Private-equity firms are lending to real-estate investors who need mortgages for rental properties.
Source: New Lenders for Real-Estate Investors
A new lender is knocking on wealthy real-estate investors’ doors.
Private-equity firms are offering buyers large mortgages on properties they plan to rent out. They are targeting a niche group: affluent borrowers buying relatively low-scale properties comprised mostly of one- to four-unit homes.
Since the downturn, borrowers have had limited access to this type of financing, largely because banks have been wary of investment properties. Now, however, conditions are changing as specialty financing firms enter the market.
In November, Blackstone Group launched B2R Finance, which is originating mortgages ranging from $500,000 to $50 million for landlords who own at least five investment properties and want to finance new purchases or refinance. That same month, FirstKey Lending—an affiliate of Cerberus Capital Management—broadened its lending, launching a program for mortgages of $1 million to $5 million, citing high demand from investors.
ENLARGE
The moves come in the wake of private equity’s real-estate buying spree. Since the recession, private-equity firms have been purchasing distressed properties in bulk, converting previously owned homes into rentals. Large institutional firms are estimated to have bought roughly 100,000 to 200,000 homes over the past two years, equating to about $20 billion of purchases, says Jade Rahmani, a vice president at investment bank Keefe, Bruyette & Woods. Now, they are hoping for another piece of the rental-market pie: extending mortgages to affluent investors who, they say, collectively own the largest number of single-family home rentals in the U.S. That could equate to a total of $1 trillion to $1.5 trillion new mortgages for lenders, according to KBW.For borrowers, the latest injection of loans could provide some much needed liquidity. While Fannie Mae and Freddie Mac purchase mortgages for these types of properties, their terms come with limitations. Fannie allows a buyer to have up to 10 loans; Freddie permits up to four per buyer. Both allow only one property per mortgage. Their loans are capped at $801,950 for four-unit properties in most parts of the country, or slightly over $1.2 million in pricier markets like New York. (Caps are lower for properties with fewer units.) Buyers could turn to banks that provide mortgages that they keep on their books, though the number of loans they’ll give applicants remains limited in most cases.
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In contrast, these new lenders don’t place limits on the number of homes for which borrowers can get financing. They require applicants to come to the table with several properties that end up under one blanket loan. B2R and FirstKey typically won’t originate a mortgage for fewer than five properties. Borrowers usually need at least 25% to 30% equity for the asset pool as a whole.
Getting approved for a loan can also be easier. Lenders focus on the financial health of the properties, such as their cash flow and how area housing prices are trending. These companies lend to legal entities, like limited-liability companies, and they’ll review credit of the individuals who control that LLC, though a lower score alone generally won’t kill the deal.
Borrowers also may encounter other benefits, such as lower closing costs and shorter waiting periods than they would with regular lenders. Still, they should consider shopping around. Interest rates on these lenders’ loans can range from 6% to 8%.
Most of these mortgages have short repayment periods that can trip up borrowers. The monthly required payments are low because they are often based on a 30-year repayment plan, though borrowers actually have just five to 10 years to pay back the loan. At the end of this period, they have a balloon payment for the total remaining balance.
Lenders play down the risks, citing in part the recovering real-estate market and robust demand for rentals. Provided housing prices keep rising, borrowers should be able to refinance. Meanwhile, cash flows on their properties should become more attractive as rents continue to rise. Here are more issues to consider.
• Local factors. Some lenders say they will also review the economics of the market where properties are located before giving out a mortgage.
• A numbers game. To assess a property’s cash flow, lenders will review lease income, vacancies and expenses including management fees, property taxes and repair costs.
• Thorough vetting. Some lenders say they have detailed conversations with applicants to assess their ability to manage the investment properties in question.