Don’t permit your real estate growth to sabotage itself.
In the years since the Great Recession, the rental housing sector has boomed. In fact, around 1 million rental households emerged in the United States between 2010 and 2017, according to the Harvard University Joint Center for Housing Studies’ 2017 report on American rental housing. While many of those households have moved into multifamily apartment developments, the long-term trend of renting instead of owning in the United States, precipitated by the housing crash in the mid-2000s and solidified by generational preferences of Millennials and, to a lesser degree, Generation Z, is currently affecting our single-family housing stock in significant ways. By extension, real estate investors’ perspective on owning and acquiring rental properties is changing. This represents great opportunity and impending peril if investors are not cognizant of the outside forces affecting their investment strategies.
Opportunity: Real Estate Can be Acquired on Scale – Any Scale
Historically, real estate investors have been sharply divided along the lines of “big,” institutional firms and hedge funds capable of acquiring hundreds or thousands of properties at a time and “little” players, those who purchased properties one at a time, leveraging a specific strategy from beginning to completion. Seldom did the two types of investor cross paths. In fact, they were often nearly invisible to each other since each operated on a scale difficult to perceive from the other end of the spectrum.
Today, thanks in large part to the internet, that has changed. Small investors watch institutional funds in order to derive market insights and data about economic movements. Large investors may watch smaller investors’ movements, albeit likely en masse, in order to identify the next market they will enter. Everyone watches everyone, comments on what they’re doing, then makes decisions that are consciously or unconsciously affected by all of that input. The result has been a good one for real estate investors because today, more investors than ever are aware of the many ways in which they can acquire properties for their rental portfolios and are more actively engaged, often via self-directed retirement accounts and their associated tax-advantaged strategies, in doing so than ever before.
“Single-family rental houses rent literally as fast as we can build them right now,” observed developer Bruce McNeilage, a southeastern developer who specializes in building single-family developments that he makes available to his tenants for purchase at any time. McNeilage makes it a policy to keep rents low and his housing as affordable as possible for his tenants, but he also funds his ongoing mission to expand existing southeastern housing inventory in a price range that the average policeman, teacher, or nurse can afford, as he puts it, by selling off his developments periodically. When they go on the market, they move immediately, in large part because the concept of single-family rental investing is ubiquitous across the spectrum.
“We just completed 10 brand-new houses in Douglasville, Georgia, all on the same street, and they rented as fast as we finished them,” McNeilage noted. His company, Kinloch Partners LLC, recently sold 34 homes (also in Georgia) to an institutional investor, clearly demonstrating the massive demand for new, single-family rental properties at all levels of investor activity.
The Peril: It is Tempting to Underestimate a Simple Process
It will never be a negative that more real estate investors are leveraging their capital with more knowledge and power. However, when buying power and investment strategy exceed pure capability, danger emerges. Real estate investing is often referred to as “the great wealth equalizer” because it offers opportunities for entry at nearly every level of funding. If you have no money but are willing to put in the time, you can build wealth. If you have no time but are willing to put in the capital, you can build wealth. Furthermore, real estate investing is not a complicated concept, particularly not the rental model. Nearly every adult in America today has rented a home at some point in their lives, and Pew Research estimates nearly two in five households are renting today. As a result, the idea of being a landlord is not nearly as intimidating as the idea of, say, shorting stocks for profit. Most people feel they are capable, a feeling that can quickly create a quicksand situation for an investor actively leveraging their capital to purchase single-family rental properties on a relatively large scale.
“We see the biggest opportunities for improving bottom lines and, honestly, saving investors from losing their properties to foreclosure in some cases, when we meet an investor who recently took their portfolio from 1-3 properties to 5 or more,” said Linda Liberatore, founder and president of rental property management service Secure Pay One. Liberatore’s company is not a full-service property management company but emerged in Chicago and now operates nationwide to “fill the gap” between active, “DIY” (do-it-yourself) landlords who manage all aspects of rental ownership and full-fledged, large-scale investors who want to be fully hands-off with their investments.
“When you go from personally managing your rentals to having too many rentals to handle this way, you usually do not see rental owners wanting to just hand over the reins,” Liberatore explained. She specializes not only in collecting rents and coordinating the maintenance, screening and leasing processes for landlords, but also in helping a newly-scaled landlord monitor their investments without losing money – or their mind. “With rentals, every day adds up. If you have three rentals and it takes you 10 days longer than it should for each one to get that rental turned and rented out each time a tenant leaves, that’s 30 days of rent lost. Not good, and it can be a catastrophe for new landlords,” she said.
“When you get to 10 properties, you are talking about 100 days lost – more than three full months of rent. When you get to 15 properties, you have lost five months of rent, at least, and there are probably about a dozen other things falling through the cracks that will cost you as well. The margins are just not there. Landlords cannot afford to not stay on top of this stuff.”
With more Americans buying real estate than ever before (RealtyShares and Harris Interactive report about one in six Americans were investing in real estate in 2017 compared to 2012 when only about one in 10 were), there are more opportunities to buy and more opportunities to grow “too fast” as well. With developers like McNeilage doggedly seeking new ways to create affordable housing inventory in some of the nation’s most attractive markets and relying on other investors, both institutional and individual, to support those efforts by purchasing the properties they cannot sell at retail, exponential growth is a more accessible option than ever. It is imperative that expanding investment businesses expand responsibly and with cognizance of logistical challenges in real time so their own success does not sabotage itself.