All Forum Posts by: Tyson Scheutze

Apologies your experience was not what we would want for one of our clients. Good luck with your investing. 

Read below for my remaining notes from the Single Family Rental Forum (East) that are specific to build-for-rent!

NOTES

• Build-for-rent is the only game in town.
• Nationwide 45,000 current BFR in pipeline. There were 27,000 in 2023. There were 7000 in 2020.
• In BTR communities, think about what do we want to charge them for vs. what do we want to give them for free?
• Outdoor fenced space and smart home tech is expected in most BFR.
• Maintenance experience is the number one reason tenants leave BFR.
• BFR tenants are stickier than multifamily.
• Leverage lessons learned from BTR pioneers.
• Prospect pool For BFR overlaps multi and scatter sites.
• BTR residents often want less onsite people presence. Belief is they want freedom of interaction in their experience.
• Adjust what has been pertinent in multifamily and what has been pertinent in SFR to a better product.
• What is the difference between a value-add and opportunistic fund?
• One owner is looking to exit to middle to high sevens on yield on cost.
• Cap exits are high 5’s, low 6’s for some Class A product.
• Turnover cost projections should escalate: $500 first year, $850 second year, $1000 third year.
• Consolidation and density of BFR assets can be an issue for insurance companies.
• Owners should write a narrative about deals/assets for insurance providers.
• 2-3% rent growth is always appropriate.
• Rents are flattening.
• Buyers are focusing on untrended rents.
• Getting the pig through the snake, as an analogy for getting through current excess rental inventory absorption to get to a gap that will exist in a couple of years.
• A lot of opportunities to buy aged C-class homes at 8, 9, 10 caps.
• Small investor expense ratios are 40%.
• Large operator expense ratios are 37/38 %.
• Large platforms/institution expense ratios are 33/34%
• Big benefit of blanket insurance policies is to drive costs down.
• A lot of BFR is looking for a bridge product for 2 years to hope rates get back down in the 5% range.
• Cannot use HPA on BFR communities you plan on selling based on cash flow.
• 5-18% rental premium being achieved based on new construction communities compared to new construction scatter sites.
• For real time comps go to biggest operators BFR, small multifamily.
• More confidence about the cost of construction having stabilized.
• Some products which will not be good for retail buyers will also not be good for rentals.
• What is core + capital?
• On-site, timely maintenance is #1 amenity for BFR.
• You are buying a stabilized untrended yield on cost.
• Apartment data is very good for BFR.
• BTR more resilient to flat rental growth.
• Fundamentals of BFR are normalizing.
• Look at supply coming into any market you are developing.
• Look at yields that are accretive to debt.
• Investors in 2021 and 2022 looking at just yields and not market value of their assets.
• Put together asymmetry in your investments, cap the downside but stack upside.
• Underwriting the choppiness for the next 5 years, supply constraints will make a huge demand.
• Fundamentals are stronger now than they have been in the past 5 years.

@Robert Ellis

Thanks for the resources and your perspective. 

We can agree to disagree on the level of standardization in BFR.

Having met with some of the largest BFR capital allocators and aggregators in March in Nashville and last week in Miami, I can tell you many people are doing (and speaking of) BFR differently. 

As one participant said, build for rent is so broad it has become a bumper sticker which gets you 40 basis points on your financing.

It sounds like you personally are focused on an urban infill strategy which maximizes density and price per square foot rent. To some buckets of capital that is BFR, and to some it is not.

To some capital, as long as the product is not traditional vertical, apartment-style product then it is still build for rent.

The biggest evolution I have seen in Build for rent recently is the transition to multi-parcel and for sale/for rent hybrid developments which is contrary to what was more standard in build for rent 5 years ago---traditional single parcel developments for density and tax purposes.

I am seeing a lot of (most) developers currently go to the multi-parcel format for optionality of exit to offset market volatility.

The best definition I have seen for build for build for rent is non-apartment style, intentionally built rental communities.

Some of the types of products I am seeing labeled as build for rent include elements of the following or these developments are currently incorporating product labeled BFR:

Suburban tract built home communities

attached and detached townhome communities

master planned communities

mixed use communities

cottage style home communities

urban infill communities

patio style home communities

new modernism and new urbanism neighborhoods

stick built small home communities

horizontal apartment home communities with greater green space and more community programming

Let's catch up at some point to discuss further. You are in a market, we love. 

@Robert Ellis Thanks for offering your perspective. Build for rent is just coming into its own and lacks standardization. What is called build for rent is very broad and varies considerably even in the same market. The build for rent we pursue is about density, but not maximizing density at the cost of the experience and community of our residents. The maximum density build for rent, we view more as a traditional apartment community product.  

