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Buy & Hold

Single Family Institutional Investor Industry Turns 10

A Look at the Evolution of the Industry and What to Expect in the Future By John Gordon In an issue of REI INK dedicated to the fix-and-hold single family rental business, it is appropriate to note that many of the institutional investors have or will celebrate their tenth anniversary this year. If we take a quick glance across the playing field, we see Invitation Homes, Progress Residential, Main Street Renewal and American Homes 4 Rent all passing or getting ready to pass the 10-year milestone. Fix-and-hold as a dominant strategy gained huge momentum in the market crash of 2008–2009. Just prior to that, it was popular and profitable to fix-and-flip. Then the crash. Investors could not flip for a profit. They were upside down on the property at its current market value. They still needed the property to generate cash, so they rented the home until they could sell it. Many discovered, almost by accident, what other investors knew. This fix-and-rent concept had merit. It stuck and it grew. I’ve been professionally involved in the industry in some fashion since first engaging Waypoint Homes in Oakland, CA in late 2011. But that was not the beginning. Associations, like National Real Estate Investors Association have been paying attention and thriving in this space since the 1970s. If the truth is told, the Single-Family fix-and-hold concept has been around for a long time, at least since the Middle Ages if one thinks about it. It could be argued that it’s the second oldest profession. Sales, of course, being the oldest. The Evolution of Fix-and-Hold Regardless of when the industry began, the last ten years have seen a genuine evolution in the fix-and-hold arena. Let’s peek at a few of the key elements of the industry that have evolved in a meaningful way. Funding and addressing the challenges presented by the sheer diversity of properties along with the geographic footprint of even the smallest portfolio have evolved as have the guiding principles for the business and the role of technology. Prior to the institutionalization of the business, funding investment activity was not easy. When I first engaged single-family investors to sell product, there were few, if any, banks willing to fund investors. Wall Street was not aware of the potential and “hard money lenders” were the dominant players. I cannot accurately opine about which institutions were first to the table with “Wall Street” money, but that infusion of cash and the abundance of distressed assets led to a frenzy in the marketplace. “Super Tuesday” no longer had electoral implications. It was an often raucous auction on the courthouse steps with bidders carrying briefcases filled with cash and or blank checks. It was an exciting time and, while a bit unruly or unorthodox, it was a crucial time for investors, the industry and the residential real estate market as a whole. “Toxic assets” became revenue producing portfolios. This infusion of institutional funds was critical to the evolution of the industry both in size and credibility as an asset class. Reality quickly set in. The investors discovered an entirely new set of monumental challenges. There was the diversity of floor plans. In a portfolio of thousands of homes, there were thousands of floor plans and layouts. No two were exactly alike. Additionally, the geographic footprint of a portfolio in a single market could be 400 square miles. With obstacles like this in as many as 15 to 20 different markets across the country, the challenge of efficiently renovating and renting the newly acquired assets loomed as a truly daunting task. It was immediately obvious that most of the disciplines from multi-family renovation and management were not helpful in the single family because of the diversity and geography of any given portfolio. To this add the element of competition and things get interesting very quickly. How do you address the challenges for the properties you currently own, and then how do you scale into other markets to capitalize on the opportunity and establish your company as dominant in the space? These challenges and the expectations from institutional investors forced the investors to define and support some guiding principles for their business. The Evolution of Guiding Principles How have the guiding principles of the industry evolved? Predictability and stability were basic expectations of the investors and the operators in the C-Suites and on the ground. The industry needed standardization as it was the key to addressing both expectations. The exceptionally large investors adopted what the small Mom and Pop investors already knew. Maximizing return on investment meant selecting and staying within a stable and affordable product mix and standardizing the renovation process. To do this, many turned to industry partners for help and support. At The Home Depot, product selection and the RenoWalk app, a highly customizable scoping tool, enabled strong partnerships. The RenoWalk concept was innovative and yet fundamental. It provided a way for a company to standardize the scoping process, the product, and price across multiple markets. It kept a running total of cost for product and labor and allowed the user to push an order for product directly to The Home Depot. GL Codes could be assigned to make as many connections as possible with the business at large. RenoWalk is still a critical component of process standards for companies of every size. As the RenoWalk concept caught on, investors wanted tools and technology solutions that incorporated more of their business and that was compatible with all internal operations. To accomplish this, many developed their own scoping and app solutions. There was also an evolution in how investors thought about product selection. The whole understanding of cost of acquisition vs. cost of ownership drove decision making to a greater and greater degree. In the beginning, first cost and fast access were the decision points. As companies started paying attention to turns and maintenance details, suddenly paying a bit more for a more durable product made sense. Additionally, for items that required routine

