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Single-Family

Covid-19 SFR Eviction Tsunami?

What You Need to Know Before They Go! by Kerry Medel and Alyssa Mountain The federal ban on evictions is putting pressure on investors and landlords who are unable to directly access Covid-19 rental relief funds. Many impacted tenants would be surprised to find that the application process for relief must originate with themselves. However, if you are not in a jurisdiction that allows you as the property owner, to file the application(s) on behalf of your renters in an effort to get funds into their hands, you may be, or have already begun, the process of liquidating some of your properties to recoup losses or considering eviction. Robert Pinnegar, president and CEO of the National Apartment Association says, “If you’re in jurisdictions that have taken an approach that is not so customer service friendly, then it’s going to take a lot longer,” and you may find yourself diverging onto the unfortunate road to eviction. What you need to know as an investor/landlord Know the Laws in Your AreaThe federal moratorium is set to end June 30, 2021. This moratorium protects renters from being evicted due to nonpayment of rent if they have been impacted by Covid-19. When considering the impacts of the CARES Act on rental properties, the first thing any investor or landlord (or even tenant) should know is that everything related to the eviction moratorium is state- and in many cases, city-specific as well. Investors/landlords and tenants should first start with knowing what rights and available protections are applicable and available in their area. To Whom Does the Moratorium ApplyThere are many types of protected tenants, but that list has broadened significantly after March of 2020. Visiting sites like nlihc.org/federal-moratoriums can help your renters determine how they are protected, but it is also helpful for investors and landlords before initiating eviction proceedings. In late 2020, the Wall Street Journal reported on the impacts that protections in the stimulus law would have on credit scores, credit reports and debt delinquency, and the challenges around determining who is truly credit worthy. It may eventually be harder to become a tenant in a rental property as investors/landlords are forced to be more exclusive about who they put in their homes. Investors/landlords may not only make it less affordable to become a renter, but also harder to qualify as a renter under more rigorous future criterion. Pitfalls/StrategiesA large majority of cities and states do not have programs that will forgive your tenants their rental debt, however most will allow (and encourage) them time to pay the rent arrears. Nonpayment of back rent is grounds for eviction. However, landlords may not be allowed to charge late fees or other penalties, depending on the local laws. Investors/landlords should keep current with the ever-changing allowances and forgiveness plans for their city and state, as new protections and amendments are proposed daily, and implemented weekly, since March of 2020. Eviction TimelinesWhen it comes to evictions, the most important word is “timeline”. Many cities and states require the tenants to communicate to their landlord the loss of wages, wage reduction, loss of employment, or even contracting Covid-19 to ‘qualify’ for protection under the Act. Timely notification has been cited as one of the leading preventative actions to stop or even slow most evictions during the pandemic. However, notification from your renter does not mean that you are prohibited from rent releases, posting eviction notices, or sending letters of intent to evict to your renters, or that you cannot force the renters to vacate the property. Review timelines related to notices for termination (with and without cause) like Pay Rent or Quit Notices, Cure or Quit Notices or Unconditional Quit Notices. Filing the eviction with your local AHJ and court will also happen on a very specific timeline that is not generally designed to protect your interests as the landlord. Unintended ConsequencesTenants and investors/landlords equally do not want to be in this position. Landlords do not want to turn renters out any more than tenants want to be homeless. It is a difficult time for investors/landlords who still need to provide maintenance on units to ensure habitability while rent is not being paid. Consult with a state certified eviction attorney to ensure you are entirely protected and prepared and know how to take legal action with cause that will not lead to deeper financial or legal burden by not following local jurisdictional rules. An unfortunate by-product of investors/landlords being forced to evict tenants and sell their properties, is the reduction in affordable rental property inventory. With Covid-19 driving suburban migration, these homes will likely become owner-occupied thus reducing the stock of desperately needed rental housing. This puts a strain on the middle-, lower-middle- and working-class who historically rely on rental housing. Courts are incredibly backlogged which will cause significant delays in the eviction process and timeline. It can be anticipated that courts will not be siding as heavily with investors/landlords as in the past. An enormous humanitarian aspect has been thrust into the equation that will not be quickly discounted in future tenant/landlord cases. Knowledge is Key KNOW YOUR CITY AND STATE REGULATIONS! Landlords MUST know the complicated eviction laws inside and out, and if not, hire someone who does! They MUST not only understand the legal process but the entire eviction process. You will also need a valid (and lawful) reason to proceed with the eviction, and you will want to take all the new Covid-19 protections into account before proceeding. Ask yourself, have you tried mediating with your renters? Do I have the funds to cover the seemingly endless (and occasionally unpredictable) legal fees all while not receiving rent! Would it be less costly to pay them to vacate? If you win your case, be prepared for how you will then remove the tenants. Again, there is a set timeline in the court decision for the tenants to vacate, but you should be prepared for the need to coordinate with your local sheriff’s office

