I love this event. Every six months, my fellow travelers in the institutional and professional SFR industry gather in awesome destinations and discuss the evolution of this revolution. This industry is developing at internet speed, so every six months stuff changes. This event was no different and it was a big one, not based on some new innovation announced, or company debuted, but because of who showed up. Here were my big takeaways:
The multi family lending industry is here. I first noticed their logos all over the leader board of sponsors a few months ago and it was a happy surprise. We’ve been wondering when someone from the real estate industry would notice SFR. It was either going to be the realtors and their tech platforms, or the commercial crowd. It was the latter, and I think the SFR business is going to benefit greatly.
Multi family, the commercial asset class most closely related to SFR, is seeing a single family rental portfolio as a kissing cousin to an apartment building. What’s more important, the GSEs are seeing the same thing, and encouraging the multi family industry to cross over by adapting their loan programs to fit SFR.
A multi family lender would come to a conference like this to meet potential borrowers – people who want to buy or refinance a large SFR portfolio. But I was able to confirm that several of those lenders were also floating the idea of SFR investing to their multi family investor clients. More demand means more options for sellers who want to exit, and more capital into the hands of operators with experience in SFR. (and more activity on those online platforms that sell SFR portfolios).
The mid-sized SFR entrepreneur is here. A few years ago, the initial phase of SFR was playing out as the first large institutional funds went public, successfully issued bonds, and generally proved that this was a permanent business. Right around 2014, many people in the space began to think about their next act. After several years of pouring over the data, we all realized there were more than 15,000,000 existing rental homes in America. Not vacant homes that could become rentals, but a huge base of more than 3 trillion performing rental homes.
Many of us started turning our efforts to taking the things we had learned, the skills we had developed and the technology we have mastered for the institutional players, and making them available to all SFR investors.
This includes IMN. They had created the signature event for SFR, and they wanted to expand it. But this was no place for the “get rich quick” real estate investment crowd. IMN wanted this to maintain credibility as an event for the pros, and began inviting the entrepreneurial class of professional SFR investor.
They showed up. I was in a session when a panelist asked how many people in the room owned between 50 and 500 properties. I counted almost 40 people out of a breakout room audience of 120.
These are entrepreneurs who understand how to pull the levers of sourcing, repairing, leasing, financing and managing rental homes, and they figured it out on their own. There is much they could learn from the institutions, and even more they could teach.
This is critical because if a trillion dollar consolidation is going to take place, there needs to be a cascade. Small to medium. Medium to large. Large to XL. XL to XXXL. The owners of 50 properties who wants to use the innovations and momentum of this industry trend to grow to 1,000 properties now has the means, and a place to bring them for their exit. And they showed up.
Defending the economy seems like a full time job. I got into a fun dust-up on a panel with my friend and conference brother, Dennis Cisterna, the CEO of Investability. He moderates the opening panel on economics every year, and I was one of his panelists. Toward the end of a very productive panel, he tossed a bomb on the stage and said we were not being sensitive enough to income inequality. He set the bait and I took it. (I actually saw myself doing it from inside my own head and asked, “why are you doing this?”)
I pushed back because it sounded too cliched, and it’s too easy to pick on the landlords of America. After all, investors in homes put an end to the housing crisis by showing confidence when the home buying public had none. There are routinely articles written that bash large investors for evictions, and take the sides of people who stopped paying their rent, but wanted to stay anyway. I feel for a family being kicked out of a house, but don’t accept that the owner is to blame.
In other words, we are an easy enough target without one of our own hitting us with a talking point from cable news. The economic boom is elevating employment, and wages, and take home pay, and home prices, and stock values, and overall confidence. It’s not a political statement to acknowledge this, and something worth defending. More boats are rising with this tide than ever before.
My earliest memories of the “easy money in real estate” genre came from infomercials on late night TV. If you are too young to remember these, or just want to relive some of the golden oldies, check out some of these beauties below. They all have a few comical things in common: Rolls Royce’s, yachts and bikinis. And that they can all be yours in short order if you sign up for the class. It turned out you can get rich quick in real estate, by selling classes on how to get rich quick in real estate. The more things change, the more they stay the same. I could have done a 90 minute video of modern day versions.
