Wall Street Is My Landlord

Private Equity's Instant Rental Empire


After the housing bubble popped, millions of Americans lost their homes as property values plunged. Many saw this as a tragedy. Some big investors saw it as an opportunity. Private-equity firms led by Blackstone quickly bought tens of thousands of homes at deep discounts, most of them out of foreclosure. They converted the properties into single-family rentals, taking advantage of another opportunity — the ready market for rentals among the many Americans no longer able  to buy  homes because of the recession or tighter mortgage rules. Real estate investment trusts, private-equity firms and hedge funds have spent at least $25 billion purchasing more than 150,000 houses since 2012, by one count. This flood of money has upended a rental industry traditionally dominated by mom-and-pop owners, and introduced institutional investors around the world to an untapped asset class. Blackstone went on to invent a new version of the money machine that fed the homeownership bubble. Communities across the U.S., still recovering from a housing crisis fueled by Wall Street speculation, were left to assess how they’ll fare with out-of-town money managers as their most powerful landlords.

The Situation

In 2014, Blackstone said it thought the big wave of house purchases by institutional investors had passed as the market recovered and bargains became harder to find. But in February 2015, Cerberus, the private-equity firm, entered the field by buying Five Ten Capital, a rental business with more than 1,500 houses. Four months later Cerberus bought another 4.200 homes. The move was part of a broader consolidation in the field, as smaller operators cashed out. The key for the big players is cheap capital, made possible by a new kind of bond that Blackstone dreamed up. It’s a rental-market twist on the mortgage-backed securities that made so much money for Wall Street before blowing up. Instead of pooling mortgage payments and selling slices of that revenue stream to investors, bondholders are paid out of the combined rental checks of designated properties. Moody’s rated the biggest portion of the Blackstone’s first bond AAA and Blackstone was able to borrow $479 million at 1.9 percent, less than half of the typical 30-year mortgage rate. The money covered most of what the company had spent buying and fixing up the houses, which had already risen 18 percent in value. The deal was so attractive that other companies quickly followed suit.

Source: Deutsche Bank Securities
Source: Deutsche Bank Securities

The Background

Blackstone built its rental-home business with an advantage few if any other buyers could match: a $3.6 billion credit line. Its Invitation Homes subsidiary quickly became the largest single-family home landlord in the U.S., with 41,000 properties. Altogether, hedge funds, private-equity firms and real estate investment trusts have raised about $20 billion to purchase as many as 200,000 homes to rent. The buying — often by employees who brought stacks of certified checks to foreclosure auctions on courthouse steps — helped turned down-and-out markets such as Arizona, California, Florida and Georgia into booming ones as the firms outbid local investors and drained markets of foreclosures. As bargains disappeared from one place, they rapidly moved on to the next.  The impact of their purchases was magnified by the fact that the firms often target the same sorts of properties in the same neighborhoods.

Source: U.S. Census Bureau, data compiled by Bloomberg
Source: U.S. Census Bureau, data compiled by Bloomberg

The Argument

The firms clearly played a role in lifting property values, and in many cases they are removing blight by fixing damaged, vacant houses and filling them with tenants. But individuals and smaller investors complain that these outsiders paying cash have sucked up the best bargains. And while the firms have hired thousands of workers to maintain the properties, they face a bigger logistical challenge than the owner of an apartment complex, and some tenants report poor service. Housing advocates have called for federal intervention: They complain that lower-income home buyers are being shut out of the market, worry that the need for big profits will push up rents and are skeptical that the return of the real estate money machine will end well. “The last time Wall Street devised a plan to  make mountains of money off our homes it ended catastrophically,” the Atlanta branch of the American Friends Service Committee said on its blog after a protest at a foreclosure auction that was dominated by private-equity bidders. Economists at the Federal Reserve have noted the same potential for danger.


The Reference Shelf

  • “The Big Rent,” a series of Bloomberg News articles
  • Bloomberg Visual Data charts examine private equity’s impact on the Greater Phoenix rental market and Blackstone’s funding strategy.
  • A Federal Reserve paper in December examined the rise of business investors in the rental-home market.
  • A Fannie Mae report examining the rapid growth of single-family rentals.
  • A Census Bureau survey found rental vacancies down and rents up between 2009 and 2011.
  • The Center for Housing Policy’s review of research into the rental market.

First Published Dec. 23, 2013

To contact the writer of this QuickTake:

Prashant Gopal in Boston at pgopal2@bloomberg.net

To contact the editor responsible for this QuickTake:

John O'Neil at joneil18@bloomberg.net