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Insurance for New Construction Properties

Coverage Needs for the Owner and Contractor by Shawn Woedl With limited inventory and rising home values, the Build to Rent trend is gaining steam. A ground-up construction project adds complications when it comes to insurance. If you are an investor pursuing this approach, it is important to understand the risks and responsibilities for all the parties involved in the project so you can protect yourself and your investment against your exposures. Where are you at risk and what coverage do you need? As the owner of the property, your priority is protecting your financial investment. You should carry property insurance and premises liability. Your property insurance would cover physical damage to the property caused by the perils covered under your policy. The perils that are covered will vary based on the coverage form you purchase. Basic form covers such things as fire, storms, smoke, explosion, and vandalism. The causes of loss that are covered are listed on the policy. Some carriers (but not all) offer Broad form coverage which adds several perils, including water damage. Special form coverage is the most comprehensive coverage form as it covers anything that is not listed as an exclusion in the policy. One cause of loss that is only covered on a Special form policy that should be of particular interest to investors who are building a new home is theft. During the construction process the unattended property may be ripe for thieves looking to acquire such things as building materials or newly installed appliances. For a property under construction from the ground up, you will want your property coverage to be a Builder’s Risk policy. This coverage can extend to any materials on site that you own but does not cover the tools or equipment of any contractors that are left on site. When you purchase your property insurance, choose your coverage amount that is equal to the expected construction cost. The cost of the lot should not be included in this coverage limit. If a property loss occurs midway through the construction, keep in mind that the loss settlement cannot exceed your invested capital at the time of loss, which may be less than your total coverage limit. This is to ensure that you are not profiting from insurance, as its purpose is to indemnify and make you whole. Keep any receipts for purchases you make along the way to submit as part of the claim. You should also carry premises liability (or general liability) to legally protect you if a third party is injured while on the property. Take for instance a group of kids exploring your construction site. One of them falls and ends up in the hospital. As the owner of the property, you may be sued for damages and medical expenses for the incident occurring on your property. Keep in mind—premises liability does NOT extend to injury of someone you have hired to work on the project and be on site. What does your General Contractor need? First and foremost, hire a general contractor (GC) who is properly licensed to complete the work for which you hired them to complete. The licensing requirements are specific to the state. Your GC should carry their own liability insurance to cover their business operations and their employees. At a minimum, this should include the following: Contractor’s General Liability: This covers damage to your property for which the contractor may be responsible. Importantly, it should include Products and Completed. This ensures that after the work is done, the GC is liable for any negligence in workmanship that leads to a lawsuit. Workers Compensation: If your GC has employees, they should carry Workers Compensation to cover injuries to those employees while on the job. When hiring a GC to work on your project, require them to add you (whatever entity that owns the property) as an additional insured on their liability coverage. This does two things. First, it extends coverage to you if you are named in a lawsuit caused by their negligence. For example, your contractor cuts corners when installing a staircase railing and after you have placed a tenant, the handrail breaks causing your tenant to fall. This type of liability claim would be picked up by your general contractor’s liability coverage and not your premises liability, protecting your loss history and future insurance costs. Second, if you are listed on the policy, you will be notified if the coverage lapses or is cancelled while the project is still active. Other coverages your contractor may consider includes: Equipment Floater: Coverage for the contractor’s equipment such a bulldozers, excavators, and tools while on your construction site. Commercial Auto: Coverage for the contractor’s vehicles while used during business such as hauling material or traveling between jobsites. Each subcontractor hired by the contractor should carry their own liability insurance for the work they are contracted to complete. When purchasing a Contractors Liability policy, they will be asked to provide the Class Code for the work they are being insured to provide. The insurance agent they work with can help identify the appropriate code. The general contractor may want to require their hired subcontractors to sign a Contractual Liability/Hold Harmless Agreement, so they (and ultimately you) are not held responsible for damage or injury for which they are negligent. You may also ask the subcontractors to list both you and the general contractor as Additional Insureds on their liability certificates. What if you are the owner AND General Contractor? If you are serving as the GC on your construction project, your premises liability protection does not extend to your actions and work in that contractor’s role. More specifically, you would need to purchase the contractor’s general liability coverages listed above AND premises liability coverage for incidents that are not connected to the project. To obtain this coverage, you will need to obtain the proper licensing as required by your state. You will still want to hire subcontractors for more specialized services like electrical,

