With the return of the housing market, we are also once again seeing more businesses willing to take on risks in the real estate market. Blackstone Group LP has been investing heavily in California and across the U.S. in the sales of bonds that are backed by rental-homes.
Investment strategies of this kind have been criticized in that it can lead lending practices that may not be particularly sound. Bonds backed by real estate or other property can go bad if transactions surrounding that property run into difficulties. And right now it has been banks that have been financing real estate ventures involving companies such as Blackstone.
There has been a trend of bundling assets into bonds in order to provide real estate investors the ability to purchase and rent out such properties. Such properties have seen gains of as much as 40 percent in certain regions throughout the country. However, due to rapid increases in the prices of such properties, these bond investments come with a number of hazards. For example, when prices go up and it's time to repay debt, rental owners may simply be unable to repay this debt - even through refinancing.
The success of such ventures is of course dependent on whether borrowers can repay their debt. Even if repayments are not timely, bondholders may have to wait longer for any return on what they've invested. Understanding the risk as opposed to possible awards of such a venture is therefore essential and that's where the counsel of experienced commercial debt lawyers can come in handy. These attorneys can reduce the risk of such investments, and also provide banks and businesses the confidence to pursue promising opportunities.
Source: Bloomberg, "Blackstone Lures Investors to Home-Rental Bonds: Credit Markets," Jody Shenn, Nov. 6, 2013