Month: August 2016

by Tim Herriage Tim Herriage No Comments


As an investor losing a good tenant is never ideal on a number of points: a vacancy, a rental refresh, cost of marketing, responding and screening prospective tenants and the whole lease up “getting-to-know” your new tenant process. Don’t panic. You have options.
A tenant with monthly rent that is a large portion of their income, possibly a rent increase, may be inclined to ask the question……Should I continue renting or should I buy?
This is a classic dilemma facing a household considering stabilizing living arrangements. This applies to a household of one, or a family of many.  The question is answered by satisfying one of two questions” Am I likely to be staying in the job/location for more than a couple of years” and “Is renting or buying cheaper and economically wiser?”
Redfin, is a next generation real estate brokerage that positions itself as redefining real estate in the customers favor, most specifically in listing or finding, and transacting the sale. To improve their appeal and process they regularly survey their audiences and markets. This latest survey was to determine if there is substance to the argument that “high rents are driving first-time homeowner purchases.”
Redfin received 1,887 responses from recent homeowners in 41 states and Washington, D.C. The survey was conducted August 2016. This illustrates current decision shifts in the rent vs buy argument:
8-31 Buy ConcernAffordability is the dominant concern, but embedded in this is the conundrum of paying high rent to be in the home the tenant wants versus saving for a down payment on a home purchase.  In this conundrum is a lesson for investors looking for alternative investment strategies.  That rent payment could become a loan payment and secured long-term investor cash flow, with a mortgage security over the house. Rent payment becomes a mortgage payment, along with a significant reduction in rental management and expenses for the investor.  There can be compelling convenience and financial benefits for a tenant transitioning to a homeowner in this property also, especially if their are school-aged children involved.  There are a number of services that can help you transition and manage these sorts of private mortgages. 2020 REI can help you structure this.
These criteria come as no surprise and mirror what wise rental investors should be seeking in a single-family residential rental.
Lessons from this survey and any long-term  discussion about selecting rental properties is the fact mid-market renters are not much different than mid-market homeowners.  Investors should position to answer their tenant needs in terms of housing goals, and be able to adapt if the rental market begins to peak by shifting to a position of seller and maybe lender.
I have number of colleagues in this business who have converted much of their rental portfolio into private loan portfolio. Many of their new borrowers began their relationship with this investor as tenants, with no intent to purchase. These family goals changed and the investor understood selling these properties at near market after the properties have paid for themselves as rentals was a sound strategy and reduction in his management time, expense and responsibility.  These were never, and are not, a rent-to-own strategy.
2020 REI Companies may be able to help you define and execute a combination tenant to buyer exit plan, where financing (for the tenant or the investor) may be necessary. For help call 2020 REI.  

by Tim Herriage Tim Herriage No Comments


Most borrowers (especially investors) loathe having to find money. “Their experience going for a loan has been painful” says Mike Burkett, Investment Finance Advisor at 3L Finance. “This is because many loan officers are not that sure of what they are doing and may misjudge their ability to help.” We know how to change this.
In a current case a husband and wife team in Dallas had determined they could not expand their portfolio as they had run out of cash. They owned 15 rental homes free and clear and were reluctant to go through the borrowing process based on previous experiences.  They then met Burkett at 3L Finance.
3L Finance is positioned as lending advisors to investors. As a result they are able to work with borrowers to make quick assessments, streamline paperwork and smoothing the path when they can seen a loan solution.
Many loan officers in the investor space come out of conventional lending so are cautious based on their compliance background that does not apply to investor business lending. Even though they are aware of this, caution and inexperience falls out on the investor borrower in the form of delay and documentation hoops that often lead to a dead end. Inevitably investors find this painful and frustrating.
The 3L Mission arose out of 3L founder Tim Herriage’s experience trying to bridge individual investor needs with institutional lender requirements. “3L Finance,” says Herriage “is about reducing barriers to investor funding by simplifying process and actively advocating for the investor. Knowing the right question to ask a borrower, or answer to provide a lender, 3L can quickly help dismiss what would otherwise be an objection.”
In the case of the equity rich/cash poor Dallas landlords, it was the strategy and process of identifying five of the properties that best met borrower needs while staying within lender underwriting criteria. This allowed a $250,000 loan secured by these five rentals.  This new found cash-out liquidity plus the ability to leverage newly bought properties has already allowed the borrowers to identify and contract for a new property.  3L will finance 90% the purchase and all the renovation. The borrowers have already put 10% down on a $260,000 SFR purchase, with a $375,000 After Repaired Value (ARV), following a projected $50,000 to $60,000 renovation.
By enabling this family with added liquidity they can now expand their rental portfolio with some cash generating flips, they have learned two lessons by working with Burkett and 3L Finance:
First, borrowing does not have to be painful, even with less than perfect credit scores.
Second, an investor savvy loan advisor can make the borrowing process easier, quicker, more transparent, and probably far more successful than most borrowers have typically experienced.
If you are in need of funding for your project call 3L Finance and see if Mike can help. Go here…….

