The Evolution of the Single-Family House Space
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. Both boomers and millennials are simplifying their lives and, in many cases, don’t want the responsibility of home ownership.
The combination of limited supply coupled with a strong desire to achieve scale quickly and the prospect of reduced maintenance is leading investors to B2R. New residential communities are springing up across the country as the appetite for single-family home rentals proliferates, especially in the South.
Jack Miller, one of the greatest business minds on single-family houses, wrote about horizontal apartments in the late 1970s. He was speaking of single-family homes replacing multifamily and apartments and how to build wealth one house at a time. That’s exactly how the hedge funds and entrepreneurs are looking at the new asset class.
The communities operate like apartment buildings, and they are efficient from an operational standpoint. When you have the scale of 75 houses or more in a community, you can afford on-site managers for leasing and maintenance, which effectively increases the net operating income. Jay Byce, now at ResiBuilt, has taken it a step further. When he’s scoping out potential projects. he prefers to add amenities such as tennis courts, pools and fitness centers to attract and retain tenants. Often, yoga classes, wine tastings and gathering places enhance the communities.
Why B2R is Making an Impact
There are many reasons B2R is growing in popularity. Here are a few of them to consider.
1) Demand for housing. We simply don’t have enough housing, especially in the affordable price range and especially in the South. I live in Tampa, Florida, and I’m telling you, it’s blowing up from Tampa–Lakeland–Orlando like nothing I’ve witnessed before.
2) Scalable and efficient. For builders and developers, B2R enables highly efficient construction with streamlined operations and management. It’s a lot easier to rent houses that are all located in one area instead of spread out 90 miles in every direction.
3) Freedom and affordability. Owning a home isn’t the American dream anymore. Many owners’ dreams turned into nightmares after the last recession. People want freedom and the choice to pick up and leave whenever they want.
4) Warranties. New construction comes with warranties, and for owners it’s nice to start with a clean slate and have confidence to project proper future maintenance. You shouldn’t need major work on roofs and mechanical systems for a long time.
5) Minimal wear-and-tear and more rent. Builders are using granite and durable floor goods, so expenses related to these items will be minimal going forward. But, you know what? Tenants will pay more and stay longer in a new home, and this reduces turnover and increases profit. If you’re in this business of real estate, then you already know about B2R. Maybe it’s time you took a more serious look at it.