Perspective

The “Not So New” World

To Thrive Post-Pandemic, Build a Community of Willing Partners by John Gordon It seems impossible to engage in any current dialogue that does not turn to some aspect of COVID and the “new world” in which we all live. While there is no denying COVID and the profound impacts it has had on so many lives and businesses, I would like to share some thoughts about the “not so new” world in which we all now live and work. I began my career in the home improvement industry in 1980, starting in the lumber business. At that time, a new product called “wafer board” had hit the market. Any self-respecting and seasoned carpenter and salesperson knew that no product made from chips of wood could ever be a legitimate and structurally-sound building component. Well, how wrong we were. If you don’t know how the story ends, “wafer board” evolved—and today OSB (Oriented Strand Board, if lumber jargon is not your strong suit), is a building staple accepted and respected by all. Much has changed in the last 40 years. I have moved on from selling lumber to managing businesses and launching new markets, new concepts, and new technology. Even our world of real estate investing has undergone significant changes in just 15 years of its 61-year history. While COVID has been an agent of change for us all, there is one constant that underpins survival and success in both the best and worst of market conditions: strong partnerships. Oh, the irony. In a time when COVID has us isolated and socially distant when in public, the need for strong relationships with supplier partners continues to be key to success. Strong Partnerships Building on a foundation of strong partnerships is not just a great sound bite—here is what it looks like in practice. Price and value are table stakes. Value that differentiates is the stuff of strong partnerships. How will my business work to make some element of my customers’ business better? How can we integrate processes and solutions to save time and money? How can we leverage existing capabilities to solve new challenges? I trust that most of you have built strong connections with your partners. I am fortunate to have genuine partners in our industry and in others. As director of national accounts at The Home Depot, one of my responsibilities is supporting very large single-family property investors with product and service solutions. At any given time, my team works with customers who, in aggregate, touch almost half a million single-family homes and their occupants. Think of this. Taking care of the residents who occupy our properties and communities took a serious blow when maintenance techs were not able to get into homes for 30 or 60 days. Thanks to strong partnerships with our suppliers, investors/property managers were able to share “how to” content that walked residents through simple but urgent fixes during those months when technicians could not enter homes. This small act of reciprocity lessened our backlog and made it more manageable until homes could be entered again. Given today’s supply chain and transportation constraints, having a partner with the ability to assemble product in a single place and deliver it as a package when needed is a huge win. We turned many times to our internal business partners to leverage order aggregation and distribution solutions traditionally used in multi-family settings to solve problems for our single-family residence customers and their contractor networks. Similarly, industry partners whose traditional focus was assembly of products for our retail customers came to our rescue when additional capacity was needed. Now, in addition to assembling product for our stores they made property visits to complete pre-defined and routine activities. This was an existing partnership with a whole new spin. Bottom line: While there have been many new challenges and pressures, strong partnerships—both current and new—have proven to be a reliable element of success. The type of partnerships you will need to weather hard times will vary. Identifying and embracing technology partners helps to make most all other partnerships exponentially more effective. Personally, I could do without digital meeting platforms. But given the last year, I was forced to embrace the concept during stay-at-home orders. Using Technology as a Force Multiplier How can home renovation business entities utilize technology to partner together in a way that is mutually beneficial? It is difficult to build from scratch solutions within the tech world’s breakneck pace of innovation. Thankfully, The Home Depot has found ways to share information with existing systems and platforms that marry the best of both partners. Today, the RenoWalk app, launched in the investor marketplace over ten years ago is better than ever. It now accommodates the tracking of change orders, provides before and after pictures and tracks project status updates. RenoWalk has forms that allow for loading information directly to digital project management and procurement platforms. It supports investors and property managers with the ever-debated tenant responsibility and deposit tracking details. To make adoption easier, there are open API’s (data feeds) for integration with existing platforms.  Technology is a great enabler and force multiplier. When it is placed in the hands of the innovative and resilient people who run and support daily businesses operations, the outcome is success. The resiliency of the human spirit is not to be ignored or underestimated, especially in difficult times like the past year. Resilient people tend to be innovators when new solutions are needed—resilient employees are to be treasured. An engaged employee committed to taking care of your customer, despite hardships at home, can make or break your business. Your people need to know you will care for them in these difficult times. Taking Care of Your Team What have you done—what are you doing—to take care of your team and to reinforce their trust? How are you improving their lives as your business improves? This will be your most important partnership. Take care of them and they will take care of you

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