by Tim Herriage Tim Herriage No Comments

NEW & RESALE HOUSING SALES RECORDS – What does an investor need to know?

New Home sale expectationsRegularly breathless reports are published about the growth of new home sales in the U. S. New sales as of June 30th 2016, (U.S. Census Bureau and the Department of Housing and Urban Development,) show the best month since February 2008.  June 2016 came in at a seasonally adjusted annual rate of 592,000, This is a 3.5% increase from May 2016 numbers of 572,000. This is an increase of 25.4% increase from June 2015 estimates of 472,000. This is great but understand these are projections based on signed, yet to be funded contracts, but there is more:
Do not misunderstand our comment about these numbers as they are vital to growing the economy because of the money spent on labor and materials that go into building a projected 592,000 homes. Builders have added 215K jobs, building material sales (retail) are up 3.5% and related suppliers such as furniture sales are following. It is a historic fact that every economic recovery cycle prior to this recovery cycle, residential home building has been a vital growth engine. This cycle however housing has been late to the party for many reasons.
In 2015 the National Association of Realtors reported that about 5,070,000 existing houses changed ownership. In 2016 this number is expected to be 5,450,000 sales. Similar projections were made this time last year so it is reasonable to estimate that 5,100,000 to 5,200,000 will be the number sold.
Months supply 2016We are facing light headwinds in the form of limited inventory, good paying job growth relevant to qualifying mortgage rules and potentially higher mortgage rates. The last could spike up sales by year-end with homebuyers seeking to lock in lower rates, or if they miss a forecast Q’4 rate hike, retard sales further in December.
Using projected 2016 sales performance in new and existing home sales ratios it is possible to see how new houses impact inventory:

  1. If 592,000 new homes is the sustained 2016 run rate against the expected sales of existing homes of 5,200,000, this means new homes are just 10% of total sales and have a minor effect on total inventory.
  2. Investors should not fear new inventory as this does not even begin to meet demand created by population growth of 1,430,000 new households.

Builders build where they can make money beginning where the demand is and adjust what they build to make the most money. There are three factors they can manage to achieve profitability: land cost, building cost and how much they want to make. Traditionally each category has been about 33% of the new home cost pie. If land and entitlements are expensive, build more densely and make profits on more houses per acre. Alternatively, build fewer, larger luxury homes and make up margin by selling a higher priced house. Currently this is apparently the predominant strategy. This prices these houses beyond mid-market buyer/tenant. These house seldom cash flow and are sold at market so have little built-in equity.
Another alternative in maintaining affordable housing prices is to buy land in the far-burbs. Essentially a replay of “drive-till-you-qualify.” Inconvenience and extended commutes puts these houses out of reach for most tenants or buyers who work regular jobs, as they are inevitably remote from employment hubs. They are not typically attractive for investors so new inventory or not, these 592,000 nationally dispersed homes, have a minor effect on satisfying housing demand.
Current mid-market SFR housing is in demand in most Sunbelt markets where economies have remained sound. Historic appreciation rates have been exceeded especially for income generating SFR rentals. Tenant demand for safe and secure rentals shows no slow down. If you are an investor looking to buy or add to your portfolio, the assistance of an aggressive local buying resource is essential. In Dallas/Fort Worth, a resource professional investors depend on is 2020 REI Companies acquisition division led by Jason Riney. 2020 REI can help.

