Retail investors have taken the spotlight during the pandemic. Fueled by stimulus money, empowered by free trading apps like Robinhood, and organized in online communities like Reddit they have taken the stock market to new highs and have propped up some of even the most seemingly doomed companies (case in point, GameStop). But while retail investors do account for a large part of the investable capital in the world, it is still just a fraction of the size of what are called “institutional” investors such as a pension, endowment, insurance, and sovereign wealth funds. As retail investors rush into the equities market, many for the first time, institutions are looking to investments that have historically been the territory of the “main street” investment world: single-family home rentals.
Large financial institutions started taking single-family homes seriously as an asset class after the financial crisis in 2008. Big private equity firms got into the mix, the biggest of which, Blackstone, spent tens of billions as houses around the country were being sold from foreclosure. They went on to buy over 50,000 homes and rented them out under the brand Invitation Homes. They also acquired another 30,000 rentals when they merged with Colony American Homes and Starwood Waypoint Residential Trust. Eventually, these properties were spun off into a publicly traded REIT.
This move has paid off. Demand skyrocketed for detached abodes during the pandemic as many fled cities and crowded buildings. “Single-family is having a major moment. It outperformed any expectations,” said Clayton Wyatt, VP of Business Development at Roofstock, a single-family home marketplace and investment platform. He worked for Jefferies & Company when they helped Blackstone raise the capital for their SFR spending spree. “The pandemic made people realize more than ever that they didn’t want to share a wall, that they wanted a space that felt like their own,” he said.
This has pushed many would-be homeowners into the housing market. Even with historically low-interest rates, housing prices have become out of reach for many. Others, particularly younger generations, actually prefer the personal flexibility and financial independence of renting versus owning a home. “It might be that the American dream isn’t owning a home, it is just living in the type of home that provides you with your own personal space,” Wyatt said, adding, “who knows, maybe the American dream going forward will be investing in rental housing to build generational wealth.”
Institutional investors are hands-off. They need investments that can be easily managed and scaled. Institutions are also focused on profitability, as they often have to pay a dividend to their limited partners. This posed a problem for detached, disbursed single-family rentals. When compared to larger buildings they do not have the same ROI; managing and maintaining two hundred units under one roof is much more cost-effective than doing the same for two hundred homes scattered throughout a metro. But, as Wyatt pointed out, single-family does have some important advantages, “People feel more ownership when they rent a home versus an apartment,” he said. “Because of that, you see retention rates in single-family rentals that are much higher than in multifamily, which makes them competitive when it comes to overall profitability.”
Open your own house
Converting stand-alone houses into a portfolio-grade investment took more than just capital. Making these properties viable at the scale required recently developed technology and some creative thinking about what parts of the rental process can be automated. One of the people tasked with making single-family homes capable of being managed en masse was Lucas Haldeman. He was the Chief Information and Marketing Officer for Colony American Homes when they were amassing their single-family portfolio from the wreckage of the great recession. “Coming from the multifamily industry we had to think about ways to function without on-site leasing and maintenance staff,” he told me. “We know that for a lot of regions the average drive time between properties was 60 minutes and that just wasn’t doable for a leasing team so we knew that self-guided tours was the only option.”
By adding smart door locks, a scheduling system, and connected thermostats, Heldeman’s team was able to make the properties available for a tour without the need to be let into the unit by an agent. When I asked why a thermostat was so important to the leasing process, he could help but chuckle at my southern Californian naivete, “In Arizona where we started we had a painter leave with the thermostat turned down and we got hit with a $27,000 electrical bill.”
Haldeman went on to use what he learned to help bring multifamily buildings up to snuff with its single-family counterparts by founding SmartRent. You have likely heard that name recently since they became public at a valuation of $2.2 billion thanks to a special purpose acquisition company (SPAC) created by the built world investment firm Fifth Wall. The investor excitement likely has a lot to do with the incredible untapped market for smart-home technology in multifamily buildings. Lucas explained it like this, “I would say that less than 1 percent of apartment buildings and complexes nationally have self-guided tours. We are the largest company in the space and we service 160k units, there are 20 million units in the US alone.”
The number of units that allow for self-guided tours seem to have nowhere to go but up. With that increase, many are betting that the way self-guided tours are facilitated will change as well. “Self touring is going to be the new norm,” said Anthony Esper, founder of Occupi, a self-guided touring software. “The problem is that it is so removed from the first stage in the funnel, which is the marketing. We need to give prospects the ability to start a tour wherever and whenever it needs to happen. Soon I think we will see yard signs with QR codes that will activate a self-guided tour so it can be done on the spot.”
