IS RENOVATING HOUSES TO RENT A $21 BILLION DOLLAR BUSINESS? – Part 6

by Tim Herriage

IS RENOVATING HOUSES TO RENT A $21 BILLION DOLLAR BUSINESS? – Part 6

by Tim Herriage

by Tim Herriage

Last week we estimated that Fix, Flip and Resell activity for 2015 at $9.7 billion dollars. This pales in comparison to renovation for investors who buy and renovate to rent. What is spent to maintain and/or “turn” the entire SFR rental market is another business we will look at next week.
Revisiting 2015 NAR and RealtyTrac data of 1,090,000 homes sold for investment purposes, just 179,778 of these were “fix, flip and sell.” This means 910,000 houses most likely went into the national SFR rental pool.
How big an economic contribution does making these houses ready to rent?
RENOVATING BUDGET FOR RENTAL USE
Like renovation for retail sale, rentals are also influenced by property class, location, and property condition, knowing this property is going to end up as a rental.
The tasks to make the property an attractive tenant rental, without going beyond the neighborhood or local market finish standards, are determined by understanding what else is available (competition) and what is the demand. The 2020 REI Group is happy to offer advice on this.
RENOVATING TO RENT?
Getting to meaningful rental house renovation numbers, just like resale, rental properties, start with the property class considerations that should have been a core part of any pre-purchase analysis.
We will use the same rules of thumb used in Part 5, with minor adjustment to determine the volume of houses destined for rent by the same three classes of home, luxury, mid-market and affordable. Luxury ($500,000 to $1 million plus,) is 10 to 15 percent of the total market. We will use 5 percent. For mid-market homes (appraised at $150,000 to $499,000) we use 80 percent of houses sold as renovated for rentals. Affordable homes are defined as anything below $150,000 and we use 10 to 15 percent of market total.
Luxury Rentals: Because of capital costs to buy and renovate a luxury house, these are not normally cash flow positive as rentals, so are more likely to be fix, flip and resale candidates. Renovations in this market typically exceed $100,000, however we expect no more than five percent of luxury properties to may make there way into the rental pool. These luxury houses are bought more for appreciation (and tax benefits?) in trophy markets rather than rentals. Rental income offer a luxury house owner a minor cost offset, unless there are some extraordinary circumstances such as acquiring the property by way of an inheritance or a gift. These are typically renovated to the style and finish of the owner, thus falling in line with the $100,000 plus renovation. Five percent of 910,000 equal 45,500 homes.
Mid-market Rentals: This median range house (ARV = $150,000 to $500,000) comprise around sixty percent of the resale market but make up a sweet spot for serious investors, small funds and institutional SFR investors. Their analysis has concluded A and B class production houses in mid-market neighborhoods, built after 1990, are the most desirable rentals. We estimate this is about 80 percent of the rental renovation volume where a typical rental renovation, light to heavy, ranges from $12,000 to $30,000 or more. Older A & B homes, nearer to economic hubs, are back in vogue but typically require more renovation. These are harder to find and fewer in number, but for this estimate we will stay with base estimates. This means about 728,000 mid-market homes are renovated at an average of $21,000 each.
Affordable Rentals: Just because these houses are cheap it does not mean they are a good deal. Class C and Section 8 rentals and neighborhoods require special expertise to be profitable. This is estimated 15 to 20 percent of the total housing rental renovation volume, or 182,000 homes. If renovations occur they are typically less than $10,000 but have a shorter life-cycle adding to management complexity of this class of property.
IN SUMMARY
In 2015 NAR & Realty Trac data suggests 910,000 homes were bought to be rented. Following the “house by category” spread and using rules of thumb, the buy-to-rent renovation volumes and dollars look like this:
Class                          Market %      Units     Est.$              Labor        Materials
$500K and up               5%           45K        >$100K           $60K         $40K
$100K to $500K         80%           728K         $12–30K      $6–18K    $5 –12K
<$100K                      15%           182K          $10K (?)     >$6K         >$4K
Based on these estimates and assumptions:
– 45,500 luxury rentals mean about $4.55 billion in renovation revenues.
– 728,000 mid market rentals averaging $21K mean $15.28B in renovations
– 182,000 affordable flips averaging $10K generates $1.82B in revenues.
A $22 BILLION RENTAL RENOVATION CONTRIBUTION?
Based on these estimates, renovating houses bought-to-rent by investors generates at least $21.65 billion in national economic activity with sixty percent for local labor and general contractor profits and forty percent to local and national materials suppliers.
This does not include any rental turn or refresh activity. Next week we will attempt to estimate these numbers for 24 million SFR rentals in the current national inventory.
            For more on how 2020 REI delivers renovated rentals to investor clients, get to know our team at Investable Realty.

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