Q&A with ILE Homes’ Mahesh Shetty and Dan Brady
A Conversation About SFR, Multifamily, and Institutional Buyers
Mahesh Shetty is the CEO of ILE Homes, a privately held single-family rental and asset management company. ILE generates current income and capital appreciation through investments in single-family rental homes and mitigates risk through diversification across the best residential rental markets so investors can build wealth with little active management.
Dan Brady is the Vice President of Acquisitions for ILE Homes. Dan has been involved in over 1,750 scattered site single family acquisitions and professionally renovated over 450 homes since 2011.
REI INK sat down with Mahesh and Dan to get their thoughts on the single-family rental market, multifamily investments and how, if at all, institutional buyers changed the real estate investment landscape.
Mahesh, given your finance background, do you see the economics and operational aspects of SFR and Multifamily converging even more than has taken place over the past five years?
MS // At a macro level, it appears that there is a lot in common. And there is significant overlap in multifamily and BTR single family segment. But the similarity stops there. The art of acquiring scattered sites, renovating, and managing them requires a skill set that is completely different from managing apartments. The advantages of design and density that is common in multifamily is absent in scattered site rentals — one size does not fit all in single-family rentals. There is a bespoke nature to single family rentals that requires seasoning and acculturation in the team to be truly successful.
Mahesh, you have an extensive background in almost every facet of real estate, except Single Family Rentals. Most people gravitate toward, some would say graduate to, Multifamily from SFR, but you are doing just the opposite – why?
MS // With my background in private equity and mergers and acquisitions, I was excited about the opportunities of creating value in a fragmented sector. Every other sector of commercial real estate is “institutionalized”— single family rentals are on the verge of massive consolidation in the next ten years. I wanted to play a small role in the process and be on the proverbial cutting edge of this industry consolidation.
Dan, there has been a lot of recent press around institutional buyers — mostly bad. Has this press tarnished the SFR space?
DB // In no way has the press tarnished single family rentals; however, they have tried to paint
us as the “bad guys.” I would say that institutional buyers are IMPROVING the normal rental experience for our tenants. Institutions renovate with two major thoughts in mind — safety and security — neither are ever compromised.
Institutions typically have more available cash to renovate properly on the front side, and also spend when necessary for major repair and maintenance issues. The typical tenant experience in an institutional home, is normally superior to the average Mom and Pop owner that may be cash strapped when repairs are needed.
Dan, to expand on that, as institutional buyers continue to grab market share, do you see them pushing the smaller operators out of the space, which would actually mirror what happened in the multifamily space?
DB // We are a LONG way from institutional ownership dominating the SFR space unlike the ownership patterns in other sectors of commercial real estate. For example, in multifamily the institutional presence exceeds 55%. If institutional ownership in the SFR space reaches 15% in the next 15 years, I would be surprised. There will always be a space for both smaller operators and institutions.
Mahesh, what are your thoughts? Are institutional buyers really keeping first time homebuyers from entering the market?
MS // First time home buyers are typically more competitive than institutional buyers because their time horizon on ownership is longer, they are looking to provide a shelter for their family, and there is a tremendous amount of pride and emotion wrapped into the purchase. As a result, they are willing to pay market or a premium for the home.
On the other hand, the institutional investor is numerically focused on returns over a 5–10-year horizon and is less likely to pay a premium for the property. Typically, they buy homes that are in some form of distress and require a level of renovation that first time home buyers do not have the knowledge or the patience to attempt.
The flipper market has always existed in the US — their exit was the mom & pop rental owner. The institutional investor has consolidated the flipping business without impinging on the first-time home buyer market.
Mahesh, what steps did you take to prepare the company to both solicit institutional capital, and how large would I need to be before seeking institutional capital?
MS // We started with the proverbial three-legged stool — an experienced team, developed and refined our processes, overlaid it with proprietary technology. Once we had those three elements in place, we bought properties to demonstrate our ability to synthesize the components and make the whole (our company) better than the sum of the parts (people, technology and processes).
Institutions are keen on investing in management teams and platforms that can absorb capital and scale and providing institutional level reporting and transparency on the performance.
Dan, with the market downturn, do you foresee institutional capital staying on the sideline?
DB // This is a great question! I would say that “some” institutional capital may run, but the majority will remain committed to the space. SFRs are the safest harbor in an inflationary environment. The ability to dollar cost average as one buys scattered site homes is core to portfolio valuation protection.
While one asset may take a dip, another certainly will offset the decline, and often out pace. We are long-term players, as is our capital. Long-term, SFR is the absolute best hedge in real estate.
Mahesh, what is your vision for ILE Homes and how long will it take you to get there?
MS // We have always dreamed BIG. Our vision for the company is aligned with our slogan — creating wealth and doing good. A perpetual company that creates a path to homeownership and allows hard working families to create wealth for their children. Our work has just started, and we are gathering momentum. Creating wealth is the ultimate dream of every American and Doing Good is a testament of our values and our fundamental commitment to translating our values into an actionable plan.
And finally, Dan, what is your vision for the SFR space in 2023 and 2024?
DB // Vision is technically described as “unusual competence in discernment or perception and intelligent foresight”. That is one serious set of shoes to fill. First, there is a housing shortage in the US, that based on new construction numbers, will not be filled. Second, the ability of an individual to own a home has become significantly more difficult due to the economic environment.
My vision is that the need for SFR homes will continue to expand. However, based on the current new home permits, population growth, and the plethora of new home buyers that are expected to enter the market, the supply simply cannot keep up with demand. Thus, I believe that rents will continue to rise, albeit at a lower level than we have seen the past two years, and the SFR space will continue to expand.
ILE Homes is a privately held single-family rental and asset management company headquartered in Dallas, TX. For more information, please visit https://www.ilehomes.com/ or call them at 855-ILE-1547.