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Unlocking the Build-for-Rent Market

2021 May Be the Best Year Yet for Private Lenders…If They Are Careful by Paul Stockamore and JP Ackerman 2020 was a coming of age in the Build-for-Rent space. Amidst the turbulence, the strategy was brought to the forefront driving real estate principals to recalibrate executional strategies in the face of rapidly changing market dynamics. It was not the beginning of the build-to-rent trend, but the confluence of factors in 2020 hastened the momentum. Long standing consumer migration and housing trends were accelerated causing disruption in established real estate conventions. The pervasive uncertainty in the real estate markets in March 2020 ultimately proved to be the beginning of a transformation. Home prices approached new highs on the back of record low mortgage rates and a surge in move-up activity amongst homebuyers at each tier. The milestone year demonstrated that the real estate cycle was far from over, while also heightening challenges to property investors building their rental portfolios. Many investors are exploring alternative strategies to create housing supply through purpose-built single family homes. Build-for-Rent: A Hybrid of Multifamily & Single Family Rental The Build-for-Rent strategy is a hybrid of multifamily and single family rental designed to create additional housing supply to meet the increasing demand of families seeking high quality, affordable rental homes. The product is designed for the lifestyle of today’s renters while also delivering a more durable structure to withstand tenant use and turnover. The durability of these homes enables managers to reduce operational costs (specifically repair and maintenance) while also tapping into increased property management efficiency generated by a concentration of homes in a singular community. The result is operational costs more similar to multifamily levels than that of traditional scatter site management thereby driving up Net Operating Income (NOI). Given the macro factors driving the rental market and persisting institutional investment appetite, it is likely that cap rates will continue to compress, further increasing the reward for investors participating in this strategy. Emphasizing the “B” in BFR The homebuilding trade is an essential expertise to navigate the many pitfalls that exist through multiple years it takes to bring these projects to fruition. Build-for-Rent strategies generate significant increases in NOI, while also providing a housing solution that is both satisfying and affordable for tenants. The skill set required, however, is significantly different than those necessary for scatter site acquisition, renovation, and stabilization. The essential functions include land acquisition, site planning and entitlement, horizontal improvements, and ultimately vertical construction.  As property managers and developers consider Build-for-Rent projects, it is imperative to establish in-house expertise and solidify partnerships with third parties. Equity and debt providers are cautious about engaging inexperienced teams and may require increased returns to offset the risks. Underwriting Build-for-Rent Projects Identifying viable Build-for-Rent projects requires a thorough vetting and deep understanding of key underwriting assumptions. Among the many moving parts, there are a few that represent the greatest challenges to many projects: