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Brian Russo has been a real estate investor in Florida for two decades. During the housing crisis, he bought dozens of distressed homes, which he turned into rentals. He paid cash for all of them. In today's market, cash is still king among investors because loans on investment properties are extremely expensive. Interest rates can be in the double digits, and qualifying for the loans is onerous. That is about to change.
B2R, a mortgage company owned by private equity giant Blackstone Group, just began offering a mortgage product for investors that requires absolutely nothing of the borrower, save a 20 percent down payment on the home. The loan is based entirely on the rental income of the property. Russo intends to use it to pull millions of dollars worth of cash out of the homes he already owns.
"We're sitting on $6 to $7 million worth of single-family (homes)," said Russo. "I'm going to use that money to buy more homes."
B2R's requirements are pretty simple: The investor must hold a minimum 20 percent equity in the property for a purchase, 25 percent for a refinance. The rental income of the property must exceed the owner's costs, including principal, interest, taxes and insurance (PITI), by 33 percent. In other words, if it were a regular, owner-occupant mortgage, it would be like a 67 percent debt-to-income ratio, but in this case, the income is all based on the property, not the borrower. The borrower needs to have a minimum 680 FICO credit score.
"We're not verifying any income [of the borrower]," said Matthew Weaver, a vice president at Finance of America Mortgage, another Blackstone company working with B2R.
The interest rate on the loan, which is 30-year fixed, will be between 6 and 8 percent, about twice the rate on a traditional mortgage for an owner-occupant, but far lower than the current cost of investor loans. Fannie Mae and Freddie Mac have limits on how many properties an investor can own. B2R will lend up to $750,000 per property, and there is no limit on how many properties an investor can own.
"Most investors are using cash because the financing is so difficult. Commercial lenders really have no appetite for them," said Russo. "Looking at the real estate market and the indicators, I'm comfortable with it. The rates are higher than traditional, but traditional really isn't an option."
By taking cash out of his current properties, Russo said he intends to create a portfolio of close to $20 million in rental properties.
"The buying power is significant," he added.
Florida is seeing very strong rental demand, as is much of the country, especially in single-family rentals. Millennials are waiting longer to purchase homes, and millions of previous homeowners who went through foreclosure are still trying to rebuild their credit, unable to buy again.
"I think it's a good niche product. It obviously meets a need," said Guy Cecala, CEO of Inside Mortgage Finance. "The questions I'd have would be that rents are, by historic standards, high now, and it's not that difficult to have the rent more than cover the mortgage and insurance. Historically though that hasn't always been the case, and rents fluctuate."
Weaver maintains that the math used in making these loans allows for a little bit of an adjustment in rent.
"What we're looking at is roughly about 33 percent higher in rent versus the PITI payments, so you can see that there's a little bit of a buffer there, in order to sustain any type of slight dip," he said.
The appeal is pretty clear to investors who bought at the low end of the housing dip and are sitting at nearly double or triple equity positions on their homes. They are seeing strong rental income, so they don't want to liquidate the properties, but they also don't want to ignore so much equity. The product would be less appealing to house flippers, as there are prepayment penalties.
For Blackstone, it's a high-yield product with relatively low risk. In just the two weeks since it launched Weaver says there has been considerable interest. The vast majority of that interest is from investors who want to do cash-out refinances on the homes they already own.
However, the one risk to the market, noted Cecala, is that if this product is so successful, other lenders will come in to compete.
"The question is, will others then start pushing the envelope?"
UPDATED: This story was updated to include the percentage of equity required in a property to refinance, and the requisite FICO score requirement.