by Tim Herriage Tim Herriage No Comments


Too Many Luxury Apts
As a real estate cycle matures, it is important to remain ahead of the pack in terms of watching for early warning signs that develop into trends as formerly winning strategies and markets lose their edge. It’s a bit like musical chairs. When the music stops you don’t want to be the last player standing, but worse still, a chair maker with unsold stock! What do media market rumblings mean to you?
The real estate business is a cyclical business that moves in cycles that are different to other investments and within the real estate business effect different buyers and sellers. For example a homeowner’s wants and needs are very different than that of a single-family rental investor. Among real estate assets there are also different cycles as explained by this report on upscale urban apartments. Note: We are not confusing apartment demand versus SFR rental demand because they appeal to different audiences, but this illustrates how optimism without expert research can work against an investor.
 August 16th 2016 USA today reported “apartment building owners are struggling to rent many of the luxury units that have flooded downtowns across the country in recent years even as a relative shortage of multifamily homes in the suburbs has driven up rents.”
Their solution is to offer amenities and rent incentives of up to six month for longer-term leases. These cuts in income changes their profit potential and destroys investor pro formas.
The issue is simple. Many were late to the cycle. These developers raised money using early cycle data, when their lead-time to plan, fund, build and lease-up reality ignored the time it takes to build was 12 months or more later in the cycle. Their efforts and competition made sure they would all over-supply that a relatively narrow segment of luxury downtown renter demand.
The media likes dramatic shifts in housing markets as it makes news, but it also can “set the table” for better investor deals.
There is a growing drumbeat of stories about single-family real estate slowing down as it has reached a current peak, that is unsustainable and likely to be followed by a downturn in home buying. The key is a downturn in home buying by homeowners.
Reporting on the real estate industry does not pay much attention to investors other than to complain about our effect on reducing inventory, raising prices and rents, and general grousing by journalists about independent entrepreneurs. It was an obvious but unexpected reality to me to find that the local newspaper housing beat reporter was a renter! Their editors want headlines to stimulate readership, not insight to help home buying, especially by investors.
These headlines compound to inject caution into the home buying and selling public, so that search and transaction activity drops for Realtors. They communicate this to their sellers. Competition is reduced, meaning any offer stands out, especially if it’s an investor cash buyer offering a fast close.
Just because cash flow positive real estate is less susceptible to ups and downs in value because it generates income, it does not mean you can be any less rigorous in analyzing markets and demand for the type of property you are seeking. Positive cash flow insulates a property from value loss to a degree provided the property attractive to tenant demand.
A vacant rental is an expense, especially where there is oversupply. An occupied cash flow positive property is an asset in a cash flow positive business. Be curious and follow media but understand what trends mean to you as an investor.
The answer is maybe, depending on where and what you are renting or buying-to-rent. Then how is the economic background (jobs and pay points) doing compared to the housing supply and price points?
As we have noted before multifamily housing market data is not bell weather or concurrent metric for single-family home rental market data, however there is a relationship. Single-family homes are aspirational, especially for a family growing out of an apartment. Luxury apartments are aspirational homes in a few American cities, for people raised their or those who dream of living there. Cities like New York, downtown Chicago and San Francisco with city “islands,” are such towns. In many other cities with robust suburban economic hubs and housing markets for many apartment living is considered transitional, especially in luxury rentals. Where life stage and economics drive demand it is for affordable and midmarket apartments.
Major markets like Dallas/Fort Worth are still attracting new businesses and business expansion. These jobs require skilled mid-market employees who desire mid-marketing housing. Texas and investors in Texas are happy to oblige with midmarket rentals. In a market like this (homeowner or investor) local market experts are vital. Contact Investable Real Estate for assistance.