Gross yield. Defined as the annual rent divided by the home’s value, gross yield measures the viability of a rental property and should be at least 7-8%. HOA dues and additional tax assessments should be netted from the rents. Properties with lower gross yields are typically unable to generate sufficient NOI to remain viable as a rental long term. Note that gross yields vary significantly by market and tend to fall as price points rise making higher cost markets less attractive for Build-for-Rent execution. Monthly rents. There are many tools to complete a rental analysis (e.g., HouseCanary, Zillow), but the science is determining which comparable property is most representative of the project under evaluation. Overstating rents is one of the most common underwriting challenges, which can both make prospective investors wary andslow down the initial lease-up process. With new projects, many tenants are willing to pay a premium rent for newly constructed homes and communities. Institutional property managers have demonstrated a 5-10% premium to smaller operators who emphasize maximum occupancy, while new home builders have long proven the ability to generate a 10-15% premium when selling a new home. In a Build-for-Rent strategy, the two factors converge enabling Build-for-Rent properties to command a 10-20% premium above market, while maintaining a similar vacancy rate to institutional norms. Given the long timeframes for Build-for-Rent projects, many developers use appreciation in their models. These assumptions are risky. The best investments are those where no rental appreciation is required to be viable. In contrast, if rents are appreciating, cost hikes will likely follow. Best practices are to avoid appreciation or appreciate the cost structure and top line equally. Operational Expenses (OPEX). OPEX is one of most differentiated assumptions between Build-for-Rent and scatter site rentals. OPEX includes sales and marketing, turnover costs, property taxes, insurance, utilities, common area expenses (e.g., landscaping), other included resident services, property management, repair and maintenance, accounting and legal. Institutional managers report OPEX at 37-38% of net rents, whereas Build-for-Rent projects operate more efficiently (500-800 bps lower) through the reduction of costs associated with turnover, repair and maintenance.  Debt Service Coverage Ratio (DSCR). DSCR is a critical underwriting metric that speaks to the long-term viability and ability to finance the ongoing operations. Defined as NOI divided by the costs of debt service, DSCR should be greater than 1.25 to qualify for long term financing post stabilization. Most debt providers will ensure this is no less than 1.1 or more during the stabilization period recognizing that debt service costs should notably drop once permanent financing has been put in place. To drive construction and development underwriting, here are several best practices: Build a strong network of local experts in development and construction. Unlike scatter site acquisition where the properties have already been planned, approved, and constructed, new developments must be approved (sometimes lobbied for), improved, and built. During the early phases of a development, the as-is property value typically falls before new value is created. The “J curve” is a critical risk factor on which developers and financiers must focus. Timelines & Contingencies. Development timelines

