Paula Hess is a former editor of California Real Estate Magazine and a Los Angeles–based freelance writer.
Property Management 2.0
Bulk portfolios of single-family homes have redefined the rental business. How are large landlords coping?
July 16, 2014
Real estate industry watchers tend to view the housing market as an either-or proposition, either a buyer’s market or a seller’s market, but the Great Recession has created a third reality. “There has been a tremendous increase in people renting,” says Chris Herbert, research director for the Joint Center for Housing Studies at Harvard University. “Part of the surge in rental demand,” he notes, “is caused by finances damaged by the Great Recession and those unable to obtain financing.”
This renting revival is also fueled by investors who have bought foreclosed properties in bulk, often in all-cash deals—30 percent of listed homes in some markets—and converted them to rentals. The trend is driving a property management revival as well, spawning both opportunities and obstacles for property managers who have never before had to contend with single-family homes and their specific maintenance issues en masse. In some cases, it’s proving to be more cost-effective to have policies encouraging tenants to take care of repairs rather than send over plumbers and electricians for every small job. Managers are facing new technology issues, too, since software programs have never been commercially available to track SFH rentals at this level.
Today, the country’s largest landlord is equity firm Blackstone Group, whose holdings include Invitation Homes, which controls about 44,000 homes.
That’s a lot of roofs.
Managing the Big Picture
“How effective will property managers be?” Herbert wonders. “It’s hard to manage properties on this scale. It’s unprecedented.”
Managing geographically dispersed properties is “work intensive,” agrees Danny Kattan, managing director of PIA Group in Miami. Kattan and two other principals launched the company in 2009 with the financial backing of a wealthy family investor. In addition to owning a construction company and a reconditioning company that renovates acquisitions, the firm manages its portfolio of 500 units in South Florida and 100 units for third parties.
PIA Group’s criteria for purchasing, regardless of neighborhood, are cap rates between 7.5 percent and 10 percent, which have trended down from 2009’s rates of 12 percent to 13 percent, Kattan explains. PIA Group renovates all acquisitions and provides “basically a brand-new home” to all tenants. The portfolio includes Section 8 properties, many in working-class neighborhoods, which poses specific challenges to the bottom line. “An AC unit is stolen every week,” says Kattan. The average rent for PIA Group properties is $1,300 to $1,500, and PIA Group’s business counts on referrals. “At Thanksgiving, we give turkeys to tenants—those paying and those not. People say, ‘We want to rent with the turkey guys.’ ”
Given the cost of sending a repair person to single-family homes, PIA expects tenants to do basic maintenance such as changing air conditioner filters and fixing clogged toilets if the tenant is responsible for the clog. In the case of a toy getting stuck in the pipes, PIA will charge the tenant if a plumber is called.
PIA’s overhead includes insurance, taxes, and the cost of capital, plus the $500,000 sunk into developing its own software and processes. The software needed to manage SFHs didn’t exist, Kattan explains. The existing apartment-specific software could not address the multilayered home acquisition processes: purchasing, closing, renovating, working with vendors and contractors, and turning on and off utilities. “We realized that if we did not build it, we would have to wait for the industry to build it.”
Although the Florida company is still adding to its portfolio of holdings, Kattan notes that the single-family space is uncomfortable for local banks, which typically provide loans to corporate and individual investors for up to 10 properties. PIA Group is ready to leverage its equity and is seeking a $20 million to $30 million loan from an equity firm in order to purchase 400 more homes in the region. “The government left a hole for lenders to step in,” says Kattan. Investors like PIA Group can turn to several lenders, including B2R Finance LP, a Blackstone subsidiary that offers floating-rate loans starting at $10 million for SFH investors. “The big companies are setting up platforms to acquire and manage these assets. Their bet, and our bet, is that single-family homes will become an asset class much like multiple-family homes.”
One company that is intent on institutionalizing renting is Oakland, Calif.-based Waypoint Homes. “Our mission is reinventing renting,” says Doug Brien, co-CEO and cofounder. The company, through Starwood Waypoint Residential Trust, owns 11,000 SFHs in locales as far-flung as northern and southern California, Phoenix, Houston, Denver, Dallas, Chicago, Atlanta, Orlando, Tampa, and south Florida. The company recently went public and manages private funds for GI Partners and a number of other institutional and smaller investors.
Waypoint Homes has about 600 employees and handles all property management; teams of local property managers handle about 250 properties each. All of Waypoint’s local leasing specialists are licensed real estate agents. “We do all of the property management ourselves,” says Brien. In each region, Waypoint has a walk-in service center, sometimes in a Safeway-anchored shopping center, where tenants can pay rents and consumers can easily make inquiries. The company offers a loyalty program that rewards tenants with points if they pay rent on time and maintain the home with regular tune-ups. The points accrue toward upgrades and even cruises.
