Who is the biggest investor in single-family rental properties in America? Forget the real estate gurus and the big names like Donald Trump, because the answer is neither a person nor even a corporation, but private-equity giant Blackstone Group LP.
Blackstone has spent over $1 billion since the beginning of the year purchasing over 6,500 foreclosed properties, and is in the process of finalizing a loan from Deutsche Bank for another $300 million to buy more. And while Blackstone may be the largest, they are far from the only private-equity firm buying up foreclosures to repair, lease out and eventually sell; additional firms buying up foreclosures by the thousands include Colony Capital LLC, Oaktree Capital Group LLC and KKR & Co. Analysts estimate that private-equity firms and other large-scale investors have raised between $6-8 billion for mass foreclosure purchases, to take advantage of low prices, strong and rising rents, and appreciating values as markets nationwide climb upward again.
This is mixed news for real estate markets nationwide. While it will buoy markets by removing much of the excess supply caused by foreclosures, these massive private-equity firms may muscle out the largely mom-and-pop competition, who currently buy the majority of foreclosed homes.
For all the money being raised and invested, there is also no assurance that it will generate a return on the private-equity firms’ investment. While the firms hope to take advantage of large, bargain-priced bundles of properties from foreclosing lenders, most of the properties must still be individually renovated, rented and eventually sold, which makes it difficult to create an economy of scale.
Real estate is, of course, fundamentally local, and poses a challenge for large-scale equity firms as it requires local property management and servicing. Many of the firms are responding by partnering with local property management companies to repair, lease and manage the investment properties. Blackstone, for example, has partnered with a Tempe-based property management company and a Dallas-based company to form Invitation Homes, a joint venture to manage the Southwestern rental properties in Blackstone’s portfolio.
Still, Blackstone closed a $13.3 billion property fund last month, and as they continue buying and leasing out homes, a spokesman for the firm reports they expect a 6-7% return from the rental income. Though Blackstone typically promises a higher return on investment to their investors, they hope that rising rents, and rising real estate prices, will eventually create the double-digit return on investment that they promise their investors.
Additionally these rental properties are tangible assets that firms like Blackstone can leverage by borrowing against – which is exactly how Blackstone is achieving their $300 million loan from Deutsche Bank.