By Duke Dennis
Would you like a quick and easy way to finance the acquisition of multiple single-family residential properties for a personal investment portfolio or to sell to a big institution? Did you know institutions like Starwood Capital, Blackstone, and other Wall Street firms have been purchasing single-family homes in droves for the last several years and renting them out? The demand for such a business plan has resulted in capital providers coming out of the woodwork to fund such needs.
So how did we get to the point where aggregating portfolios of homes became a viable business plan? During the “Great Recession,” many individuals and families had their house foreclosed. One of the main factors that go into buying versus renting a home is the ability to come up with a down-payment. As the recession continued, individuals and families with personal liquidity constraints and a desire to live in a home would start seeking rental houses as opposed to buying a home or renting an apartment. This way, the family could still have the experience of living in a home without needing the down payment to do so.
Wall Street and other smart money recognized these dynamics and began to act by buying numerous amounts of homes at deep discounts from lenders at auction. Players in this market include:
- U.S. Colony Starwood Homes
- American Homes 4 Rent
- Invitation Homes
- Progress Residential
- American Residential Properties
- Silver Bay Realty
- Main Street Renewal
- AHV Communities LLC
The business plan of renting out single-family homes is not new. A lot of Mom & Pop operators have used this thesis for years; however, now large institutions are not only using their size and scale, but also macroeconomic trends and events to break into the space. Given the institution’s size and ability to pay “all-cash” historically gave them the upper hand when competing for these properties at auction. However, with the help of new capital sources, Mom & Pop outfits and individuals have been able to bid and close just as fast as the institutions at auction. This is allowing smaller and more entrepreneurial firms to aggregate pools of 10 – 50 homes at a time and then sell these portfolios directly to the large institutions.
Who are these capital sources? The answer…debt funds and private lenders.
These lenders will extend the following range of terms:
- Stabilized & Bridge Acquisitions
- Line of Credit up to 75% – 80% LTV
- $500,000 – $100,000,000
- Interest Rates 5% – 12%
- Interest-Only Primary Term, followed by 25 & 30-year amortization for Extensions
- 6 month to 3-year Primary Terms
- 0 – 1% Origination Fees
- Recourse & Non-Recourse Options Available
- Minimum DSCR 1.25x
- Quick Closings!
The advent of debt funds and private lenders have allowed smaller, more entrepreneurial real estate companies to acquire and aggregate portfolios of homes and compete at auction with the larger institutions. This was a positive for the capital markets and residential home markets as it took foreclosed properties off the books of lenders and put capital to work.
The author, Duke Dennis, is a Senior Director in the Denver office of Metropolitan Capital Advisors. To learn more about single-family portfolio acquisitions and how your project can be financed, Duke can be reached at [email protected] (720) 527-8173.
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