Waypoint is still acquiring properties, but Brien notes that home prices have increased and cap rates have declined from 10 percent to the 7 percent range since 2009. Although the tenant turnovers are half as frequent as with apartments, the cost to renovate SFHs is twice that of apartments, which is generally the case for the property management industry as a whole. The company, which launched in 2009, was one of the first large players in this space. Waypoint initially offered lease-to-own options but discontinued them three years ago, because, Brien says, “Investors wanted to control assets and decide when to sell.”
Like PIA Group, Waypoint also discovered the shortcomings of existing property management software. The company has spent four years developing Waypoint Compass, a portal for residents to pay rent, contractors to bid on jobs, and would-be tenants to view listings.
The company has positioned itself for a long-term presence in the housing market. “Renting has never been institutionalized,” contends Brien, “but it’s evolved and [more] people are renters by choice.”
Unlike investors with bulk portfolios, owners with several properties may locate property managers via third parties, such as All Property Management, which provides qualified leads of property owners to licensed property managers. According to Reggie Brown, CEO of All Property Management, “During the housing crisis, there were more ‘reluctant landlords’ driven by the need to rent out their homes to avoid involuntary displacement. Currently, home owners and investors are shifting from do-it-yourself management to using professionals who can provide better results.”
Washington, D.C.–based Nomadic Real Estate serves this noninstitutional niche and manages 400 properties, half of which are SFHs. According to Joe Rieling, cofounder of the leasing and property management company, Nomadic also struggled with inadequate operating software before the company custom-designed its operating software in phases, at a cost of roughly $75,000.
“The issue is that existing property management software programs are designed for either small property managers (1 to 10 units) or huge multifamily management companies (2,000-plus units). Existing software for companies managing between 100 and 1,000 properties is very limiting and not user-friendly or customizable, and it has no accounting integration,” Rieling says. “I see people writing on notepads. You need software; otherwise, it’s pure chaos.”
The demand for rentals in the region is high, with a three- to four-week absorption rate from marketing to rental. The demand comes from families moving back to Washington, D.C., from overseas, including State Department and military personnel; those relocating from the suburbs; and many who are unable to put 20 percent down. “Since we started the business in 2007, single-family homes have been very easy to rent,” Rieling says. Nomadic charges two fees: a leasing fee equal to one month’s rent to find a tenant and then 8 percent of the monthly rent managed, with monthly rents typically running about $3,200 for a home in the city but reaching up to $5,000 in some neighborhoods. He says 70 percent of the homes Nomadic rents are joint-tenancy arrangements with three or four young professionals on one lease.
Nomadic employs 10 people, and wages and insurance premiums comprise 75 percent of the business’ costs; Nomadic’s leasing agents earn a commission on top of their base salary.
Rieling says human error has the potential to nibble at the bottom line. For example, if a leasing agent promises a washer/dryer as part of a rental package, that misstep can cost a month of earnings on that property. “Leasing agents do not have the authority to make final decisions, so this type of mistake often does not surface until the tenant has taken possession,” Rieling explains, at which time he can either contend with a furious tenant or make this concession. “We analyze on a case-by-case basis and often honor what they were told.”
Poised for Growth in Vegas
In Las Vegas, price increases have weeded out investors seeking to add SFHs to their holdings, and as the inventory of SFHs began shrinking in 2012, cap rates also began dropping from 10 percent to 6 percent, says Glenn Plantone, broker-owner of Vegas International Properties. Also an investor, Plantone began purchasing foreclosed properties in bulk packages of 10 to 40 SFHs and condos starting in 2011 and continues to assemble properties both individually and in bulk from HOA foreclosures. He has personally flipped more than 200 of these properties in the last several years, selling many to investors and owner-occupied buyers. Most of VIP’s investors are out of state, many from California, and about 25 percent are international.
Plantone’s portfolio mushroomed from zero to 240 properties in two years, necessitating the hiring of property -manager Kara Morrison to manage 250 properties, including 100 SFHs.
“[SFHs] are a lot easier to manage than condos,” says Morrison, referring to the absence of maintenance issues that affect adjoining walls or properties. The type of tenants varies, too. “Renters of single-family homes are generally older with families and possibly owned a home at one time; they may be waiting to buy again,” she says.” Like other property managers who scale up their business, Plantone grappled with software. After “flirting with developing our own,” Plantone says, he opted instead for the Web-based AppFolio software.
VIP charges $100 or 8 percent of rent to manage a property. The company recently requested that tenants make minor repairs in exchange for rent concessions. Plantone also has lease-to-rent options on 10 to 15 properties, and the tenants pay the home warranty costs.
Regardless of the market, Plantone says of VIP and its staff of eight, “We are poised for growth.”
Real estate industry watchers may be cautious about the ability of property managers to manage large portfolios of SFHs, about whether price increases will preclude a further influx of investors into the SFH space, or even whether the cap rates are sustainable. Regardless, the single-family landscape has been altered by investors. PIA Group’s Kattan says, “In the next two to three years, we will have an SFH institutionalized space that’s in America’s best interest.” The availability of rental homes, he says, will allow renters the flexibility to relocate to pursue employment and provide alternatives to those not ready for home ownership.