The IMN Single Family Rental East and West conferences are always great opportunities to meet with the most active residential rental experts in the country. And this week's conference in Miami delivered lots of insight as usual. The mood was decidedly more pragmatic than the unbridled enthusiasm of some past events. But accompanying a more measured tone was also the noticeable maturation of thought around the still developing SFR and BFR asset classes.

The consensus, not surprisingly, was that we are in uncertain times but there are certain societal and market fundamentals that make residential rental property, aka SFR and BFR, extremely attractive asset classes, short-term, mid-term and long-term.

This thesis statement was driven by the collective understanding that there are significant rental inventory supply issues in most markets in the country. Even those markets with oversupply are believed to be lacking significant supply for the mid-term and long-term needs. As one participant said, it is not 2009 and inventory will not be coming from foreclosures.

The main takeaway is that the best (and only) way forward is going to be in the construction of new, intentional build-for-rent (BFR) communities. The biggest constraint on these communities is financing rate uncertainty. As rates go, we all go. Read below for notes from the conference and look for notes next week specific to BFR.

NOTES

- Home buying is currently double the cost of renting in most markets. Home price appreciation outpaced even aggressive projections.
- One operator said their data showed slow interest in applications Q1, uptick April/May that also is being accompanied by FICO rate increase.
- Insurance costs are the biggest issue for investors, rates could be higher for a lot longer. The best exit for many SFR aggregators is adding to MLS, for potential purchase by owner occupants.
- M&A opportunity is currently turbo-charged in our space.
- Many sellers of portfolios have been more moms and pops and smaller mom and pop owners are still bringing their smaller portfolios to market.
- Current inventory we’re seeing is not coming from foreclosures. It is not 2009.
- It is as much about stability of rate as it is about reduction of rate.
- Investment going into tier 2 or 3 markets with less insurance risks.
- Service providers are offering more and more operating services.
- Lenders are not balance sheet lenders. They are looking for an exit for their loans.
- Investors would be wise to look into stabilized bridge products with low prepayment penalties.
- Prepayment options have become more flexible.
- There are a lot more bridge loans for rental products, different than original conceptions of bridge products.
- Lenders want to work only with sponsors/operators they are already comfortable with
- Capital is meeting the needs of investors, more flexible.
- The biggest factors for lenders are LTV, FICO, DSCR.
- In a tight DSCR environment, insurance is becoming increasingly important. Needs to be collected early.
- 3% rent growth and 3% HPA is being modeled in most markets.
- Most current rates are in the 7-7.75% range.
- Competitive pressure to deploy capital compressing dropping of rates.
- Buyers are underwriting portfolios to as-is rents.
- Machine learning models are helping to reduce risks.
- Reverse migration to Rust Belt is occurring based on affordability issues elsewhere.
- Scatter site is a defensive asset offering a lot of optionality.
- Market conditions are challenging for scatter site hold unless you are underwriting a 10-year hold.
- Setting up operations for SFR from scratch is very difficult.
- One investor is buying at cap rates in 5s or 6s. Their core product funds return low teens IRR. Their opportunistic fund returns IRRs in the high teens / low twenties. An Atlanta broker reported the average size of 20-30 units at 6 caps.
- Every lender has a certain amount of distress currently. You may not know it.
- Short term rental first bucket of distress based on municipalities prohibiting.
- One broker is targeting retirement age portfolio owners.
- ADU market should be strong for a long time to come.
- Use bandit signs for disposition.
- One investor said for their property sourcing, they are touching people 80-90 times before they buy.
- All lead gen is 90 days out of activity before hits happen.
- There are cost segmenting services that let you do cost segmentation for $450.
- You can’t monitor what you can’t measure.
- Asset management is building client feedback into customization of investment strategy.

In this week’s blog, I am turning it back over to COLE THOMPSON. He continues with Part Two of his three-part series.

In the ever-changing landscape of residential construction and development in the southeastern United States, adaptability and resilience have been constant companions. As we reflect on the challenges faced during the financial crises of 2007-2012 and draw parallels to the current market conditions of 2024, one concept stands out: the “Missing Middle.”

The term “Missing Middle” refers to the scarcity of housing options between single-family homes and large-scale apartment complexes. This gap in the market has become increasingly pronounced, posing challenges for both developers and consumers alike.

During the Great Recession, the housing market saw a shift towards multifamily rental properties as homeownership became less attainable for many. This trend has continued into 2024, with an increasing demand for rental housing driving up prices and creating affordability challenges for middle-income families.