by Tim Herriage Tim Herriage No Comments


The financial contribution made by property management services companies managing investor owned rentals is capped by the fact that only about 7.6 million of a total of 23.7 million single-family residential rentals (U. S. Census Bureau and NMHC 2015 data) are managed professionally.
This points to an important fact about the real estate investment business. Two thirds of single-family rentals are managed directly by an owner landlord. This hands-on, do it yourself mentality is to be lauded, but it gives rise to a number of issues and costs that these owners and the industry fail to recognize.  This also identifies a vast underserved business opportunity.
The one third of rentals or 7.6 million SFR rentals that are professionally managed (estimated monthly fee of $115 or 10% of monthly rent,) means about about $874 million a year, plus lease-up commissions (another 8 to 12% on current turn rates of 32%,) mean $902 billion is spent by investors on property management annually.
When you ask do-it-yourself landlords why they self-manage, the typical response is that they can manage as well as a professional so these services do not justify the cost. There is a tendency to minimize and dismiss their direct effort and time as having minimal cost. Calculating the number of hours spent per rental annually by an investor translates in large numbers.
One advantage is that a landlord managing their own property will have a better understanding of the property economics and how this meets their personal financial state and goals.
The down side is the time spent away from family and “the cost” of that time to the do-it-yourself landlord. More properties, more time and attention needs to be paid. However there is far greater exposure to loss and potentially uncontrolled landlord costs is the growing activism of tenants and agencies that will represent them. Combating actual or perceived wrongs arising from the landlord/tenant relationship can mean rental discounts or worse. Fair Housing, Americans With Disabilities and other regulations, testing and enforcement are a goldmine for a number of for-profit testing agencies that work on a fee plus contingency basis finding alleged landlord abuses. Just engaging a lawyer expert in local real estate and rental matters can be costly.  Professional property managers normally shield the investor from this.
Another complaint is the perception that property management is about the property, collecting rent, tenants and landlord payments in that order. Properties before people?
Investors who approach rental investing, as a “rental business” want these priorities reordered to emphasize consistent rental revenue, from a satisfied tenant, in a professionally managed asset that may be part of a larger portfolio and investment return goal. This approach of customer (the revenue source) satisfaction first, inevitably leads to better investor profits. Few property managers have made this transition and they are in high demand.
The first issue in deciding how to provide property management is whether or not the DIY landlord has the know-how, time and proximity to the property to manage it adequately. Expect to be contacted for help at the most inopportune times. A DIY landlord’s time is only his own when tenants are happy and paying their rent. A property manager can change this.
A property management company may offer full or partial service options depending on what a property or owner requires. Full service begins with the property manager who:

  • Advertises, markets, shows and leases-up the property.
  • Screens prospective tenants for credit, rental history, criminal, Patriot Act information.
  • Collects monthly rent and fees from tenants as well managing delinquencies and evictions.
  • Provides the first point of contact for tenants, vendors and maintenance contractors.
  • Maintains formal relationships with accountants, insurance agents and attorneys.
  • Provides interior and exterior maintenance — actual operational upkeep, maintenance and refreshing the property for the next tenant.
  • Coordinates contracts, purchase orders, invoices payment, purchase supplies.
  • Performs general accounting and banking needs.
  • Creates, maintains and follows a budget for both short term and long term goals (yield, scheduled maintenance and improvements.)
  • Maintain administrative tasks like reporting and record retention including income statements, property and tenant reports, historical records and file backups of online systems.
  • Provide professional grade insurance that covers their actions on behalf of the landlord covering business risk, errors and omissions, real estate license and bonding to cover managing property, complying with Fair Housing, ADA and other applicable local rental requirements while keeping the property safe and secure for tenants.

