#5 - The Opportunity for Single Family Rentals

In partnership with

Hello SCPS Family,

It has been a busy few weeks. Since we last posted, I have had the opportunity meet and consult with various people in the industry who have been gracious enough to spend some time with me discussing everything from overcoming operational challenges as a alt investment startup, to adequate splits for GPs and Co GPs, to capital raising techniques for your first building.

THE OPPORTUNITY FOR SINGLE FAMILY RENTALS IN THE DC METRO MSA

We already talked about the DC Metro MSA as a market and the opportunity we thought it presented for our firm. Now we want to dive into the asset asset class of single family rentals in the DC Metro market and why there is an opportunity for success.

Let’s start with the advantages of owning and operating a SFR portfolio:

SFR tenants absorb more of the TCO (total cost of ownership) that a multi family tenant. They are responsible for the utilities, the lawn care, the snow removal and other ancillary expenses that most multi family operators will assume as owner of the property.

Well kept properties have lower maintenance costs than a class B or class C apartment building. Most multi family operators who subscribe to a “value-add” playbook, buy class B or C buildings to make improvements and force appreciation. While this is a solid strategy, the value add work most often amounts to a large capital expenditure on the property. A well maintained SFR can go through an entire lease cycle with minimal repairs and still appreciate in value.

At present, buying a home in an elite school district can be expensive for many folks who lack the liquid capital to make the required down payment. In many cases, the next best option that provides flexibility in the near term is renting in the school district of choice.

Historical SFR Rents vs. Apartment Rents
Even during recessionary periods, single family rents have stayed positive even when apartment rents have seen a decline

The single family rental market remains a resilient asset class. It has historically made up one third of all rental housing stock across the United States.

SFR rents are expected to continue to outperform both home prices and apartment rent growth even during specific times of economic and political uncertainty.  These fundamentals have driven significant institutional interest as a viable asset class for investment.

SFR asking rents are forecasted to grow by more than 3 percent in 2023, more than 3.5 percent in 2024, more than 4 percent in 2025, and more than 5 percent+ in 2026.

• Single-Family rent remains strong, averaging $2,167 per month, up 4.3% year over year, as of the second quarter of 2023.

• Single-Family occupancy has stabilized at 96.0% as of the second quarter of 2023, slightly down 30 basis points year over year.

This resilient rent growth is due to a combination of factors:

• Low supply of for-sale and rental properties in the majority of markets

• Higher mortgage rates and continued elevated home prices

• Homeowners are staying in place longer diminishing purchase opportunities for SFR investors to increase supply

• Continued healthy job growth numbers

• Inflation driving renters to rent instead of purchase

• Approximately 43 percent of single-family renters who prefer to rent plan to stay in their current home for five or more years

• Institutional investors (owning 1,000+ homes) purchased 1.6 percent of total home purchases in the first quarter of 2023, slowing from 2.4 percent of total home purchases in the peak of the second quarter of 2022 while the industry took pause due to prevailing economic conditions.

• All investor types made up 25.6 percent of sales in the first quarter of 2023, well above the historical average of 21 percent from 2006 to present.

• Institutional investors make up 3% of SFR owners nationally while in many markets they exceed 10%.

• Example of Owners: Progress Residential, Invitation Homes, First Key Homes, Amherst, American Homes, Tricon America, Front Yard Residential Connerex, Vinebrook

 NOTE: The Washington DC Metro market accounts for less than a 2% distribution of "institutional investor" owned homes.

Institutional investors are defined as owners who own more than 1,000 units of Single Family Rentals

"Mom & PoP" landlords are defined as owners who own fewer than 10 units of Single Family Rentals

_{SEVILLE Capital's acquisition objective for the SCPS SFR EG FUND is 285 homes distributed across the green light school zones in MD and VA.}

MOCO SCHOOLS - HOW ARE THEY RANKED?

‣ 9 of the 12 highest ranked public schools in the state of Maryland are in one county.
‣ Home prices in Montgomery County MD have risen by an average or 4% YoY since 2019

WHAT ARE HOMES IN MOCO TRADING FOR?

THE MATH - HOW DO YOU MAKE MONEY?

THE COMPETITION
BIGGEST LANDLORDS OF SFR PROPERTIES AND MULTI FAMILY

 Of the 14 million single-family rentals (attached and detached houses):

• 80% (11.2 million houses) are owned by mom-and-pop landlords with 1-9 rentals

• 14% (1.96 million houses) are owned by landlords with 10-99 units

• 3% are owned by landlords with 100-999 units (TARGET AREA FOR SEVILLE CAPITAL)

• 3% (around 400,000 houses) are owned by a handful of huge landlords with 1,000+ units each.

The largest single-family rental landlords in the US:

• Progress Residential (about 85,000 houses), a privately-held company.

• Invitation Homes (about 80,000 houses), a publicly traded REIT [INVH]. The company was formed by Blackstone during the Housing Bust in 2012 and later spun off to the public. Blackstone sold is last shares in 2019.

• American Homes 4 Rent (about 60,000 houses), a publicly traded REIT [AMH]. The company was founded during the Housing Bust in 2012, and was spun off via IPO in 2013. In 2016, it merged with American Residential Properties. At the time, AMH owned 39,000 houses, and American Residential owned 9,000. Combined, it became the largest landlord at the time.

• FirstKey Homes (about 50,000 houses), privately-held company.

• Blackstone got back into single-family rentals by acquiring other big landlords. In 2021, it acquired Home Partners of America with 17,000 rental houses. In January 2024, Blackstone announced it would acquire Tricon Residential, a publicly traded Canadian company [TCN], with about 38,000 houses in the US and multifamily apartments in Canada. When the Tricon deal closes, Blackstone will once again be one of the biggest single-family rental players. Blackstone is not acquiring individual houses.

• Equity Residential to purchase Blackstone’s portfolio

These five companies combined own about 330,000 single-family rentals, or about 2.4% of all single-family rentals, and about 0.3% of the 95 million single-family houses in the US (occupied and unoccupied, attached and detached).

• The PPMs for both the single family fund and the multi family fund are in draft. Both are scheduled to be completed within the next week or two.

• The website is in development and is coming along nicely. We anticipate a soft launch for our domain and a move into production within the next month.

• The soft launch timeframe for the firm is tentatively scheduled for November.

In closing, we would like to reiterate our dedication to bringing our LPs a first class platform to invest on their own terms.

Recommendations of our newsletter are greatly appreciated. Help us spread the word to others who may be interested in what we are doing. It is completely FREE and comes with no obligation.

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For general inquiries please contact us: [email protected] 

v/r,
Michael Gillespie
SEVILLE Capital

Disclaimer: The authors of The SYNDICATE newsletter are domain experts but are not tax advisors or attorneys. This email is for educational use and not financial advice. It encourages independent research and consultation with professionals before making financial decisions. Our content, which may contain affiliate links, is subjective and not to be used as the only basis for such decisions. We are not responsible for any losses from relying on this information. Past performance of any asset is not indicative of future results.

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