Single Family Rental Strategies in a Hot Market
Act Quickly, Honestly, and Decisively
by Adam Stern
The residential housing market is HOT. Inventory is down in all major markets across
the country, prices have risen precipitously for consecutive years since the late 2010’s, and the influx of capital into the rental housing space has been steady and ever increasing.
Low inventory, cheap money, and the driver? People are renting homes at a faster pace than ever before. The confluence of these market factors could make it hard for incumbent firms with existing rental property assets to acquire new homes and make it difficult for newly emerging investment firms to find an entry point into the asset class. It all comes down to strategy.
As a broker that has been focused on identifying capital sources active in the Single-Family Rental space and, on the flip side, identifying, engaging, and servicing those who own, manage and build rental housing, my firm, Strata SFR, has a unique perspective of the various strategies that firms employ across the country. Since Strata does not generally act as a principal in transactions, the velocity of our movement in the space is extremely high vs investment firms that generally stick to a single strategy for buying and/or selling.
Strategy of the Biggs
Incumbent firms that have been in the space since the downturn in 2008, many of them public REITs and privately held real estate investment companies, are a good place to start. Their strategies generally have to do with building onto existing footprints, growing market share in the areas they currently operate, pruning their holdings to create higher margins through improving operational efficiencies, and in some cases breaking into new markets while leveraging existing infrastructure. Firms who do not have the scale that these bigger companies possess may think that their tasks are somehow easier than firms that are just starting out, but I find generally it is quite the opposite. After all, once you set the level at which revenue is generated from owned assets, there is only one direction these firms can move to keep investors happy and coming back and keep companies thriving. If progress is not made through continual revenue growth, the market tends to notice. Lots of attention means a higher level of scrutiny from all sides. Forward progress is the only surefire way to ensure long term survival.
When my company is engaged by larger firms with existing portfolios, it is generally geared toward the disposition of assets no longer viewed as essential to their long-term strategy. That means pruning existing holdings to redeploy capital into areas that have a better opportunity for future growth. The strategy is to sell those assets and move capital into higher growth areas, including transitional areas, where inventory is of lower cost and higher yielding or where the acquisition of new assets is easier to come by due to higher availability or lower competition. Very often assets are sold to other firms with a more regional focus thereby allowing competing firms to grow to scale.
Many firms opt to add new build strategies in areas where one-off or portfolio acquisitions are harder to come by. This strategy, Build-For-Rent, is a longer and more involved way to eventually own and operate assets at the end of the process, but the benefits of venturing into these types of deals provide a huge long term competitive advantage. While cash flow is further out than buying existing assets, often the price that firms pay, on a per asset basis, is lower and at the end of the process, they own a new home that will appreciate faster in a rising market than older homes. An added benefit of moving into the new build space is the experience and know-how achieved buy completing such transactions. Once you have the infrastructure to source land or lots and the resources to erect new communities, the barrier to entering new areas of existing markets or new markets all together with a Build-For-Rent strategy are much lower than competitors without such experience. Once these firms learn how to ride that bike, that skill set cannot be unlearned, and the benefits of this acquired ability will pay dividends for years to come.
Strategy of New Firms
For newly minted firms, raising capital, whether easy due to reputation or contacts or hard due to lack of experience, is seen by many who have raised it as the easier part of the equation. Once capital is committed, then comes the challenging part of choosing markets, setting up acquisition and sourcing channels, and managing assets. Many firms coming from alternate asset types such as multifamily are making the switch, looking to use their resources to address the challenges of entering the Single-Family Rental space.
At Strata SFR, we love these new firms. They provide an opportunity to source brand new large and medium sized portfolios from some of our smaller regional investment clients looking to exit in a seemingly overheated market. The way these relationships often play out is, the firm
identifies a market or markets they are bullish on; we identify the largest owners of SFR in those markets; and approach them with an exit opportunity. For many owners, the presence of these new buyers is a welcome site as they give smaller operators a path to sell their portfolios at an attractive price, in one transaction, to one buyer.
The ability to bring to the table a buyer with deep pockets, a relatively low Cap Rate threshold, and the ability to take down large numbers of rented houses is enough to get an opportunity
on the table for our new fund clients. Once an initial portfolio trade happens, setting upon the task of helping these new funds build on early success is the next stage. Often this entails helping them create on-market acquisition strategies or connecting these firms with land developers and builders to build single-site communities.
Whatever the method, the goal is clear: fast growth, rapid capital deployment into assets that will deliver a strong ROI to investors, and solid cash flow and home price appreciation in the years to come.
Whatever pathway capital chooses to make its way into this market segment, one thing is certain: some will do it well and others will fail to see the kind of success that has been achieved by some of the best aggregators and operators of SFR in today’s market. Firms that act quickly, honestly, and decisively will succeed and continue to grow.