Good property management services provide all of the needed functions for a rental business freeing the owner from day-to-day issues while enjoying the financial benefits of rental investment.
This question is does going it alone or recruiting professional help better for you? Landlords and investors are an independent group, but with the increasing complexity of finding, filling and managing rentals as easily and as profitably as possible, the argument for professional help is strong.
Clearly these landlord-managed rentals are an opportunity for our industry as there are compelling reasons for professional management. Moving the professional property management adoption rate by just one point adds $27 million in annual revenues nationally and work for around 30 property management companies. These investors are freed up to either find more properties or enjoy the fruit of their investments.  2020 REI Companies has direct experience resolving this DIY versus using a for-fee professional. Click here to see how they can help.
Part 1: How big is the Single Family Rental Industry?
Part 2: How big is the Single Family Rental Industry (continued)?
Part 3: Investment Industry Size & Real Estate Investment Clubs(continued)?
Part 4: How big is the Rental Home SFR Industry (continued)?
Part 5: Is Fix & Flip a $7.5 Billion Dollar Business (continued)?
Part 6: Is Renovating Rental Houses a 21 Billion Dollar Business (continued)?
Part 7: What do Rent-Ready Costs Contribute to the Rental Industry (continued)?
Part 8: Rental Maintenance adds another $5 Billion in Annual Industry Revenues (continued)?
Part 9: Professional Property Management Contribution to Rental Industry (continued)?
Part 10: Do-it-Yourself Property Management Contribution to Rental Industry (continued)?

by Tim Herriage Tim Herriage No Comments


We have always argued that good real estate investment is based on fundamentals and cash flow. No one lost his or her investment by buying based on sound cash flow. Trying to time the market gets some investors into trouble by buying at the wrong time in the cycle, using borrowed money on expected appreciation. So when is a good time to buy?
PROVIDED….. the property meets what Kieren Trass describes as a SAFE property. SAFE is a pneumonic list of the four acid questions an investor should ask about property performance and condition. Is it:
S – Sensible – Does it produce positive cash flow now versus waiting for appreciation?
A – Affordable for you? If interest rates rise does this mean you cannot afford to hold this property?
F – Is the vendor or owner friendly and keen to sell at an attractive price?
E – Is the property easily rentable or resalable?
Every real estate buyer asks this question. It can easily be “no” if the market overheated or dead and less than ideal. If the answer is yes, the next questions are why and where? And if not right now, when will it be right again? Where are the bright spots in the form of undervalued or out of favor opportunities?

The Property Clock

                     The Property Clock

Hybrid Group offers a real estate variation of “the economic clock.” This first surfaced in England around 1900 to explain stock market economic phases or cycles, from boom to bust and back again. This has been adapted to explain economic ups and downs as a recurring and predictable succession of events that can affect residential real estate market. Understanding where on the clock a particularly market is important especially if you are an investor.
This irregular series of causes and effects creates or reduces wealth in a predictable sequence of boom, slump and recovery.
Adapting the economic clock to real estate, Hybrid looked at four major western economies and hundreds of potentially key economic events, drivers and influencers in U.S, U.K, Australia and New Zealand. These have been reduced to simple formula of twelve or so milestones. These unsurprisingly disregard much received wisdom that drives herd-investment behavior.
The key drivers are net population growth, new construction, household creation, household headcount and income levels. Interest rates alone are only a short-term influencer, but over the long term cannot make a bad deal good, or jump-start a justifiably slow real estate market.
Understanding why market influencers are an investor’s best friends can deliver a market advantage. Then understanding where a market is provides an initial advantage.
The next step is research the numbers necessary to do a meaningful analysis for a specific property. We will examine what these are and the steps necessary in a standard real estate investment analysis to confirm the subject property meets your criteria beginning with our next newsletter.
In the meantime if you are looking for expert help in finding attractive properties in middle markets that have a reputation for reliably producing cash flow check with 2020 REI Companies can help you advantage from our experience in viable properties.

by Tim Herriage Tim Herriage No Comments


One of the traditional sources of affordable and entry-level homes has been a household growing out of a house. The family adds members either through adding children or taking in other family members in multi-generational households. The family breadwinners improve their employment situation and income increases make a move-up into a larger home more affordable.
For Sale Homes as % Occ HomesTraditionally this meant there was a vacant house left behind to be sold to the next family looking for an entry-level home. Because of a number of economic and social pressures, families are choosing to remain in place, upgrade and/or expand the property.  The inventory of homes for sale has dropped to 1.7%, well below the median of 2.3% of the total number of occupied homes.  

