BlackRock to finance rental-home investors

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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.

Increased competition

“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.

Cash flow

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.