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Shrinking Margins & Government Eviction Bans Challenge Investors

Where is the ROI? by Rick Sharga Single family rentals (SFRs) have been one of the fastest-growing segments of the housing market for the last decade. Formerly a well-kept secret and the purview of local mom-and-pop investors, the category sprung into the nation’s consciousness during the Great Recession, when institutional investors entered the fray, buying thousands of foreclosure properties and converting them into rental homes. Popular opinion at the time was that large institutional investors like Blackstone would dominate the market, but exit it relatively quickly, with a business model designed to make modest profits during the holding period, while banking on longer-term home price appreciation for the bigger profits later. This theory also held that the phenomenon of renting single family properties would be relatively short-lived, and last only as long as it took these renters to repair their credit or improve financial positions that had been devastated during the foreclosure crisis. Both of these assumptions proved to be very wrong. Instead of shrinking, the number of SFRs has almost doubled over the last 12 years, and ownership is still heavily skewed towards small-to-mid-sized investors. According to a recent Freddie Mac report, almost 90% of SFRs are owned and managed by investors who own between one and 11 properties. And the demand for these homes continues to increase as tenants who prefer renting to owning look for alternatives to apartments, and for opportunities to move out of urban markets into suburban areas which often boast stronger school systems. So, should all investors be focusing on single family rentals? Like most things related to real estate investing, it depends. Supply and Demand The challenge for investors hoping to become SFR landlords is that there’s almost nothing to buy. Institutional investors originally built their SFR business by acquiring bank-owned properties or other foreclosure homes, but mortgage default rates are historically low due to the government’s foreclosure moratorium and the CARES Act mortgage forbearance programs. While some investors are banking on a wave of post-pandemic defaults once the government programs expire, that seems highly unlikely for reasons too numerous to delve into here. Meanwhile, the inventory of existing homes available for sale is at the lowest numbers ever recorded by the National Association of Realtors®. So, there is very little to buy, and demand is exceptionally strong, driven by demographics and extremely low mortgage interest rates. Investors find themselves competing with traditional homebuyers for this limited number of properties, which drives prices up and makes achieving ROI targets more difficult. The good news for SFR investors is that their ROI tends to be more cashflow-based and less based on the “buy low, fix inexpensively, sell high” approach employed by fix-and-flip investors who need below-market pricing to make their models deliver the kind of returns they’re looking for. This means that SFR investors are often better positioned to compete with homebuyers, as well as other investors, for properties selling at or near full market value—an advantage in today’s housing market, where prices have risen by double digits year-over-year. Where’s the ROI? Institutional investors initially focused on markets with the highest numbers of foreclosures like California, Florida, Arizona, and Nevada. As the distressed inventory was purchased, home prices rose more quickly than the investors anticipated, and in many cases, homes became too expensive to rent out at a profit. Much of the investment by these larger firms since then has been done in less expensive markets in the Midwest and Southeast, where properties are lower-priced. Those lower prices, coupled with today’s low interest rates, offer investors of all sizes the opportunity to improve their yields. According to a report from ATTOM Data Solutions, higher prices have had an impact on SFR ROI over the past year. The average anticipated annual gross rental yield (annualized gross rent income divided by median purchase price of single-family homes) among the counties in the report is 7.7 percent for 2021, down from an average of 8.4 percent in 2020. In fact, the yield declined in 87 percent of counties ATTOM analyzed. However, it’s not all bad news for rental property investors—there are still markets delivering high yields. The ATTOM report identified Counties Schuylkill County, PA (26.1 percent); Bibb County, GA, (18.1 percent); Baltimore City/County, MD (16.2 percent); La Salle County, IL, (14.1 percent) and Chautauqua County, NY (13.7 percent) as the five counties with the highest yields. Among the top 50 rental returns for counties analyzed in 2021, 25 are in the Midwest, 15 in the South and 10 in the Northeast. Todd Teta, chief product officer at ATTOM, noted that “Returns on single-family rentals still generally remain strong, and there are pockets, especially in the Midwest, where yields top 10 percent. There also are some signs that things could improve in 2021.” Among larger counties, the highest potential annual gross rental yields in 2021 according to the ATTOM report are Cuyahoga County, OH (9.9 percent); Dallas County, TX (8 percent); Tarrant County, TX, (8 percent); Franklin County, OH (7.9 percent) and Bexar County, TX (7.9 percent). COVID-19 Increases Investor Risks Of course, no article would be complete without a COVID-19 component, and the SFR market is no exception. As noted above, the ownership of single family rental units is skewed heavily towards small, “mom-and-pop” investors. Most of these property owners have financed the purchase of their rental units, and many are highly leveraged. The combination of high unemployment rates, missed rental payments, and a ban on evicting non-paying tenants in order to lease properties to paying tenants can prove to be a toxic mix for these mom-and-pop landlords, whose mortgages are often not protected by the mortgage forbearance program in the government’s CARES Act, and also are not necessarily eligible for protection from foreclosure. RealtyTrac published a Rental Property Risk Report which analyzed over 3,100 counties across the country to determine in which markets SFR property owners were in most danger of default due to the conditionsoutlined above. Of the largest counties, 53% were considered to

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How Real Estate Investors Can Pivot in a Tight Inventory Market

