Perspective

The Evolution of the Single-Family House Space

• by RJ Palano
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The new asset class on Wall Street is single-family homes, with a new focus on build-to-rent communities. In 1979, I purchased my first single-family investment property. It was located in Williamsville, New York, and I paid $23,200 for it at a mortgage foreclosure. After investing slightly more than $10,000 to renovate it, I sold it for $57,000, netting a profit of $20,000. That deal changed my life. I’ve been involved in more than 3,000 transactions across 12 states and 50 cities since then. According to Zillow, that first house in Williamsville sold for $289,900 on Sept. 24, 2017. That is exactly why we all invest in real estate, particularly single-family homes. One of my early mentors, Chuck Gorrow, told me that he wishes he’d kept every house he bought rather than selling them. It should be obvious that a rental portfolio can replace your job income, and eventually you can choose to work. And that’s what I did. I acquired houses one at a time at foreclosures, from distressed owners or off the multiple listing service (MLS). Times Have Changed The single-family housing business used to be relegated to mom and pops. The more sophisticated real estate investors would acquire apartments and commercial space. Well, we all know that isn’t the case anymore. The new asset class on Wall Street is single-family homes, with a new focus on build-to-rent (B2R) communities. The reality is that the hedge funds, family office and entrepreneurs resurrected the single-family housing business when they entered this space around 2012. At that time, mortgage foreclosures were prolific, and the entrance of these large, well-capitalized companies helped absorb massive amounts of defaulted properties. This stabilized communities, cities and regions of the country. It clearly expedited the resurgence of the U.S. economy through massive investment of time, materials and laborers to fix and rehab these properties and make them available for rent or sale. Everyone started to make money from realtors, mortgage brokers, lenders, laborers of all kind, appraisal companies, home inspection companies, property managers, materials providers as well as the entrepreneurs and the hedge funds themselves. These were good times. A lot of money was made and invested back into local communities. All this activity made it very difficult to find and keep good laborers. Laborers of all kinds were able to achieve higher wages as a result of the strong demand for services. The tremendous shortage of skilled labor is still a problem in the U.S. Because of that challenge, we hear often about the need to make businesses more efficient. Technology has leveled the playing field for all of us at one level or another. There is an application for almost everything. Technology allows us to access more information to make informed decisions faster than we could in the past. And I’ve got news, the speed of information will continue to increase, allowing all your competitors to get the same information as fast as you get it. Thus, the ability to make fast decisions and take action is more important than ever. The Problem Starting in 2009, U.S. single-family house investors acquired distressed and foreclosed properties to create single-family home rental portfolios at record rates. Today, distressed and foreclosed properties comprise only 2% of the residential real estate market. Seven years ago, I had a team of five people looking at auction houses in eight counties in the Atlanta metro area. We would purchase 8-22 houses each month. I can still remember how I would look at up to 55 houses a day, five days a week before auction. It was a lot of work, but I loved it and we did quite well. Once we rehabbed the property and placed a tenant, we would sell within weeks to overseas investors or hedge funds for cash. It was the best of times, because our cash was recycled every 60-75 days. I’ve never experienced anything like that. In the end, we bought, sold and managed more than 1,000 houses in a six-year period. Something very interesting also happened at this time: I acquired hundreds of lots. Hey, I was never a “lot” buyer because lots don’t pay rent. What I observed was an incredible opportunity to stockpile lots and wait for the market to turn. It didn’t take long! I sold one community undeveloped in Douglasville, Georgia, to DR Horton. I had 78 lots in the second phase of a community. Since that time, they’ve completed the community. I also contracted with a builder to build eight houses in a community in Fairburn, Georgia, that I had pre-sold to Australian inventors who had pre-sold to Chinese investors. At that same time, I had 56 lots in the subdivision of Regency Park in Hiram, Georgia. This was my second B2R community to be built out. The beauty of the transaction was in the details and the outcome. I did a joint venture with an experienced builder on B2R properties. The Paxis Group, led by John Wojtas, built 52 of the houses that we had pre-sold to Jay Byce, who was involved with American Residential at that time. Due to the quality of the builder and the buyer, we went from start to finish on 52 houses in one year. The Newest Asset Class on Wall Street Little did I know that B2R would take off. Now, many hedge funds are clamoring for it. Literally, it’s exploding. At the November 2019 IMN conference for single-family houses, everyone was involved, or trying to get involved, with B2R. You see, there are simply not enough homes to rent in the U.S. The last recession really shook up American homeowners, especially the ones who lost their equity through foreclosure. Higher home costs, fear and the desire to maintain freedom and flexibility has changed the landscape of home ownership in the U.S. In fact, homeownership is at its lowest level in 60 years, and it’s not necessarily the American dream anymore. There is not a negative stigma with being a renter.