Patrick Sisson
March 15, 2022, 1:32 PM MST
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In Phoenix’s hot housing market, investors are turning to new tools that help them quickly buy, repair, and rent out large portfolios of homes.
Like many real estate investors in Phoenix, Albert Hernandez wanted to cash in on the sprawling southwestern city’s stratospheric growth. In 2011, he started buying rental properties to supplement his income, and by 2022 had quit his job working for a hedge fund to go full-time with Venture Real Estate LLC. Along with multifamily buildings, he’s been building a portfolio of single-family rental properties — the fastest-growing segment of the housing market. Especially in Phoenix.
“We’ve blown up. With so many investors and institutional investors buying here, it’s a hot place to be,” he said.
To keep up with demand, he started relying on FlipOS, a platform that helps investors prioritize repairs, access low-interest loans, and speed the selling process. Hernandez says FlipOS can compress what’s typically a four- to six-month job into a single month. “Fix-and-flip isn’t always the easy route to take; there are capital needs and higher risk,” Hernandez said. “It always intrigued me, but I never wanted to jump in until I had everything in place. FlipOS made it a lot easier, and alleviated a lot of the risk.”
Skyrocketing home prices and billions in institutional cash have made the U.S. single-family rental market extremely hot. More than a third of U.S. rentals are now single-family homes; demand is so huge Wall Street investors have created an $85 billion market to build ground-up single-family rental neighborhoods.
But for the most part, this market remains decentralized, and difficult for players to put together large portfolios of new inventory. Enter FlipOS and other tools that are entering the market to streamline the process, making it faster to acquire, upgrade, rent, and assemble a collection of single-family rentals.
“Inventory is king, and we’re creating inventory,” said Or Agassi, chief executive officer and co-founder of FlipOS. The company works with everyone from mom-and-pop investors to institutional buyers and started collaborating with Phoenix-area flippers last February to try and figure out what he calls the flipper’s “black magic” — the ability to find houses and do a quick and fast renovation — and then standardize it.
“Together we can be a machine that creates more capacity,” Agassi said. FlipOs plans to expand to 20 markets by the end of 2022, including in fast-growing states like Georgia, Texas, and North Carolina.
With billions of dollars from the likes of Goldman Sachs Group Inc. and KKR & Co. flowing into single-family rentals, others in the world of real estate technology — known as proptech — also see opportunities for software and tech that can streamline the renovation and rental process.
“This is a highly fragmented and offline service industry that had to be put together across many individual markets, from cleaning and renovation,” said Fifth Wall partner Dan Wenhold, whose venture capital firm invests in proptech. Property owners can find it time-consuming to assemble and operate a large number of homes spread across a city or region. “There aren’t any real national brands for property management,” said Wenhold. “There’s really an opportunity to being a national brand and a technology layer to help manage portfolio value and services.”
Entrants into this market include Lessen, a managed marketplace for service providers focused on single-family rental firms; Belong and Darwin, which are platforms focused more on mom-and-pop investors; and Mynd, an end-to-end platform for investing and managing residential real estate assets that launched in 2016 and is now working with Invesco, which has directed $5 billion to purchase single-family assets nationwide via the platform.
Mynd’s CEO, Doug Brien, who’d previously run Waypoint Homes, a 17,000-unit single-family rental firm that helped pioneer institutional investment in the sector, said the industry’s biggest bottleneck isn’t funding or inventory, but technology.
“The joke we use in the industry is swivel-chair management,” he said. “For someone to be successfully operating in the space, they probably have three or four screens open, with eight or nine different systems. That doesn’t scale — it just doesn’t.”
Mynd’s vision is offering a system that shows the life cycle of an investment in a single app, from buying and upgrading to operating. In single-family ownership and operation, property management — typically a less glamorous, more commoditized part of real estate — is key to success, because homes can be so spread out.
“There is a shortage of six million homes. By speeding up the process of rehabbing homes, we’re able to start closing that gap faster.”
Mynd plans to double from 20 to 40 markets soon, going from roughly 5,000 to 11,000 units under management. There’s more room for expansion after that: Brien says that just 2% of the industry is currently institutional investment (per Urban Institute stats, 45% of single-family-rental landlords own just one unit, while in contrast, half of the multifamily rental units are owned by institutional investors). As that sector suddenly needs to manage thousands of homes — and the mom-and-pop side of the industry also grows — both will benefit from these new tech tools.
“There was a question of what would happen to single-family rental in a big downturn, how stable and durable an asset class it is,” said Brien. “During Covid, it didn’t just survive, it thrived. Ever since that happened, there’s been a flood of capital coming in from traditional investors. They’re not chasing a shiny object. They have a mandate to be in this space, and there’s a shortage of operators with the platforms to deploy capital at scale.”
It’s difficult to document just what the spread of this software could do to an already overheated single-family rental market. Rents have jumped 35% year-over-year, hitting $2,160 median rent across the U.S. in February, according to home rental marketplace Dwellsy. It’s clear the Phoenix area’s rental market is clamoring for new units; new lease growth was 12% in Phoenix last year, according to data from John Burns Real Estate Consulting. A recent analysis by Scottsdale-based economist Elliott D. Pollack led him to declare the situation is the worst he’s seen since 1969, placing the region “at the precipice of a very serious problem.”
Making it faster to buy and rent properties, and easier to manage more of them, could accelerate the already rapid influx of capital into the space. But FlipOS’s Agassi believes quicker flipping and increased investment volume means more value for renters. “There is a shortage of six million homes in this country, and that number is only growing,” he said. “By speeding up the process of rehabbing homes, we’re able to start closing that gap faster. That means more renters will be able to move into safe, comfortable homes sooner than they would have otherwise.”
Phoenix has been ground-zero for a lot of technological innovations in home buying and selling, such as the iBuying trend, the expansion of build-to-rent homes further from city centers, and single-family rentals, especially after a massive foreclosure problem after the Great Recession. But it’s also been a case study in the way these new trends impact the market.
Arizona’s housing culture has always been based on single-family homes, spreading forth in sprawling circles around the Phoenix metro. But the region simply can’t build its way out of its housing crisis without a lot more density, says Alison Cook-Davis, associate director of research at Arizona State University’s Morrison Institute for Public Policy. The rental market has become particularly unforgiving: One-bedroom rents in parts of the Phoenix metro rose 117% from September 2020 to September 2021, 97% of rental units are occupied, and an estimated 291 people a day move to the greater Phoenix area.
There’s a desperate need for affordable units, said Joseph MacEwan, the City of Phoenix Housing Manager. As part of the 2020 Housing Phoenix Plan, the city found itself short 163,000 units to meet current demand. MacEwan’s department is running a number of programs to increase affordable options and preserve naturally occurring affordable housing, but the incredible growth in the market, and investment interest, has made that challenging, with lower-priced homes offering especially lucrative opportunities for flippers.
“A lot of investors are seeing dollar signs,” said MacEwan. “What the market is supporting and encouraging is high market-rate development, because high demand is there. It’s hard to compete when money is just such an important factor in this industry.”
And that money will increasingly seek the vaunted single-family rental asset class. Mynd’s Brien sees tech platforms as key to the segment’s expansion: To deploy all the capital waiting in the wings takes operations in dozens of markets, and a system to organize everything. Mynd and its competitors, all with expansion plans to multiple cities, seem poised to bring the Phoenix experience nationwide.
“More and more capital is coming in,” he said. “More and more markets will be invested in that you haven’t seen historically.”
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https://www.bloomberg.com/news/articles/2022-03-15/how-technology-is-fueling-the-single-family-rental-boom