A New Paradigm in Acquisition and Disposition Strategies  by Nate Trunfio The U.S. housing market is currently experiencing an unprecedented and severe housing shortage. In 2020, the national housing inventory declined by nearly 40%—leaving 449,000 fewer homes for sale compared to December 2019, according to Realtor.com. In May 2020, the national inventory had a 4.8-month supply of homes, according to the National Association of Realtors, but that number steadily dropped throughout the duration of 2020. By December 2020, there was a 1.9-month supply of homes, the lowest number ever recorded. The Major Challenge of Inadequate U.S. Housing Supply, a recent study by Freddie Mac, estimates that 2.5 million houses need to come on the market in order to combat the shortage. In addition to the record-breaking low inventory, the country also experienced extraordinarybuyer demand. Of course, low inventory and a high demand combine to create an increase in housing prices. As of December 2020, the national median price for a home was $340,000—an increase of 13.4% from the previous year. Changing the approach to investing Simply put, the housing shortage is forcing investors to rethink the way they do business. As a result, many are being forced to find and use different deal strategies. One example of this is many investors are going into deals with multiple business plans. For example, an investor could close a deal with two strategies: renovate a home with a B.R.R.R.R. strategy where they have intentions to hold the property long term while also analyzing the profitability of flipping the property by selling it to a retail buyer. Having multiple strategies allows an investor to be prepared for any changes in the market conditions. Another route investors are pursuing is more heavy construction projects and scrape-and-builds. These approaches are typically used because the replacement costs of many homes are comparable to what the building costs are. Also, many times more value is created when you re-build a property, or expand its footprint, compared to simply doing renovations on the home. On the other hand, some investors are doing the opposite—they are doing lighter rehabs which allows them to acquire assets at higher prices to compete with other buyers. Since there is so much demand for housing, end buyers are paying premium prices for homes with lower-end finishes, so investors are cutting construction costs to keep their margins. Investors are also beginning to transition away from fix-and-flip projects, turning to new construction projects instead. One reason for this change is that investors are finding more opportunities to buy land and build a new home at a lower basis than buying an existing property that needs renovations. Also, construction costs and budgets are much more reliable with new construction than fix-and-flips. The build-to-rent market is a tremendous strategy for investors. Rather than buying rental homes, investors are choosing to build rental homes because they will rent for higher amounts to better tenants with less maintenance costs. Build-to-rent is one of the hottest trends in real estate investing, and this trend should continue for quite a while due to the rental housing shortage and desire of tenants—especially millennials—to rent new homes versus being locked into buying a property. Where are investors going? The crunch on housing inventory has also caused some investors to expand into new markets. They are growing their “territories” in order to cast a wider net – moving from primary to secondary and tertiary markets where there is seemingly less competition. Many investors are following the “urban flight” migration trends. A mass exodus from urban areas across the country during the pandemic created excellent investment opportunities in the suburbs. As a result, investors are taking deals with lower margins. (It is not ideal, and we do not suggest it. But it is happening). Investors who focus on secondary and tertiary real estate markets have been laser-focused on this demographic trend pre-and-post-COVID. The trick is to not overpay for available suburban investment property, which is difficult to achieve during a housing shortage—especially with the competition also vying for investment properties. The trend of urban mass exodus and an increase in suburban demand is also affecting new construction. Subdivisions and small housing developments are popping up on just about every available plot of land to support the demand. How are investors finding acquisition opportunities in this market? The best real estate investors know that the real money is made on the acquisition when buying properties at a discount. But whether it is a rental property, a fix-and-flip, or land for new construction, investors are having a harder time than ever trying to buy properties at a discount due to the tight inventory levels. One way that investors find properties at a discount is by marketing directly to potentially motivated sellers. Operators are trying new marketing strategies and campaigns to get in front of motivated sellers. Still, their cost per acquisition from a marketing perspective has continued to rise due to other investor and retail buyer competition. This means investors either need to spend more money on marketing or expect less acquisitions with their previous budgets.  Why and when are investors selling? Dispositions and when to sell has also changed. Many investors who previously intended to hold their properties long term are now deciding to sell since home sale prices and demand are so high. As home prices have risen, home equity has multiplied, creating an incentive to sell earlier rather than later. Some investors are on the sideline waiting out the housing shortage. Rather than continuing to invest, they are selling their assets to accumulate liquidity for future distress in the market—perhaps when eviction and foreclosure moratoriums expire. What to expect in 2021 The 2020 housing market was largely unbalanced. It was a huge sellers’ market that left little room for buyers. The real estate market always tries to reach equilibrium, but finding a perfect balance between buyers and sellers takes time. As a result, there has been larger separation of the wealth gap among real

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A Generational Shift in Housing

