Build-to-Rent in a Brave New World

Global Real Estate Services Combines Personal Services and Technology for Investing Success from Start to Finish By Carole Vansickle Ellis Mike McMullen, founder and CEO of Birmingham-based Global Real Estate Services, started investing in real estate in 2002 at the behest of his accountant. “He asked me why I had so much money in the stock market when I knew nothing about it and suggested I work in what I know: real estate,” McMullen laughed. “So I started buying and managing investment properties.” While the humble beginnings of Global Real Estate Services, a family of companies that today covers all aspects of single-family residential real estate investing from building to renting to selling, sound relatively simple, McMullen’s operation did not stay simple or small for long. “When I got started, I was working with my wife on our own properties, but we eventually opened a rental management company, started selling to investors, and used the same formula we had used personally to build all of the companies in the Global Real Estate Services family,” McMullen explained. “We are the original build-to-rent company. We have been building a build-to-rent machine for nearly two decades at this point.” Global Real Estate Services consists of three companies: Prominence Homes, which specializes in “build-to-rent” single-family homes that both individual and institutional investors purchase as long-term rentals, America’s Rental Managers, which operates throughout the southeast and manages more than 1,500 doors for more than 1,000 real estate investors, and Mike McMullen & Associates, a real estate brokerage with clients in 24 states and across 17 countries. Despite its size, the company maintains a highly personalized relationship with every client. “We treat every property as if it is our own, so when you become a client, you are coming into a family,” McMullen explained. “We are very intent on listening to what the goals of the investor really are.” That close attention to investor goals has paid off, with some of McMullen’s earlier clients already achieving goals like retirement in their early 60s. “All they do is travel all the time and count their money – and that was their goal,” McMullen said proudly. “They wanted to be in a position to really enjoy retirement, and it was fun to be a part of that and know we helped make it happen.” A Southern Approach to Real Estate Perhaps one of the first things investors learn from McMullen about his operations is that he is intensely proud of his southern company and its southern heritage. Global Real Estate Services was founded in Birmingham, Alabama, and is actively building, acquiring, managing, and selling properties throughout the highly attractive southeastern region of the country. It is more than just location for McMullen, however. His “southern company” is a way of doing business. “We will travel the world for our investors,” he said, noting that he has flown more than 3 million miles in order to meet investors face-to-face and make sure he understands their financial goals. “We are southern people, so we want to see who you are. We want to enjoy working with you and for you to enjoy working with us,” he said. That determination to keep interactions personal was challenged in 2020 during the COVID-19 pandemic when many businesses like McMullen’s drew back, laid off workers, and did their best to take things “virtual” as the world shut down. McMullen, typically, went in the opposite direction with the full support of his executive team: Terri Nava, COO of America’s Rental Managers, Misty Glass, CFO of Prominence Homes, and Scott Underwood, chief development officer for Prominence Homes. “I pointed out to them we have never won by following what everybody else is doing and we decided to not change one thing [from a production standpoint],” McMullen said proudly. “We increased production 50 percent. We never changed our hours, and we never laid people off. It kept us all sane.” While Global Real Estate Services was willing to meet remotely with clients who wished to do so, no one who wanted a face-to-face meeting with McMullen was denied. That dedication and clarity of purpose paid off, and McMullen and his partners invested in a private jet so the team could travel without uncertainty about flights, changeable health policies, and the increasingly controversial hygiene theater that was taking over the country at that time. “It was a great decision because it enabled us to go into three more markets much more quickly than would have otherwise been possible because now I can get to those markets in a matter of 45 minutes on the plane. Everything comes with opportunity,” McMullen said. He added proudly, “Because we remained open and doubled down, we were able to meet client needs in terms of inventory and services while providing stability to our employees. There was no confusion or uncertainty about our companies. We were open and ready to meet investor needs. People always need a place to live – even in a pandemic.” Seizing Opportunities with Nerves of Steel One of the most important characteristics of the entire Global Real Estate Services family is a willingness to identify opportunities and then act expeditiously and decisively. In the wake of the housing crash in the mid-2000s, McMullen and Glass, who is his sister in addition to co-heading up Prominence Homes, began actively accumulating land. This enabled the company to ultimately get a huge head start on the build-to-rent trend – “We were build-to-rent before it even existed,” McMullen likes to say – and has also given them a huge advantage in today’s land-starved market. “We have a whole division headed by Scott Underwood, the third principal in Prominence Homes, dedicated to going out and finding land, so we are able to have between 200 and 400 lots in front of us every month,” McMCullen said. Glass noted that even as acquiring land has become more difficult, the company’s established relationships with bankers, developers, and other real estate and finance professionals enables

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Build-to-Rent Turns Stress Into Success