“Homeowners are remodeling rather than selling,” says Todd Tomalak, Vice President John Burns Consulting. This means they are not moving up to a more suitably sized home.
“We know this because “big-ticket” remodeling revenue is surging, while homes for sale as a percentage of occupied households has hit an all-time low,” says Tomalak.
Home builders and resale agents are voicing frustrations, while remodeling contractors are as busy as they remember with homeowners on pace to spend more than $215 billion on remodeling in 2016 with $73 billion of this projects that are $5,000 per project. The remaining $142 billion is being spent on smaller projects.
Real estate investors that are seeking affordable and entry-level homes as properties to flip or rent should find and befriend effective local wholesalers. At the 2020 REI Group we can find and sell these types of properties to local investors. Contact us today.

by Tim Herriage Tim Herriage No Comments


Demographics and economics continue to favor renting and Single Family Rental (SFR) rental owners. Is this about to change? What are the drivers and what do these mean for real estate investors? Will you be effected?
In 2006 the U.S. Census Bureau reported 69% as the home ownership high watermark. Now, ten years later Q’2 2016 the U. S. Census Bureau reports home ownership has declined to 62.9%, the lowest number in 50 years.
This difference of 6.1% home ownership decline represents 5,586,000 households based on 2015 single family housing numbers from the National Multi-Housing Council identifying 23 million rental and 73 owner occupied houses (SFR, up to four doors and mobile homes.)
Government promotion of home ownership through 2006, led to credit expansion that tested prudent leverage rules, boom and bust. Many of the families impacted were not yet ready for home ownership. The downturn ended their dream, but not their experience of single-family life in the suburbs. They are reluctant to return to apartment living or older “near-burb” neighborhoods and homes.
After losing homes these families contributed to “bump” in demand for SFR rentals, individual or fund owned. This trend is projected to peak in 2018 says John Pawlowski, senior associate at Newport Beach, Calif.-based REIT research firm Green Street Advisors.
Pawlowski concludes this will favor apartment REITs, however ignores the fact there is little tenant migration back to multi-family after living in detached SFR rentals, in fact the opposite is true. To many families, a private backyard, pool and barbecue are important!
It is interesting to compare the U.S. 2016 renter to owner ratio in other modern Western economies with similar lending regimes. For years the natural home ownership rate has settled around a standard 64%.
If current the U. S. home ownership number is increased by 1.1% to 64% this means that the rental population will only change by 1,056,000 households, former owners or not. This is less than the current U. S. annual 1.2 million household growth or 2.48 million people (U. S. Census Bureau Q’2 2016 = +. 077% X 322 million people.) This does not suggest a dramatic change in rental demand unless excessively high rents in popular cities force home ownership?
Even then a wise SFR investor can benefit from by selling rental properties prospective home buyer capturing appreciation.
Any expected trough in home ownership in 2018 is a year after the 2016 election year. National economic growth is a priority and home building and home ownership have long counted as growth engines. Both have stalled over the last decade.
The government (both parties) saw no downside in helping people buy houses, so they loosened credit requirements. Homeowners and investors took advantage of that boom and the current market is part of the decade long reset.
A number of suggested election proposals project a less restrictive lending environment to allow more people to purchase homes, yet there is no indication yet these strategies may be used again even with encouragement from Realtors and bankers?
Fannie Mae’s July 2016 Home Purchase Sentiment Index that showed an all-time high in consumers confident in the housing market. 67% of HPSI consumers polled said they would buy a home if they moved, whereas the share who said they would rent decreased to 26%, equaling the all-time low for the National Housing Survey, but even if finances free up where are the homes going to come from to satisfy the pent up demand?
Any assumption of easier loans for home buyers detracting from SFR rental demand runs into various problems. There is limited land available in popular economic destinations unless people are willing to accept an extended commutes. Tax abatement incentives and land availability attracting builders into less than prime areas do not materially change the economics, as it is counter to culture.
Where land is available it is not profitable for builders to build affordable housing. Funding is demanding, permitting is slow, material is expensive and construction labor is scarce compounding delayed availability. Add expanding local government fees to costs and the sweet spot for SFR builders is pushed into the $500K to $1 million dollar range, out of reach for most upwardly mobile SFR rental families.
Unless there is some dramatic financial change to the way homes are located, funded and built, SFR rental demand is not likely to change in the foreseeable future. Individual and institutional rental investors will continue to own a local housing commodity that remains in demand and rented at market rates.
To help you find attractive rental properties seek local experts. 2020 REI Group specializes in real estate investor products and services.  Our fully integrated ecosystem can assist companies and individuals of all levels of experience and/or scale with their real estate investment endeavors.  Contact us today, or comment below, to learn how Our Hindsight is Your Advantage®.

