Los Angeles Real Estate Investors
The Los Angeles rental market is one of the best in the United States – if you are an income property investor particularly in high demand areas such as Beverly Hills, Hollywood Hills, Sunset Strip and West Hollywood. Vacancy rates are low, potential tenants are often over qualified and rents continue to increase due to the low supply. Even in this investor’s dream of a real estate market, investors have been handicapped over the last several years. There just hasn’t been enough financing to go around. Traditional lenders consider investment properties to be high risk loans.
Fortunately for established Los Angeles real estate investors, private-equity firms are not scared and view this as an opportunity to fill a untapped market space. From my perspective, when you see what I call “smart money” jump into any market, it typically means that sector is going to perform strong with solid returns.
According to a recent article in the Wall Street Journal, private equity firms are targeting established real estate investors who would normally purchase Los Angeles luxury homes that are now interested in acquiring relatively low-scale properties to use as income properties. Two private-equity firms featured prominently in the WSJ article: B2R Finance and FirstKey. Both firms were launched as a direct response to the demand from investors for financing – as well as the private equity firms’ desire to broaden their positions in the investment property market.
B2R Finance is a division of the Blackstone Group. It originates mortgages between $500,000 to $50 million for investors that own and rent at least five properties.
FirstKey Lending is willing to offer investors mortgages from $1 million to $5 million.
These loans are in many ways superior to traditional loans provided by established lenders as far as investment is concerned.
- There is no limit on the amount of properties covered under a single mortgage. That is in stark contrast to Freddie Mac and Fannie Mae loans that impose a limit of a single property.
- Loan approval is generally easier. Private-equity firms focus on the financial health of the properties, cash flow and how the housing market is trending. It’s less about credit scores and more about a good investment.
- Closing costs are typically lower, and the time to close is typically shorter.
These loans do come with some drawbacks that can trip up inexperienced investors.
- Private equity firms generally require that investors have 25% to 30% equity in their asset pool.
- Interest rates are a little bit higher at 6% to 8%.
- There is a requirement that investors have at least five income-producing properties before applying for a loan through a private-equity firm.
- Loans from private-equity firms are balloon loans. Borrowers typically have just five to ten years to repay a loan before the balloon clause kicks in and the remaining balance comes due.
Even with these drawbacks, investment loans through private-equity firms are an excellent option for investors in a financing-starved market. This is especially true in a city like Los Angeles where, whether you’re investing in Los Angeles luxury homes or the average house for sale in LA, the price of real estate is going up, rents are going up and this doesn’t look like it is going to change in near future.
Susan Andrews | Estates Director
BRE License #01425843
Susan Andrews is your ultimate real estate source for Los Angeles, California and surrounding communities.