U.S. property owners with just one rental house can now get cash from Wall Street to buy more.
Cerberus Capital Management, which initially targeted landlords with multimillion-dollar loans, is financing low-volume deals for small investors through its FirstKey Lending, with looser terms than government-backed mortgages from Fannie Mae and Freddie Mac, said Randy Reiff, the business's chief executive officer. Blackstone Group's rental lending arm, B2R Finance, is making a similar push to mom-and-pop landlords.
"Our premise has always been to be able to lend to the middle market and entrepreneurial borrowers in the space, not just the institutional borrowers," Reiff said. "The biggest guys have always enjoyed access to capital. The largest part of this market is really the entrepreneurial owners."
The companies are competing to lend to owners of the almost 14 million rental houses in the U.S. at a time when many Americans are struggling to get a mortgage and homeownership is declining. Cerberus and Blackstone, along with Colony Capital, also are racing to package debt on homes managed by separate landlords for the first multiborrower bond sale.
Blackstone, the biggest U.S. single-family landlord after amassing 45,000 houses since early 2012, has led Wall Street's issuance of $3 billion of securities backed by properties owned by one company. The New York-based firm's B2R unit is expanding the rental bet with plans to offer funding to investors who only need one rental home to qualify, starting this year, John Beacham, president of B2R, said in a telephone interview.
About 53 percent of the 14 million U.S. investor-owned or vacation houses were without a mortgage as of last month, based on data from property-research firm RealtyTrac, implying investors in about 7 million homes could get cash-out mortgage financing to buy more real estate or make other investments. There are more than 1.3 million property owners in the rental market who own at least two homes, according to Westminster, Colorado-based RentRange.
Blackstone's B2R was among companies offering loans last month at a Dallas meeting of HomeVestors of America, which has 472 franchises for property investors in 120 cities, most of whom own fewer than 10 single-family homes, according to Co- President David Hicks. Small landlords have struggled to get financing until the last couple of years and most offers came with high interest rates, said Hicks, whose company advertises on billboards that say "We buy ugly houses" with a picture of a cartoon caveman.
"Now they have a choice of who to borrow from," he said. "It's like night and day."
Low-interest loans available
The Wall Street firms offer loans with interest rates of 6.5 percent to 7 percent, compared with 12 percent to 15 percent for non-bank hard-money loans, the most common source of debt for landlords who can't get a bank mortgage, Hicks said. The lower-interest deals can come with strings, such as such as requiring an analysis of the cash flow from rents, a turnoff for many HomeVestors franchisees, who usually buy properties based only on the price, according to Hicks.
"They're using Wall Street money and they've got all those rules," he said. "Sometimes it's just hard to relate that to an independent investor."