Options for Single Family Rental Investing

Why Invest in Single Family Rentals?

If you’ve been following our story, you’ll be familiar with our views on Single-Family Rental (SFR) fundamentals. The global pandemic has shed a light on the defensive nature of the asset class and has likely accelerated an existing surge in demand from the household-forming millennial generation. To the extent you share our view that demographic and psychographic tailwinds will propel rent growth and capital appreciation in SFR assets for years to come, you may be interested in putting some capital to work. See below for a comparison of available options to invest in SFRs and how our unique Plot structure provides targeted, efficient and liquid investment in the SFR space. 

An Asset Class Ripe to Generate Alpha

The first key to understanding the single family rental market is identifying who owns single family assets. As opposed to the stock market which is largely driven by capital flows of large institutions, the single family rental market is fragmented. “Mom & Pop” investors make up  98% of the industry while institutions control just 2% of homes (US market data). Individual investors have varying motivations for buying and selling single family assets such as life events, liquidity needs, and time constraints. Similarly, a “Mom and Pop” investor may not have the resources required to employ a data-driven approach for determining the intrinsic value of a single family asset. These market dynamics, among others, makes the SFR market “inefficient”. This allows investors to generate excess returns over the long term by taking advantage of SFR asset mispricings. 

Data Source: Invitation Homes (INVH) Nareit REITweek Investor Presentation, John Burns Real Estate Consulting

Primary Vehicles to Invest in Single Family Rental Assets

Real Estate Investment Trusts (REITs) - REITs offer exposure to a diversified portfolio of single family rental assets. Publicly traded REITs are the most liquid way to gain exposure to the single family rental market. Additionally, they are managed by seasoned real estate professionals with extensive experience buying, selling and leasing properties. 

A primary driver for investors participating in real estate is the diversification benefit when added to a traditional stock and bond portfolio. However, because REITs are more correlated with equities, the diversification benefit is diminished relative to a more direct Real Estate investment.

General and Administrative costs of publicly traded Single-Family Rental REITs can represent between 6% and 10% of their annual NOI. Given their diversified nature, REITs generally do not offer the ability to gain exposure to specific markets or assets. Therefore, it can be difficult to use REITs to express an investment thesis on particular cities or geographic areas.

Private Equity (PE) - Much like REITs, Private Equity funds can offer diversified exposure to the SFR market. While REITs tend to focus on a long-term buy and hold strategy, PE funds are more active in managing the portfolio to generate excess returns. PE funds may be more willing to take lease-up or development risk, and utilize other value creating strategies. 

PE investments tend to be relatively illiquid from a Limited Partner (LP) standpoint. While the underlying assets may be easy to sell, the Fund looks to maximize value for LP investors typically over a 10 year period. To liquidate their investment prior to the Fund returning capital, an LP will likely have to offer at a material discount to induce a buyer. Like REITs, PE also offers the opportunity to benefit from experienced management and platform. However, PE fee structures can dilute the value creation realized by investors.

Direct Ownership - Direct ownership offers the greatest capability to generate alpha due to the  freedom to concentrate investments in specific markets. Additionally, the investor has the ability to influence the cost structure and long-term asset management of the investment. They can add value via capital expenditure (capex), optimize the leasing strategy (minimize turnover vs. maximize rent), as well as negotiate property management contracts, repairs and maintenance, etc. Given the price point of most SFR assets, an investor can build a portfolio across a specific city (or a few cities) with a relatively small capital commitment. However, one of the drawbacks of direct ownership is the time commitment required to actively manage a portfolio of assets, particularly if the investor does not live nearby. 

Fractional Ownership - Fractional ownership is a strategy in which multiple investors pool their capital in order to acquire a real estate asset or portfolio of assets. Fractional ownership can take many forms depending on the structure of the investment. Some platforms utilize crowdfunding to pool investor assets and tend to have a large number of investors who invest a nominal amount. Fractional ownership can be a great way for someone to get started investing in real estate because of low investment minimums.

One of the primary concerns with fractional ownership is the issue of control. If one investor does not have a majority stake, it can be difficult to make decisions particularly those that require additional capital such as (re)development, re-leasing strategies, repairs and maintenance, and value-enhancing capex. Similarly, the liquidity of fractional shares can vary considerably. Secondary trades of fractional shares can be difficult to sell because of the lack of a deep, liquid investor base.

What We Bring to the Table

Plotify - Our Plot structure is a unique way for qualified investors to strike a balance between generating alpha and liquidity. Unlike REITs and PE, investors have the freedom to focus on markets and assets that fit into their individual goals and risk appetite. 

Our platform allows for direct investment in SFR assets without the headaches associated with traditional direct investment. We save investors 2-6 months compared to a traditional real estate acquisition process by purchasing, seasoning and financing a property before our customers invest in a fully managed Plot.

Time Savings:

Visit Our Website to Learn More about Plotify and Our Plot Technology

Or email us at hello@plotify.co.uk for more information. 

Capital at risk. The value of your investment can go down as well as up. The investments that you make through Plotify are not protected by the Financial Services Compensation Scheme (FSCS) which means that you will not receive the money back that you have invested if your investment falls in value. Plotify does not provide any tax or investment advice and any general information is provided to you to assist you in making your own informed decisions.  Potential investors are advised to obtain their own tax or investment advice.

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Plotify Financial

USA Market Update September 2020 (3)

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