To address this issue, developers and construction companies have begun to explore innovative solutions such as “Build-for-Rent” projects. These developments offer the amenities and privacy of single-family homes with the flexibility and affordability of rental properties, filling the “Missing Middle” gap in the market.

Another trend that has emerged is the use of light gauge steel construction, which offers durability, efficiency, and cost-effectiveness. This method has gained popularity among developers looking to build affordable housing quickly and sustainably.

Additionally, developers have diversified their portfolios by introducing new product types such as townhomes, duplexes, and triplexes. These smaller-scale developments not only cater to the growing demand for affordable housing but also promote community living, walkability and neighborhood or community revitalization.

Collaboration has been key in navigating these challenges, with developers, lenders, and policymakers working together to find innovative solutions. Strategic partnerships and alliances have enabled industry players to pool resources and expertise, ensuring the success of new projects in a challenging market.

As we look towards the future, it is clear that the “Missing Middle” will continue to be a focal point for residential construction and development in the southeastern US. By embracing innovation, fostering collaboration, and remaining adaptable in the face of adversity, we can overcome the challenges of today and build a brighter future for our communities.

@Jena Vail the ideal locations are usually the same places traditional homebuilders are looking. 

In this week’s blog, I am turning it over to Cole Thompson. He uses his 25 years of experience to offer insight on the parallels between the market during 2007-2012 and today’s market.

As a seasoned professional in the residential construction and development industry in the southeastern United States, I have witnessed firsthand the rollercoaster ride of economic ups and downs over the past 25 years. Reflecting on the similarities between the financial challenges of 2007-2012 and the current market conditions of 2024 sheds light on the resilience and adaptability required to thrive in this dynamic landscape.

During the tumultuous years of 2007-2012, the southeastern US, like much of the country, faced unprecedented financial turmoil. Mortgage-backed securities were not a common household term, yet the collapse of the housing market and the onset of the Great Recession sent shockwaves through our industry. Consumers were left reeling from plummeting home values and credit markets tightened. Homebuyers struggled to secure financing, while construction companies grappled with stalled projects and diminishing demand. In these pressures, we saw the consolidation of the American Household. By this, I mean multiple generations under one roof. We must not forget the impact of gas prices, post hurricane Katrina. In the Charleston, SC and Columbia, SC MSAs (Metropolitan Statistical Area), it was business as usual until Hurricane Katrina. It was like a lever was pulled on purchases and buyer confidence. It was a scary time to say the least. When you look for advice and 40-50 industry veterans cannot help, it is a lonely place.

Fast forward to 2024, and while the economic landscape has evolved, echoes of those challenges persist. Today, consumers continue to face uphill battles in securing affordable housing and navigating the complexities of mortgage lending. The ripple effects of global events and economic policies reverberate through our region, influencing interest rates, inflation, and housing affordability. With this uncertainty, gas prices are once again on the rise as inventory numbers plummet in secondary and tertiary markets.

However, amidst these challenges, there are also signs of resilience and opportunity. Developers and construction companies have adapted their strategies (Build for Rent), embracing innovation (light gauge steel construction) and diversification (new product types) to meet changing consumer needs and market demands. Collaborative partnerships and strategic alliances have become paramount, enabling industry players to weather the storm and emerge stronger than ever.

As we navigate the uncertain waters of 2024, it is essential to draw lessons from the past while remaining agile and forward-thinking in our approach. By staying attuned to market trends, leveraging technology, and fostering a culture of adaptability, we can position ourselves for success in the face of adversity.

In conclusion, the parallels between the financial challenges of 2007-2012 and the current market conditions of 2024 serve as a powerful reminder of the cyclical nature of our industry. By embracing change, fostering resilience, and maintaining a relentless focus on innovation, we can overcome even the most formidable of obstacles and continue to build a brighter future for our communities in the southeastern US.

@Julia Hagen Glad the stories resonated. Most of my capital came from private, hard-money lenders and other friends and family who could see the opportunity in single family homes in our markets. 

Apologies for your experience @Todd Weber. That is not the experience we seek for any of our clients. Can I ask when you were a client of Auben? And in what market?  

We completely overhauled our operations a year ago because as we grew in size, we found we were not consistently and uniformly delivering the personal experience we desired. Our main focus  of the operational improvements included bringing in senior and experienced managers, providing more proactive communication updates and adding an investor hotline so as to ensure a more personal and communicative experience for our residents and investors.

Thanks again for the feedback and goo luck on your investing journey. 

If there is anything else you feel I should be aware of as an owner, you can reach me @ [email protected]