PE vs Single Fam Rentals

Have been approached by a recruiter for a company; simple business plan, they're buying up all the single fam homes and renting them out. Literally, all single fam homes are in the cross hairs of pension/insurance/blackstone type companies lol...

Anyway, the role would be helping build out the platform. The guys are well experienced, and they're are a few strategies they mentioned to buy in bulk that seem interesting. Debt is at like 0% bc the LP behind the operation is a massive name. 

Thoughts on if this sector could be interesting in the future, or even more lucrative than a vanilla PE role? the PE stuff is cool, but as many people know, outside of hunting deals and structuring them, it becomes pretty cookie cutter. 

If comp were the same, would you take the role, interested to hear people's thoughts...  

Its also 100% remote; good or bad, that is kind of huge to me .. I'm not bullish on office, nor am i a fan of using offices lol

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Comments (37)

  • Associate 2 in RE - Res
Sep 1, 2021 - 6:31pm

This trend is absolute cancer for middle-class people. If it goes far enough, it will create an economic-left backlash that will leave Occupy Wall Street in the dust.

Sep 1, 2021 - 7:42pm

The key is if it goes far enough. Right now, even all the money people like black stone are putting in to this market, it's still such a small fraction of the single family residential market. Single family houses is just a massive market. 
 

At the end of the day single family residential is just too costly to operate through one off deals.

purpose built single family rentals is the big wave. Not just buying random houses and converting them to rentals.

  • Associate 2 in RE - Res
Sep 1, 2021 - 9:17pm

I don't think it's a small fraction. According to the WSJ a few days ago:

Deep-pocketed investors may have a hand in would-be buyer woes: one in six home sales went to an investor in the second quarter of 2021, according to Redfin. In Atlanta, Phoenix and Miami, it was one in four.

 Anecdotes I'm hearing from people who are selling existing SFRs right now are consistent with this.

Sep 2, 2021 - 10:32pm

"At the end of the day single family residential is just too costly to operate through one off deals."

I thought this at first too.  But the SFR companies are using acquisition algorithms and prop tech for operations that make it really really efficient, otherwise the deals would not pencil.  
 

A highly recommend you listen to this Leading Voices in Real Estate episode.  The guest are some SFR executives and they explain how efficient their platform is.  Pretty eye opening.  
 

https://leadingvoicespodcast.com/chaz-mueller-and-dana-hamilton/

Sep 4, 2021 - 3:02pm

The problem is many mom and pops are going to look to sell properties in upcoming months as these ridiculous policies come to an end. Many of them have been absolutely burned by unethical renters/government and now they are going to sell as soon as they get the chance, or if they still love real estate, they will begin jacking up rents to settle their interal rage and recoup some of their losses, which is totally understandable at this point. I expect all renters to be the biggest losers of this three years from now, but hey, the people got what they want, even if they didn't realize it's inflationary as heck.

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Sep 1, 2021 - 7:35pm

The concept is interesting, but it is a really bad idea on a societal level.  Also the return picture for this seems pretty suspect.  If you have 0% capital sure it can work in the short run but in the long run that will change and if these companies have massive ballance sheets of worthless assets because people stop paying their rent or there is zero exit opportunities for the over inflated junk assets.  We will have a repeat of 08, only this time the systemic risk will be even more highly concentrated and I would bet the desire for bail outs will be close to zero.  There was appetitie last time becuase the bubble was created by a stupid idea of getting everyone a home.  This time the collapse will fall and crush massive financial firms whose hubris led them to believe that they should control all of the assets that underpin the American dream.  

I won't be remotely shocked if the heads of these groups and the people behind these strategies are pulled out into the streets and shot in the back of the head when this collapes. 

Sep 15, 2021 - 8:46am

No, 0% debt does not guarantee 100% equity.  Some of these large institutions have debt instruments that after accounting for all incentives is basically a 0% rate.  

Even if it is pure equity, there is still ballance sheet risk as the equity capital is not a 0% cost structure.   If you have a fund in which you are transacting these deals out of the investors in that fund expect a rate of return on their investment.  So the equity situation makes even less sense because the debt basis is going to come off of the fed funds rate while the equity basis is going to require at bare minimum fed funds plus inflation, creating a higher cost of capital.  The issue is it is almost impossible to control the supply of SFH in any market let alone the US market.  The level of hubris is astounding.     

Sep 2, 2021 - 11:00pm

when blackrock/blackstone can borrow at 50bps on their warehouse lines they can get their 1% origination fees and then lever their 50% at 2.5%.  That's how this makes sense.  Maybe if we didn't want to float X trillion of treasury bonds for bloated government then we could raise rates.  