by Tim Herriage Tim Herriage No Comments

PROPERTY MANAGEMENT – Economic Contribution to National SFR Rental Industry? (Part 9.)

Beyond fixing, refreshing and keeping the physical property to maintain habitability, there is the equally important management of the rental as a profitable business. This involves finding a tenant, screening and leasing, ongoing rent collection and being on call for problems.
A majority of rental investors decide to manage themselves but about third of rental landlords choose to use third-party property management. This means about 8 million rentals (SFR, up to four-plexes and mobile homes,) are managed by professionals.
How much revenue does third-party property management contribute to national and local economies?
The data on property management entities is at best estimates from aggregated sources, such as historic data from National Association of Real Property Managers data, company surveys (Visio Finance and others) and public records.
By taking entity counts, properties under management (NARPM®) and other survey data, we estimate that about 67% of SFR rentals are self-managed, leaving 33% under third-party management. We assume this is by professional property managers.
Some 7.6 million rentals are managed by a formally established property manager whose average profile suggests is a small company of around 12 employees, generating about a $1,000,000 in annual revenues. The majority of this is derived from leasing and managing 319 long-term SFR rental “doors.” These managers also claim some apartment, condo and HOA management fees. This data is from NARPM® Annual Customer Experience Survey 2015.
Property managers not only derive fees from month-to-month management services, but they also earn commissions from successfully leasing a property to a tenant for about one month’s rental fee. There are other ancillary services outside of core management such as maintenance fees, eviction and other services they can collect and administer. The sum of these fees is consistent with typical operating costs for a single-family rental.
To get to the annual contribution we begin with typical SFR rent (2014 U. S. Census Bureau,) to be $11,208 per year for the 23 million occupied rental houses. This gross rental income equals $258 billion a year.
If one third of these rentals are professionally managed at an average monthly management fee of $115, the estimated revenues generated by managing 7.6 million SFRs is a minimum of $874 million a year, plus lease-up commissions of another 8 to 12% on current turn rates.
Not all rentals turn every year, and given the 32% per year turnover rate we used for our rent-ready refreshment calculation, this 32% turnover adds another $272.5 million in leasing commissions making a total on $1,146 billion in property management revenues for managing just one third of SFR rentals.
Clearly these unmanaged rentals are a massive opportunity for our industry as there are compelling reasons for professional management. (Look for Part 10.) Moving the adoption of professional property management by just one point adds $114.5 million in annual revenues nationally and  work for around 100 property management companies. Next issue will discuss justification for hiring a property manager and discuss why investors need more than simple property management. Investable Realty specializes in sourcing, management, and disposing of assets for real estate investors.  Click here to see how they can help.
Links to the rest of this series:
Part 1: How big is the Single Family Rental Industry?
Part 2: How big is the Single Family Rental Industry (continued)
Part 3: Investment Industry Size & Real Estate Investment Clubs(continued)?
Part 4: How big is the Rental Home SFR Industry (continued)?
Part 5: Is Fix & Flip a $7.5 Billion Dollar Business (continued)?
Part 6: Is Renovating Rental Houses a 21 Billion Dollar Business (continued)?
Part 7: What do Rent-Ready Costs Contribute to the Rental Industry (continued)?
Part 8: Rental Maintenance adds another $5 Billion in Annual Industry Revenues (continued)?
Part 9: Professional Property Management Contribution to Rental Industry (continued)?
Part 10: Do-it-Yourself Property Management Contribution to Rental Industry (continued)?

