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Is it Time to Take Rent Growth Out of SFR Deal Pricing?

By Jack Rogers

June 28, 2022 at 08:11 AM

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A SFR player in Texas grows while basing prices on current rents in cash-only deals.

As interest rates rise in response to spiraling inflation, SFR investors who have reaped a bonanza of returns from the Saturn V liftoff of housing prices during the past year may be starting to think about retrorockets, heat shields and parachutes for a re-entry into what may soon become a recession.

Well, maybe a few of them are.

There is still a lot of talk in announcements about housing acquisitions in tight markets where it’s assumed that supply won’t catch up to demand any time soon and significant rent growth has been priced into deals at a time when the national average for monthly rent is topping $2,000.

Rents can only go up, right? But what if they stop going up and/or get pulled in the other direction by the gravity of an economic downturn? In other words, is it time to start taking rent growth out of the pricing calculations for housing acquisitions?

According to a report from one of the nation’s hottest housing markets—Dallas—a relatively small SFR player has an answer to this question and already is deploying it as a growth strategy.

ILE Homes, which began acquiring SFR properties in 2020, currently owns about 450 rental homes. Despite signs of a cooldown in the national housing market, the company remains bullish on its plans to double its portfolio to 1,000 SFR homes by the end of this year.

ILE, a private company based in Plano, TX, says it is taking a “yield-driven” approach to acquisitions based on the rent they can charge tenants after they buy the house and, where needed, renovate it.

ILE doesn’t factor in rent growth: it bases everything on current rents.

“What we can pay for a home is 100% based on where we underwrite rents,” said Dan Brady, VP of acquisitions for ILE, in an interview with the Dallas Business Journal.
“We don’t look forward. We don’t look for stabilization. We base everything on current rents. If the rents justify the acquisition of the asset, we make the offer,” Brady said.
Brady said the housing market has made “an incredible pivot in a very short period of time,” absorbing the reality this month of the Fed’s interest rate hikes. In response, ILE changed its approach to acquisition offers.
“We’re making fewer offers. We adjusted our yield in an upward position based on protecting the return that we needed in the event that there is a contraction in pricing,” Brady said, in the Dallas Business Journal interview.
Even though it is making fewer offers, ILE’s “hit rate”—the percentage of deals it is closing—has not changed, Brady said. ILE closes on about 15% of its offers, he said.

ILE maintains its competitive edge against other buyers—including those who are pricing in rent growth in markets like Dallas, where average rents rose 14.4% in April to $2,075—by paying cash for the houses it buys.

Most of ILE’s SFR portfolio is in the Dallas-Fort Worth and Houston markets. The company recently has started buying SFR properties in San Antonio, Orlando, Tampa, Nashville and Huntsville, AL. ILE targets home selling in the $285K to $325K range.

Mahesh Shetty, ILE’s CEO, told the DBJ the company has a “blueish-white” collar tenant profile, including public service employees, teachers and warehouse workers. On average, ILE’s SFR rents range from $1,500 to $2,200, he said.

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