Also, why can't the lower and middle class save...maybe because we don't incentive them to by eroding(theft), their savings by increasing inflation.

Sep 3, 2021 - 11:53am

That only makes sense from a bulk turnover perspective.  The problem is in the hold.  Companeis like Opendoor are turning the inventory fairly quick.  The big PE shops are holding.  Becuase they have such a low cost of capital they can afford to overpay.  But the problem comes in when those cost of capital expectations rise and they have a bunch of assets that are marked too high on the balance sheet to exit at a positive risk adjusted rate of return.  Whith high basis comes the need for an even higher exit. 

They have artifically increased the holding costs as well.  I would not be surprised if very few of these properties are even breaking even from a cashflow perspective.  Merely hoping for inflation isn't a great strategy when buying at this volume.  Rents have not been keeping up with prices for over half of a decade now.  This is not helping that situation. 

Sep 3, 2021 - 9:04am

Yup, the i-buyers and groups mentioned here are buying in massive bulk. 

Even if they're not making returns you'd expect like 15% - 20%, their cost of capital is so low their investors dont have many alternatives. Also, for them, as noted above the 1% acq fee or what ever fees they make are what their eyes are on. 

Would you work in the space? There's not much value being added .. it seems like the business plan is just to buy homes and accept a low cost of capital.  

Sep 3, 2021 - 11:49am

Adding on to other comments, there's so much money chasing existing homes right now that the real money to be made is figuring out how to bring more supply online versus eating up the limited supply out there. A lot of these groups are paying a 3.5% cap on a portfolio and underwriting huge rent pops (anywhere from 4-7% years 1-3) and the low cost of Capital actually makes these pretty attractive even at such a low yield.

Sep 4, 2021 - 9:05pm

It is terrible for affordable housing. Affordable housing is a joke though, the resources are controlled by the gov and a handful of players get allocations, etc

We are seeing assets come to market and the new leases are 8% - 15% higher than the leases signed in 2020.. can the trend continue, no one knows but the trend is definitely driving pricing on asset sales, and the prices are being paid by real institutional investors...  

Sep 7, 2021 - 1:06pm

Commissions and fees

It is terrible for affordable housing. Affordable housing is a joke though, the resources are controlled by the gov and a handful of players get allocations, etc

How else would it work?  You shouldn't just show up to your local housing agency and get handed a black check to build "affordable housing".  Only a handful of players get allocations because only a handful of people know what they're doing.

We are seeing assets come to market and the new leases are 8% - 15% higher than the leases signed in 2020.. can the trend continue, no one knows but the trend is definitely driving pricing on asset sales, and the prices are being paid by real institutional investors...  

Well, if you believe in free markets then no one will get that pricing.  Otherwise, why not just push for a new wave of public housing, or something similar to New York State's 2019 law which pretty much enforces global rent stabilization and price fixing?

Sep 5, 2021 - 3:03pm

There's seriously no way to make money purchasing at today's prices. This strategy made sense after the Great Recession, but current yields would be similar to commercial and there's FAR more geographical risk with SFR. Used to work for a company that turned into Roofstock.com and they stopped purchasing homes for their own LP five years ago because the price appreciation far outpaced rent growth. They went the tech route and now gouge the Ibuyer using their platform and just take fees… it's an absolutely bull shit business model for the masses and it's the single main reason most secondary markets have the "demand" that shows in the numbers. They can outbid nearly every single buyer who wants a home, unless that person is so flush with cash and the know with all… not only that, these are bottom feeders and are such cucks that they resort to hardline policy and will kick out any renter or give cash for keys, and it's terrible for the actual renter… not a fan of it after being submerged in that field for a bit 7 years ago

Most Helpful
Sep 21, 2021 - 11:44am

lots of political answers here but did not see many direct answers to the original question. In my opinion you are jumping into this wave a little late, and I would be concerned about the long term viability of SFR acquisitions beyond a 2-year horizon. The reality is that EVERYONE is in this game now because of the amount of institutional capital seeking SFR holdings. Land values in some of these secondary markets that are 30 min from Vegas, Phoenix, Houston, Austin, etc. are up 20-50% from 6 months ago. Homebuilders are pulling back on their fee build business because they know the retail sales are better than ever, and are also getting enough third party business that they can get smarter/more aggressive with their contracts. Local jurisdictions in all these areas are also getting skeptical about BTR product, so to the extent entitlements are required it's already getting more challenging.

IMO the SFR stuff still has a good 12-18 months in terms of digging for good sites around the country, but it's not a 10 year strategy that's going to last a full cycle and give you a ton of long term job security. That's just one opinion...

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