by Tim Herriage Tim Herriage No Comments


What does this data mean?  History records the peak of the U. S. Housing Market in 2006 and the Great Recession beginning August 2007. The rise in foreclosure rates leading up to 2006 were one of the early warning signals that indicated that lending strategies for single-family residential mortgages were ahead of repayment reality.
History records the next four years of the housing market as dominated by falling house prices, negative equity for those forced to sell, short sales, walk-aways and foreclosures. SFR Funds saw the favorable price difference in SFRs between operating income and capital expense and bought houses as never before. Does the latest CoreLogic Foreclosure Report tell us about future rental trends?
If the lesson of the last crisis is to create better government policies to avoid the next crisis, it appears the regulators have out-done themselves with the unintended effect of seriously handicapping the affordable housing segment. Housing supply and demand are conservatively unbalanced.
Three unintended consequences have compounded to reduce affordable SFR housing. Tightening credit requirements (qualified mortgage rules) has reduced the number of borrowers. A large percentage of homes in the affordable segment, (especially in attractive metros and locations,) have been bought up by investors. The typical first time buyer is facing added headwinds such as tighter job market, falling real income and employment uncertainty that reinforces the perception that they may indeed be stuck in Generation Rent.
Homeowners in the affordable and sub $500,000 price range, even if they have out-grown their home, find a renovation or expansion is wiser than a sale and move-up purchase as there are few houses that suit their expansion plans. This has dried up a source of affordable homes as “move-up” activity has slowed. One of the unintended benefits of fewer move-ups is that there are fewer foreclosure and loan delinquencies, as families are not stretching budgets to buy larger homes.
Corelogic Q’2 reports (ending June 2016) that foreclosure inventory at the end of June is at its lowest point since August 2007. The foreclosure inventory (as of June 30th,) dropped to 375,000 homes nationwide, or 1%, of all homes with a mortgage. This is a decrease of 25.9% from June 2015. Additionally, the number of foreclosures completed per month dropped to 38,000 from 40,000 for June 2015.
Corelogic Foreclosure rate 2006-16This data is reported as snapshot numbers, but in historical context, like the historic standard 5% HPI appreciation every year, historically foreclosures are typically 1% of all active mortgage loans. Welcome to Normal Town.
The instances of serious mortgage delinquency on all properties with loans that are 90 or more days past due, are tracked by the Mortgage Bankers Association, dropped 21.3% year-over-year to 1.1 million mortgages.
Again the lowest count since September 2007.Corelogic Foreclosure rates by state
Loan money is not flowing freely to entry-level buyers as there are fewer hones to buy. Affordable housing availability is behind demand. New Build entitlement and permitting, plus rising material and labor costs have reduced builder profits by 30% since 2007. Now typical builder gross margin of 36% on $900,000 home (and land) (or $324,000,) is more attractive than 36% on $250,000 (or $90,000) for just about the same effort and risk, for little more relative expense. This has stifled new affordable house production.
This all leads to sustained rental demand for SFRs, rising rents and a lack of for sale housing inventory to satisfy any “buy versus rent” justification. Beware generalized statements and seek expert help.
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