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 maintenance like faucets, quality is important as is staying with a specific manufacturer. If Moen or Delta or American Standard are the manufacturer of choice, then all homes need to be the same so that maintenance techs can stock their vans with replacement parts from a single manufacturer.
Auto replenishment solutions and inventory disciplines quickly emerged. Concurrent to all of this was the predicted evolution from using all third-party partners to complete but turns and maintenance to in-house solutions, especially for maintenance.
The Evolution of Technology
As the disciplines and sophistication grew, the industry evolved in another way. Investors leveraged technology to maximize efficiency. In the marketplace today, technology is providing remote access to properties for potential renters, 360-virtual tours of homes, integrated scoping solutions and in some cases, bots combing data and helping with all manner of business decisions.
In the ten years, we are celebrating much that has changed: funding, challenge resolution, guiding principles and the role of technology. Virtually all have changed for the better. Fortunately, some things have not changed. The importance of strategic and mutually-beneficial partnerships between investors, vendors and suppliers remains close to the top of the priority list. Nimbleness and innovation are critical to success.
What is the next evolution? I cannot say and I will not guess. Many eyes are on build to rent as it addresses the diversity of product and predictability challenges that are unique to the Single-Family market.
I expect that the future in some ways will be the same as the past. Mediocrity and mediocre performance will fade and be eliminated, good will become great, and standardization and predictability will continue to drive both profitability and industry evolution.
While the future is bound to bring change, as I take this quick look back, I, like so many, am grateful to be a part of it all.
