By Justin Laub
For those unaware, a new asset class has come into being in commercial real estate: single-family rentals. Prior to the Great Recession, when home ownership was still the epitome of the American Dream, the concept of single-family homes for rent was an afterthought. They existed but only in unique circumstances that seemed to apply to only a minority of the population. Fast forward to the new, post-recession U.S. economy, and the U.S. has become a renter nation on a scale not seen in a long time. Whether by choice or by circumstance, the U.S. population is increasingly renting its housing stock. The home ownership rate in the U.S. has fallen from a peak of 69% in 2004 to 63.7% as of Q1 2015. The current homeownership rate is the lowest it has been in over 25 years. The roughly 6,000,000 rental households added in the U.S. over the past decade have created a huge boom in demand for apartments and, in the process, created the new single-family rental asset class. Private equity firms and lenders alike have been investing heavily in this new asset class and have created ever more sophisticated ways of financing it.
The first investors out of the gate on a mass scale were major real estate private equity names such as Blackstone and Colony Capital. Over time other investors have entered the field as well as lenders and more regional players. In a short span of six years since the depth of the Great Recession in 2009, we have seen the asset class come from almost nothing to over $20 billion invested in over 200,000 homes, with major IPOs, new REITs and single-family rental-backed mortgage securitizations taking place along the way. The timeline of major events reads as follows:
- June 2012: Blackstone forms Invitation Homes to purchase large portfolios of distressed single-family homes
- December 2012: IPO for first single family REIT (Silver Bay Realty Trust, $709 million market cap)
- June 2013: within one year of formation, Invitation Homes has spent over $1 billion on acquisitions
- November 2013: Blackstone issues the first ever mortgage-backed securitization of single-family rentals ($479,000,000 bond issuance, backed by 3,200 homes, all owned by Blackstone)
- February 2014: Starwood Waypoint Residential Trust becomes the 4th single-family REIT (with the total capitalization for public, single family REITs currently around $5.5 billion)
- March 2015: Blackstone issues the first ever securitization of multi-borrower single-family rentals ($230,000,000 bond issuance)
- June 2015: Invitation Homes is the largest owner in the country with over 45,000 homes
A couple of my recent financing assignments, one in Dallas, TX, and the other in Pittsburgh, PA, give some color on the financing possibilities for this new asset class. For the Dallas assignment I was able to arrange for my client a non-recourse guidance line of credit from a bank for the acquisition of cash flowing single-family rentals in the Dallas area. I was able to show the bank that a liquid refinance market existed for this product in addition to the more obvious sale market. The guidance line from the bank was an alternative to the more typical bridge lending products on the market that offer non-recourse acquisition loans. The trade-off to get the much better bank pricing was lower leverage, around the 50% LTC level.
On my Pittsburgh assignment I was tasked with finding the most competitive sources of refinance loans for a $4.5 million portfolio of single-family rentals. Whereas most banks only offer fixed-rate loans for 5 years (maybe 7) and full or partial recourse loans, I was able to identify multiple lenders that could offer 10-year, fixed-rate, non-recourse loans for this portfolio of single-family rentals. The rate for these lenders is typically a bit higher than bank loans (5-6% vs. 4-5%), but the other terms that they can offer more than outweigh the higher cost. Banks, in general, are just not equipped to offer 10-year, fixed-rate, non-recourse loans, especially for this type of product and especially, as in the case of my deal, when there is a cash-out component to the refinance.
The financing market for single family rentals is fluid and evolving. With so much institutional money flowing through the asset class, borrowing costs continue to come down, and there’s more transparency on rent comps, sales comps, operating histories and the like. For help financing your next acquisition of a single-family rental portfolio or to refinance a portfolio that you already own, please contact MCA’s Senior Director, Justin Laub at email@example.com or visit our website – www.metcapital.com.
The author, Justin Laub, is a Senior Director in the Dallas office of Metropolitan Capital Advisors.