to have more entrants,” said Ryan McBride, chief operating officer at Colony American Finance LLC, an affiliate of Colony Capital. “This is a largely untapped opportunity in a huge potential market.”
Investors such as Alex Sifakis, president of Jacksonville, Florida-based JWB Real Estate Capital, estimates he’ll need about as much as $30 million a year to fund home purchases. In the past two years, he’s borrowed $13 million from Colony and affiliates of Cerberus to finance some of his firm’s 430 rental houses. Interest rates on the loans range from about 5.25 percent to 6.5 percent.
“More competition drives rates down,” Sifakis said. “The more people that are in market, the more I can leverage them against each other.”
Investors who buy at least 10 homes a year have spent about $110 billion to accumulate more than 620,000 properties since 2007, according to property-research firm RealtyTrac. Rental demand has surged as many Americans struggle with getting a mortgage due to tight credit standards, slow growth in wages and the lingering effects of the real estate collapse.
The U.S. homeownership rate dropped to 63.4 percent in the second quarter, the lowest level since 1967, according to the U.S. Census Bureau. The number of renter-occupied units increased by about 2 million from a year earlier, the agency said last month.
Smaller rental landlords, who make up the majority of the market, have been constrained by a lack of financing options. Prior to the housing crash, regional lenders were the primary source of loans for landlords.
“I would’ve never slowed down my personal buying if debt had remained available,” said Tim Herriage, chief executive officer of Dallas-based 2020 REI Cos., which has bought more than 1,200 homes. “In the last cycle, all debt ceased and investors couldn’t get financing, which is really what created this big opportunity for private equity giants.”
Institutional landlords led by Blackstone have spent more than $25 billion since 2012 buying single-family homes to rent, professionalizing an industry that was previously dominated by mom-and-pop landlords. They’ve accessed public markets, used bank-arranged credit lines and sold bonds to finance purchases.
The firms also opened their wallets to smaller players, initially targeting landlords seeking multimillion-dollar loans. Then they started financing low-volume deals with looser terms than government-backed Fannie Mae and Freddie Mac, and began offering loans to owners with just one rental house each.
The underlying loans are attractive because they are supported by strong yields, proven cash flow and conservative loan amounts relative to property values, according to McBride.
Investors also are increasing their returns through the securitization market by selling bonds tied to the loans and keeping the riskiest, highest-yielding portions of the debt. Earlier this year, Cerberus and Blackstone packaged the loans on homes managed by separate landlords and sold them to investors in the first multiborrower-bond sales.
BlackRock already has a stake in the single-family rental industry. In 2012, the firm acquired about 300 Southern California homes in a partnership with Newport Beach, California-based Citivest Inc., according to Citivest President Dana Haynes.
Last year, BlackRock and private equity firm KKR & Co. gained a majority stake in Home Partners of America Inc. That company offers tenants an opportunity to select a house they’d like to own and rent it for as long as five years before exercising their right to buy, giving them time to repair their credit or save for a down payment.
The largest single-family landlords, such as Blackstone’s Invitation Homes, don’t offer lease-to-own programs. Instead, they keep the properties for the long term and have the option of selling houses in bulk or one at a time at market rates.