The Trend Toward Renting vs. Owning by Adam Stern The home ownership rate in the U.S. today stands at 65.8%, which is up year over year. But it is a far cry from its height in early 2004, when it stood at just about 70%. Overall, the trend toward homeownership is down. This trend in U.S home ownership did not happen organically. It was not propagated by consumer demand or sentiment related to the lifestyle choice of owning vs renting. It was propelled by the bursting of the U.S housing bubble, putting millions of people into foreclosure, and thrusting them into the rental market, creating new consumer demand for residential rental homes. A trend that has seen an uptick over the last year was people moving from more densely populated areas and into the suburbs, thus creating an even higher demand for Single Family Rentals. Looking back to this trend, aside from the boom in foreclosures that happened during the 2008 downturn and the resulting increase in rental demand that followed, something more subtle sprang from the ashes of the housing bust and continues today in our post COVID world. And that is an undercurrent in the buying habits of the next generation of would-be homebuyers, those who are now opting to rent homes rather than own them. This shift, simply put, started with the recognition of a simple truth about the U.S housing market which was muted prior to 2008 by decades of government backed pro-housing public relations. That long forgotten truth…home prices can actually decline. That idea, so estranged from previous generations, is now affecting a generational shift in housing. And it is this shift that millions of investors (including some of the largest institutional investors) are now riding, a once-in-a-lifetime opportunity for those who understand the genesis of the shift and how to play it in the years to come. A Historical Perspective Let’s take a step back so we can get a bird’s eye view of where the trend toward renting vs. owning started. The housing bubble burst of 2007 caused a wave of defaults on loans made to “sub-prime” borrowers. These loans, made by lending giants at the time such as New Century Corp. and Countrywide Home Loans, were the product of a little-known subset of the bond market which traded in Mortgage-Backed Securities. Firms such as Lehman Brothers, Bear Stearns and Merrill Lynch were packaging subprime loans into bonds backed by the payments made by the borrowers of the loans and selling them off to other institutions who bought them knowing little more than they were rated AAA by the rating agencies (a rating that denoted the underlying securities carried essentially no risk). This commission-driven bond trading apparatus created massive demand for the very sub-prime loans that backed them, which in turn fueled the supply of cheap money that lenders were offering to less-than-credit-worthy borrowers. The macro-economic trend that had taken hold was that loans being made to people that, when the teaser period for loans expired would not be able to afford the payments, would inevitably default. Once the defaults started happening in early 2007, the collapse of the securities backed by these loans led to the collapse of some of the very firms that created them and the eventual bail out of the rest that survived. Fast forward to 2010. Foreclosures on the homes owned by defaulted borrowers were happening at record levels. Home prices in the markets most affected by the foreclosure boom decimated home prices in those markets, turning homeowners into renters. Firms hungry to snap up those foreclosures at record low prices initiated an institutional trend in residential real estate that would later be dubbed “REO to Rental”. This trend would see hundreds of thousands of single-family homes bought by institutional investors and then turned into rentals, available to be tenanted by the very people that used to own them. As the inventory of distressed homes dissipated in the early 2010’s, investors that saw the housing play as a trade were starting to realize Single Family Home rentals could be a long-term business. The moniker “REO to Rental” would eventually morph into the industry’s current description, “Single Family Rental”, as a reflection of the shifting views and strategies of the large rental home aggregators. This shift away from buying housing to generate a short-term profit and toward viewing it as a long term and operationally minded business, may on its surface seem to be a bet on the health of the U.S housing market. But that is only half the story. This shift in strategy was less about investors taking a long position on the prices of U.S housing as it was a vote on the continued growth of the U.S Single Family Rental Market. A Bull Market So why be bullish on the growth of the Single Family Rental Market? The proof is in the numbers. Although the U.S homeownership rate hit its lowest level in late 2016, residential housing starts had reached record highs and demand for homes was outpacing supply in most markets across the country. This coincided with an uptick in homeownership from 2016 to mid-2020 after which time, according to the U.S. Census, there was a steep decline down to where it sits today. In terms of supply shortage, which has steadily declined throughout the uptick and down tick in homeownership rates since 2016, investors are the reason. They snapped up inventory at multiple price levels to keep up with the growth in demand for rental housing. And throughout this time of rapid portfolio expansion by the large SFR aggregators, vacancy rates, which is a direct correlation to the demand of their homes by tenants has stayed steady. Everywhere you look, evidence of a boom in renter demand can be seen. According to a report released by the U.S Census Bureau in February 2021, this is the lowest that vacancy rates have been in almost 20 years. National vacancy rates in Q4 of

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