Average Risk-Adjusted Annual Return for BTR Investments Now about 8% By Greg Godderidge Prior to the COVID-19 pandemic, the build-to-rent (BTR) model was quietly gaining ground across the country, fueled by a shortage of housing supply and increasing demand for single-family rentals (SFR). Still, it was not on the radar for most SFR investors. However, as the pandemic exacerbated the supply and demand imbalance throughout 2020 and 2021, the BTR market crossed into the mainstream. What Makes the Build-to-Rent Model Successful? While home ownership is at an all-time low, according to Harvard University, single-family home rentals are booming. More than a third (39%) of all rental properties in the United States are single-family homes – the highest percentage since 1965. The majority of this demand is driven by the millennial generation. According to the U.S. Census Bureau, approximately 65% of Americans under the age of 35 are renters. However, multifamily rentals in urban centers are losing favor with the millennial generation as the desire for more space to raise a family and work from home have shifted the preference to suburban single-family homes. The demand for single-family rentals to accommodate the lifestyle of modern millennial families has driven a new niche market: luxury single-family rental communities with amenities like pools, fitness centers, playgrounds and walking trails. Build-to-rent communities are on the rise to meet the surging demand. According to Census Bureau data, the number of single-family build-to-rent (SFBTR) construction starts set a new record during the third quarter of 2021. Over the past four quarters, 47,000 such SFBTR homes began construction, up more than 17% and over the 40,000 estimated SFBTR starts for the preceding four quarters. That figure doesn’t include single-family homes built for the purpose of selling to a SFR rental operator which some have estimated could be as high as an additional 30,000 homes.  Nonetheless, this surge in supply is not enough to satisfy demand for single family rental homes. While there are about 16 million SFR properties in the United States, another 13 million rental households are expected to be formed by 2030, according to the Urban Institute. An Obstacle Course for Developers Unfortunately, the BTR industry has not been immune to the challenges disrupting the rest of the real estate market. A confluence of factors from supply chain disruptions to labor shortages have made construction more difficult and more expensive over the past year. Not to mention, there is a shortage of available land in desirable areas for large communities to be built. First, developers must navigate the choppy waters of local government zoning and permitting. Next, they are up against major competition to acquire sizable tracts of land for BTR projects. According to market research firm Hunter Housing Economics, a site that is well-suited for a build-to-rent community will spark a bidding war of upwards of 10 and 25 offers. The hurdles don’t stop coming once they have buildable land. Transportation delays and port-capacity limits have throttled the flow of critical building materials such as paint, window units, garage doors, and appliances. Even individual shortages can upend entire construction schedules. The Wall Street Journal reports that freezing weather and power outages in Texas last year led to a critical shortage of resin which is used in many home-building products, sending ripples through the construction industry. On top of these disruptions, there is a persistent shortage of workers with the skills to build homes. The National Association of Home Builders (NAHB) estimates that there are 400,000 job openings in construction and that the industry as a whole needs to add 740,000 workers a year just to make up for retirements and the industry’s growth. Supply chain kinks and the lack of labor mean missed deadlines and higher costs. The housing-market research firm Zonda recently reported that about 90% of the home builders they surveyed were experiencing supply disruptions. That’s up from 75% of those surveyed in January 2021. As a consequence, construction timelines for many projects are increasing from the typical 8 months, and that can drive borrowing costs higher which can decrease profitability. The Federal Reserve Bank forecasts a slow easing of supply chain constraints in 2022 that should help home builders get back on schedule. In the meantime, Robert Dietz, the chief economist at NAHB forecasts that all single-family-home starts will grow by just 1% this year compared to 13% growth in 2020 and the 9% growth in 2021. An Optimistic View for the Future Despite the setbacks caused by pandemic-related disruptions to the build process, there are many reasons to expect long term growth and stability in the BTR market. Multiple trends are converging to drive and sustain demand for the foreseeable future. The housing shortage is expected to persist for years to come—especially for affordable homes—forcing SFR investors to create their own supply. According to Realtor.com, the gap between single-family home constructions and household formations grew from 3.84 million homes at the beginning of 2019 to 5.24 million homes as of June 2021. Demand for rentals will remain high from Millennials and the emerging Gen Z population. Student loan debt and lack of savings coupled with increasingly high home prices have meant many Millennials — even high earners — are priced out of the homebuyer market in many areas. Others simply prefer the financial and lifestyle flexibility that comes with renting. Money is flowing into the BTR market. Single-family homes built to rent are delivering strong returns to investors—the Wall Street Journal reported that average risk-adjusted annual return for built-to-rent investments is now about 8%. The bottom line is that unprecedented demand has turned SFRs and BTRs into attractive opportunity for investors with the ability to securitize thousands of disparate rental properties into high cash-flow producing assets. While developers may be stressed with the confluence of challenges thrown their way throughout the building process, they are rewarded with huge success in the end.