Every responsible person knows that no one ever accomplished anything really significant, like becoming wealthy, without work, risk and patience. Of course there are lottery winners, scions of a family fortune, and the occasional and unlikely lightning strike, but none of those can be counted on. For most of us, it’s work, risk and patience. We know this, but the genre persists.
There are some common patterns that run thought much of the flipping genre. They are selling the impossible dream – that in a transparent market that is in full recovery mode, there are still plenty of people who will sell you their house at a deep discount. Those are needles in a haystack. The convenience of a quick sale is worth a few points in discount, but the opportunities that do exist to get a steal almost always involve taking advantage of the misery and misfortune of someone else. “Systems” that can identify desperate people with very limited options, or earn the trust of unsophisticated folks who don’t know the real value of their house, and might be willing to believe the wrong person. (There is a reason we call it a steal.)
I can hear some of my friends and colleagues, “But Greg, there is lots of money to be made!”
Not really, unless you want to build a business that turns you into a hamster on a wheel. Close a deal, cash your check, get back on the wheel and find another sucker. No thanks.
Flippers who are going to take issue with this should answer one important question first. What created more wealth for you and your family? The houses you flipped or the houses you kept? Winning in the real estate investing game is measured by how big your stake is. How much America have you been able to accumulate ownership of? How much passive income? How much annual, glacial appreciation are you gaining? How financially bulletproof have you made your grandkids and their grandkids?
Let’s join together and let the Rolex’s and Lamborghini’s fade to the background. Concentrate on picking winning markets. Buy assets that will be in demand for as long as the eye can see, both for rent and for sale. Whether you are an experienced entrepreneur in real estate investing, as aspiring one, or a fund manager dipping your toe into SFR for the first time, this is not a trade. It’s a business. And every great business takes time, attention, skills, and most of all, patience.
Let me begin with the conclusion: more than a trillion dollars in US real estate equity is going to be consolidated over the next decade. The Single Family Rental industry, which emerged as an institutional asset 10 years ago, is being reborn as a commercial real estate food group now. The apartment industry is adopting single family rental, and things are about to get really interesting.
To see where the path of Single Family Rental is likely to lead, look at the path of it’s more mature cousin, Multifamily Rental, more than 25 years ago.
In 1979, in an effort to reduce inflation, the Federal Reserve raised the discount rate it charged banks to a level that made many of them insolvent. Then, just two years later, Congress deregulated the same banks, allowing them to offer a wider spectrum of financial products, including variable rate commercial mortgages. The combined impact of these two government actions was to (a) render the business model of savings and loans unworkable, and (b) give them a license to gamble to make up the shortfall. Many gambled on risky loans to commercial real estate developers, a business they didn’t have experience in.
By the end of the decade, the music stopped, over 1,000 savings and loans went under, and $400 billion in distressed assets needed to be packaged and sold. The Resolution Trust Corporate was formed to resolve the crisis, and a fire sale ensued.
Commercial real estate operators and financial institutions stepped in to capitalize on the opportunity, and the modern era of institutional real estate investment was ushered in. To add fuel to the flame, the RTC offered very attractive seller financing to enable buyers to leverage their capital 3 to 1.
This chart illustrates how the total asset value of just one form of institutional real estate investment, REITs, rode the wave of this trend.
It’s uncanny how the experience of the last ten years in the housing market runs parallel. Clumsy government action set up the unintended consequence of risky real estate lending, just like in the 1980’s. A wave of distressed real estate hit the market, threatened the overall economy and spawned a government-sponsored bailout.
Smelling blood in the water, deep pockets converged for the historic opportunity. The early players were first attracted by the short term trade, but stayed and built long term businesses. The market liked what it saw. Just like last time.
The government liked what it saw too, and has begun offering fantastic financing options. Last time it was seller financing from the RTC. This time is Freddie Mac, and soon probably Fannie Mae and FHA, who are creating the lowest cost financing ever offered to SFR owners.
In the 20 years following the savings and loan crisis, over $1.8 trillion in multifamily asset value was consolidated by institutional investors. If the pattern holds, capital will flow into SFR over the next decade on a similar scale. Existing players will expand and new players will enter.
And then there’s this. Some of the new players in SFR are folks from the Multifamily industry. As evidence, take a look at the sponsor board for the upcoming IMN Single Family Rental conference. This is the event of record in SFR, and I don’t ever recall seeing a presence from the commercial real estate industry. But there they are. And we welcome them with open arms.