Finance scene improving for small-scale landlords
Financing has never been easy for mom-and-pop landlords who want to invest in rental houses. But the market is starting to open up.
In the past, small-time investors often out-and-out lied to would-be lenders that the houses they were buying would be their personal residences. Their only other options were to eliminate the need for funding altogether, by emptying their bank accounts and paying cash, or by finding so-called hard money lenders whose terms are often rather stiff.
Sometimes conventional lenders knowingly winked at borrowers who weren’t planning to live in the houses they wished to finance. But even then, Fannie Mae and Freddie Mac — the two major mortgage investors that buy loans from primary lenders — placed severe restrictions on the number of rental properties individuals can finance.
Fannie Mae won’t buy more than four loans made to a single investor, for example, and Freddie Mac limits the number to 10. Even at that, though, the two government-sponsored enterprises’ lending guidelines are tighter than Bryce Harper’s home-run swing.
To fill that void, several big private equity firms, including the Blackstone Group, Colony Capital and Cerberus Capital Management, have created subsidiaries to back small investors who own a handful of houses. Blackstone’s new venture is called B2R Finance, while Colony Capital has launched Colony American Finance and Cerberus backs FirstKey Lending.
Nearly one quarter of the country’s single-family houses — about 17 million units — are not occupied by their owners. Some are not actively advertised for rent, and a portion are vacation homes. But the number “is a fairly good proxy” for the total number of rental houses nationwide, says Daren Blomquist of RealtyTrac, a real estate information company.
Since 2011, when the housing market turned around after a five-year lull, institutional investors — those purchasing 10 or more houses in a calendar year — turned 632,000 or so houses into rentals to take advantage of their low prices and the growing desire of people to rent rather than own.
That leaves roughly 16 million houses that are owned by small-time investors. And those are the people firms like B2R Finance hope to serve.
Of course, you still need to have good credit and a hefty down payment of at least 25 percent. But if you meet those criteria and a few others, you might be in business.
B2R makes lending decisions largely on the cash flow of the underlying rental properties, as opposed to the borrower’s personal debt-to-income ratio, which is a key determinate when lending to people who are actually going to live in the houses they are buying.
The company will lend from $300,000 to $3 million to what it calls “entrepreneurial” borrowers who own at least three houses, town houses or condominium apartments worth at least $50,000 each, as well as multi-family apartment buildings smaller than 20 units. Loans will have fixed payments for a five- to 10-year term but will be amortized as if they were 30-year mortgages.
Colony American Finance and FirstKey Lending offer similar terms or lines of credit for “flippers,” who buy run-down houses and foreclosures, fix them up and resell them.
Colony American’s loans range from $500,000 for mom-and-pop investors to $60 million for large institutional investors. FirstKey provides loans of $500,000 to $500 million across a variety of loan products. B2R will also finance a portfolio of rental houses with a commercial loan, but borrowers have to be corporations. Since many individual owners are not incorporated, they might consider setting up as limited liability companies.
So far, the company has loans with 200 or so borrowers — each loan covers 15-20 properties — and has “a very robust” future pipeline, a spokesman says. Significantly, it recently closed on the first-ever multi-borrower securitization — that is, it bundled 144 loans backed by more than 3,000 properties into a security for sale to investors.
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