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Buying a Home at Auction

Auction is Ray of Hope for Homebuyers Frustrated by Tight Housing Market By Miriam Moore In a market where bidding wars and soaring home prices have become the status quo, consumers — especially 25- to 40-year-old buyers — are embracing a broader range of homebuying options. Specifically, three out of four millennials and a majority of consumers across generations told ServiceLink through a recent consumer survey that they would consider buying a home at auction. And why not? The end of foreclosure moratoriums is expected to send many more homes to auction in 2022, bolstering inventory and offering consumers greater choice. Plus, those familiar with the process of buying at auction know it often results in cost and time savings. And finally, the move from in-person to virtual, well, everything since the COVID-19 pandemic began has made people more comfortable with the idea of buying a property sight unseen through digital means. It’s not at all surprising that homebuyers are expanding their field of play to the (virtual) courthouse steps. Following are some important takeaways from the Harris Poll survey commissioned by ServiceLink in the fourth quarter of 2021, which asked 3,000 U.S. consumers to share their insights into buying a home at auction and what they foresaw at that time for the 2022 real estate market. 75% of millennials would consider buying a home at auction — and they’re not the only ones Consumers across generations are warming to the idea of buying a home at auction, although at a different pace. The willingness of baby boomers (ages 57-75) to consider the auction option — 54% said they would — is much lower than their younger counterparts: millennials (ages 25-40), at 75%; Gen Zers (ages 18-24), at 66%; and Gen Xers (ages 41-56), at 65%. The fact that more than one in five millennials (21%) have already bought a home at auction demonstrates that they are beginning to put their money where their mouths are. Thirteen percent of the emerging Gen Z generation report that they have purchased homes at auction, more than twice the incidence of the older Gen X (6%) and baby boomer (4%) generations. The wide discrepancy between younger and older buyers’ acceptance of auction may reflect its evolving image. When baby boomers were buying their first homes, auction was often viewed as a solution for quickly disposing of distressed properties. Younger generations are seeing auction in a new light: Yes, distressed properties are part of it, but more often than not, homes are being sold at auction because the seller likes the idea of getting cash in hand quickly and avoiding long-term carrying costs. Price, speed and digital bidding tools fuel consumer enthusiasm Turns out speed and cost are also big motivators among buyers. Throw the digital aspect of today’s auction into the mix, and it becomes an extremely attractive option for younger generations as well as anyone else concerned with limiting their face-to-face exposure during the home-buying process. Seventy percent of survey respondents said that potential cost savings would motivate them to buy a home at auction; 57% said the same of a faster homebuying process. And more than half (55%) of millennials and 42% of consumers overall said the ability to bid online would motivate them to buy a home at auction. Remote bidding tools can make auctions more accessible, as travel is not necessary for participation. On the flip side, consumers shared some concerns about buying at auction. Not being able to see the home in-person prior to buying (66%) and not being able to get a professional inspection (62%) are factors that would stop them from buying at auction. Consumers are split on the 2022 market outlook It’s interesting to note what consumers expect to see in the housing market this year. Not quite half of those surveyed (45%) said they look for home prices to continue increasing in 2022; if the other 55% are in the market to buy, they may be unpleasantly surprised, as most of us in the industry look for continued, albeit slower, home-price growth. Freddie Mac’s October 15, 2021 quarterly forecast calls for a 2022 increase of 7%, compared with 16.9% in 2021. On the auction front, 39% of respondents expect an increase in foreclosed homes available for purchase in 2022. Again, while few sources have committed to actual numbers, there is widespread acknowledgment in the industry that the expiration of the CDC eviction moratorium, as well as state moratoriums, will push more homes to auction. As the ServiceLink research indicates, homebuyers will be prepared to pounce on those new opportunities. The door is open for lenders to provide education As more than a fourth (28%) of respondents were unaware that they had the option of buying a home at auction, lenders should recognize and leverage the opportunity to connect with homebuyers through auction education. They can not only make more buyers aware that auction is a viable option, but also offer more in-depth information about its benefits and drawbacks for those entertaining the idea of buying a home at auction. For example, lenders might share information and insights into: >          Where homebuyers can go to see home auction listings >          How buying at auction may save them time and money >          How some auctions require cash rather than financing >          The risks involved in buying a home without a professional inspection and/or sight unseen >          The importance of checking for liens and claims before bidding As the idea of buying a property at auction becomes more mainstream, we can expect to see more and more consumer activity in the auction space. There is great potential for homebuyers to fulfill their dreams of homeownership through auction, even in the midst of intense competition. That’s great news for the coming months as well as the future, as the real estate market continues evolving to meet the needs of emerging generations.

