Betting the Rent

Illustration by Laura Cattaneo

In the wake of 2008, it seemed like housing-based financial products had a reputation too tarred to ever make a comeback. Nope! Last fall, Blackstone Group became the first to pool rent checks (instead of mortgages) to pay off a new kind of securitized bond. One recent analysis suggested that the finance industry will do $5 billion worth of such deals this year. Here’s how it works.

1. Spot the Opportunity
The number of new-renter households has grown ten times faster than new-owner households since 2005, and rental-vacancy rates have reached a twelve-year low. Builders are still holding back, and many young households find themselves unable to pony up for a mortgage.

2. Get a Cut-Rate Loan
The magic of securitization—pooling debt—means hedge funds and private-equity firms can get dirt-cheap financing. Blackstone, a surer bet than the average family, took on about half as much debt as individual buyers would have had to in order to acquire the same homes.

3. Do Some Location Scouting
Firms look to buy cheap, and in bulk, in areas hit hardest by the collapse in home prices, typically in the South, Midwest, and Southwest. They’ll send small armies of bidders to go to foreclosure auctions, canvas local Realtors, and approach banks with vacant properties after defaults.

4. Become a Contractor/Super
The moneymen need local operators to renovate, maintain, and put tenants into their properties. To do that, Blackstone created a subsidiary, Invitation Homes. The firm has “hotel style” service for tenants and negotiates bulk-buying deals with Home Depot and G.E.

5. Find Some Tenants
A spokesman for one hedge fund said that in a little over three years, the firm hopes to boost the occupancy rate in its rentals from 75 to 95 percent. Landlords are also quick to evict and replace delinquent tenants, meaning that rental-backed bonds, unlike mortgage-backed ones, aren’t as dependent on the reliability of cash-strapped residents.

6. Trust Us
Blackstone insists the 3,207 rentals backing its $479 million bond are safer than the shoddy mortgages behind the last mania. But Fed economists have raised the concern that should investors get spooked and pull out, the market would be flooded with homes nobody wants.

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Betting the Rent