Even multifamily buildings are starting to shrink their on-site leasing teams thanks to innovations like self-guided tours, technology like automated communication, and new business strategies like off-site leasing call centers. This trend will likely only continue since the growing single-family rental industry has no choice but to find ways to lease inventory without the help of an in-person salesperson.
Hands off my touchpoint
Anytime you have to meet with a renter or a prospect in person, it costs money. This is obvious for time-consuming meetings like property tours but is less so for smaller tasks like collecting rent. Even still, the process of collecting physical checks can add up to be an expensive endeavor when multiplied by every unit and every month. Many building managers try to get their residents to pay through digital payment systems but, even though they are often easier for renters, they are not always adopted. That is, of course, before the pandemic.
Jason Hagen is Cheif Opperating Officer of Cobblestone, a private real estate trust that invests in senior and modular communities throughout the South West. “Our demographic, snowbirds, always wanted to write checks,” he said. “But even they were willing to make the switch to a digital process during the pandemic. Now, most of our properties are one hundred percent paid online. Residents embraced it, it didn’t feel like we were forcing them to do it and so it happened very naturally.”
Writing a check to pay rent is an example of how some habits stay in place for no other reason than inertia. Sometimes it takes an opposing force to redirect our energy into more efficient forms. The pandemic did exactly that. For even the least tech-savvy things like digital communication and online purchases became the norm. “The adoption of online rent payment went lock and step with digital communication,” Hagen said. “Before residents didn’t want to give their email addresses but now they do it happily. We used to have to print out 500 letters and now we can do almost all of that over text and email.”
Don’t lock me in
The multifamily software industry is rather consolidated. A few early entrants were able to vacuum up the market and their stickiness has locked most operators in to using one system or another. Usually, the first step on the journey to build a building’s tech stack starts with the basics, things like accounting and basic management tasks that get handled by a software category called Enterprise Resource Planning, or ERP. Since ERPs hold much of a company’s important data and are critical for so many important functions they have an incredible amount of what economists call vendor lock-in. This means that the rest of a building’s technology usually gets planned around its ability to integrate with these property management solutions.
Nick Latz, Chief Revenue Officer at Zego, a resident experience platform said, “From what we have seen the largest players in single-family rentals are not happy with their property management tech stack. The reason is that the large property management systems are purpose-built for multifamily so they can often feel like a square peg for a round hole. Instead, some of these big portfolios are building their own in-house solution on top of platforms like Salesforce.”
The reason that Latz thinks that many single-family operators are struggling to adapt multifamily management tools to their needs is that those needs vary from property to property. “You might have some properties that need ID verification or special maintenance processes that require a small plug-in,” he said, “the existing ecosystem of property management software is not designed to add those plug-ins seamlessly.”
Most property managers have begrudgingly accepted that they are married to their systems of records. But as new portfolios of single-family rentals get assembled they are able to create their software stack with modularity and customizability built-in. No one likes the feel trapped by your technology and as more single-family asset managers find ways to unsnare themselves from their ERPs, multifamily investors might follow suit.
A home by any other name
One thing I kept hearing from the people that I interviewed is that the arbitrary distinction between “multifamily” and “single-family” rentals is blurring. Rather than needed to define themselves as one or the other investors are increasingly accepting of funds that are comprised of both. I even heard it proposed that we should just think of the entire category of “residential rentals” rather than trying to split it into attached and detached sub-categories.
SmartRent’s Haldeman said, “If I was an owner I would draw a circle around single-family homes around the buildings I own and look to invest in them as well.” This would make a lot of sense. If research shows that an area has a good economic forecast for multifamily rents, the same is likely true for single-family rates as well. Plus, having a central office point where teams could leverage their economies of scale and service both large and small buildings in a portfolio would be more efficient.
For single-family rentals to take their rightful place in the pantheon of investable assets, technology must play a large role. Making detached homes easier to lease-up and manage remotely is the key to making them as profitable and hassle-free as other commercial properties. But it isn’t just the software and the hardware that is creating this opportunity. The entire property industry is undergoing a shift in how single-family rentals are perceived by institutional investors. They no longer seem like a single income stream property (read: high risk) with lots of possible deferred maintenance (read: high cost). Now they are viewed as a steady bet in a world where people want more space but are fine with not owning it. Retail investors should take notice, as they are searching for the next meme stock or cryptocurrency to get rich off of, professional investors are buying up the houses that they live in.