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The Buzz Behind Build-to-Rent

Analyzing the Differences Between BTR and SFR By Michael Cook Build-to-Rent (BTR)’s breakthrough in the Single-Family Rental (SFR) asset class is officially old news. In 2018, Toll Brothers teamed up with BB Living to create one of the first builder/operator partnerships. Other homebuilders quickly followed, developing their own line of BTR products by either creating their own property management division or partnering with established operators to manage a steady flow of homes built specifically for rental. Even one of the leading brokers in the SFR space jumped on the bandwagon, raising a $1 billion BTR fund. The Wall Street Journal predicted the number of BTRs built annually would double by 2024. If Institutions Are All In, Is There Room for Smaller Players? Of course. Just like traditional SFR, smaller players need to find opportunities to get into the game where larger institutions either cannot or choose not to play. The big guys are focusing on deals where they can put large amounts of capital to work, so they tend to avoid these three areas of opportunity: 1.         Tertiary markets that lack strong home price appreciation metrics or solid gross yields; 2.         Smaller developments (sub 100 lots); and 3.         Challenging municipalities. How Far is Too Far? While tertiary markets generally fall outside of the top 20 on most investment lists, they often provide solid returns for local players with deeper on-the-ground knowledge of the market. From start to finish, even modest BTR projects will take years to develop. So, when considering these markets, focus on either gross yield or appreciation (if a market had both it would be a top 20 market). Regardless of the market, focus on the long-term fundamentals. Job growth, path of development, supply of housing, and proximity to retail or local demand drivers should be chief considerations. Bigger Isn’t Always Better Smaller developments lack the economies of scale required for larger players and are thought to be more trouble than they are worth. As such, these types of projects represent an excellent opportunity for smaller players to stake their claim in the space. Whether targeting individual infield lots or communities with under 100 lots, both represent areas of opportunity. Importantly, bring a large-scale mentality to the small-scale project. Where possible, utilize the same local builder. Minimize the number of floor plans and designs. Lock in material costs early. Build the perfect BTR home over and over again to offset some of the disadvantages of smaller scale. Embrace the Challenge Each municipality offers its own set of challenges. Some make it easy to build, some make it hard, and then others make it their very own special version of hell. Larger players typically avoid the hard ones and almost everyone but the locals avoid the hellish ones. While not for the faint of heart (or light of pockets), the biggest challenge in these markets lies in simply getting the approval to build the community and then the homes constructed. A strong ground game pays dividends in these markets. Sweat equity, networking, and simply camping out in the city planning office can be a good starting point. You may also consider partnering with a local partner with a proven track record of completing and exiting transactions. To be sure that you are covered, do not forget to increase contingencies and model six to twelve months more than you would on a normal deal. Ok, But Is It All Worth It? Every market has local players that have been making a living off of development for years. BTR requires a special skill set that combines the complexity of homebuilding with the expertise of a long-term property manager. Let’s look at the numbers to better understand the appeal of BTR for smaller players. The most obvious benefit is in the significantly lower operating costs of BTR. As noted above, with warranties in place, first year operating costs should be close to $0. Over a five-year hold period, our experience over 500+ homes suggests operating costs averaging $1,000 per year. That compares favorably to traditional SFR, where the costs over a five-year hold period can range anywhere from $2,000-$5,000 depending on the upfront renovation plan and the age of the traditional SFR home. Assuming a 5.5% cap rate, the maintenance benefit represents a value of ~$18k ($2,000-$1,000)/5.5%). So, an investor willing to pay $225k for a BTR home should only pay $207k for a fully renovated traditional SFR with similar specs, and much less for a similar size older home with minimal renovations. This operating cost difference is driven by the fact that you cannot renovate everything profitably. The potential for plumbing issues or foundation repairs, as an example, grow exponentially as the home ages. But, any preemptive fix generates exactly $0 in increased rent and an uncertain amount of cost avoidance. Traditional SFR investors need to balance cosmetic renovations that contribute to higher rent and fewer days on market with cost saving renovations to structural items (roof, foundation, electrical, etc.) that provide smaller upfront benefits. New Home Smell Premium BTR homes command higher rents than traditional SFR. Renters have shown that they value a perfect home more than they value even a nicely renovated home. The rental stock in many areas, even renovated, will likely have inferior appeal. Whether it is funky layouts, smaller bathrooms, or fewer electrical sockets, homes built pre-2000 were not designed for the way we live today. The premiums vary and decline over time. The first renter in a new home will likely pay a 5-10% premium, while subsequent renters will pay 2-5%. For BTR communities, that premium can get up to 20%, but it still declines over time. For simple math, let’s assume a 5.5% cap rate again and a 5% rent premium on an average rent of $1600. Assuming a new home rents for 5% more or approximately $1680, you would take $80 per month straight down to the bottom line. In total value, you would see an additional ~$17,500 ($80 x 12 /

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