313: Build to Rent Movement & Market Profiles of Florida & Oklahoma City

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I have my favorite millennial here with me today and that is our client and now she is starting to work with us. You heard her on the show before and that is Lisa. Lisa, welcome back. How's it?

Thank you so much for having me again. I'm doing great. Thank you for asking.

How do you like the title of being my favorite Millennial?

It's an honor. And it also has a lot of pressure to it. I don't want to lose it.

A lot of pressure. Very good, very good. Speaking of pressure, there's a lot of pressure on the real estate market. There is a ginormous, there's a technical, sophisticated term for everybody, a ginormous shortage of housing. We, we all know that. All our regular listeners know that. And anybody who's paying attention knows that. One of the things that we have chronicled over the last couple of years is this new trend. And it, I mean, I remember hearing that one developer did this several years ago and everybody thought it was really outlandish and really crazy and unusual. And I remember all the people in the real estate community were saying, well, how'd that work out? It's such an oddball thing. And that is the build to rent concept. Very rarely do real estate developers, unless they're developing apartment buildings or apartment complexes, I should say build to rent. But as we have seen in the past several years, developers have been building tracts of single family homes for the sole purpose of rental, not for sale. And what that says to me, and I think what it should say to everybody listening, is that these institutional developers are bullish on the rental market. They think there is a great future for rentals. Normally they want to take their profit and run and they want to just go on to the next project. But now they look at the demographics coming at the rental housing market over the coming decade or so and they're thinking, well, why would I want to sell these properties? I'm going to build them and keep them. That's a big deal. That's a real switch. Again, it's never really happened before in the US in any significant way, with the possible exception of that one tract that I mentioned a moment ago. Lisa, what do you think about this trend? And you know, we've got to play an audio clip about it as well. But what are your thoughts?

I'm really excited for this trend. I think it's a great opportunity. New construction has so many benefits to it that I think we should really just take advantage of this opportunity and seize the moment.

We should align our interests with the people who are spending zillions of dollars on market research that we are not spending that money. But let's just look at what they're doing and say, hey, you know, if they're doing it with all of their market research, with all of their resources, then it must say something about what we should do and it should inform our decisions as well. So a couple points here. I'm looking at a CNBC article. During the foreclosure crisis, just about a decade ago, investors plowed into the housing market. Okay. And mostly they really did that kind of coming out of the foreclosure crisis. I guess it sort of depends how you look at it. Buying, you know, millions of distressed homes, turning them into lucrative rentals. Now they have a strategy. Buy new properties and turn them into rentals. Right. And they say that this week ERC Homebuilders is launching a soft IPO, an initial public offering hoping to raise $100 million to build more than 1,000 rental homes across Florida. So in IPO just to do the biggest build to rent business plan. It says that the build to rent business is growing fast with several companies, including big names, dipping into it. Now here's one that really surprises me. And why does this surprise me? Because this builder's name that I'm about to mention is known for building high end homes. So I'm guessing that when they're dipping into the market here, they're not building their typical housing stock for this purpose. I don't know much about it. Maybe they are, but I can't imagine because their kinds of properties would really have very bad rent to value ratios. It would be really interesting to see if they're building the same kind of stuff for build to rent. And that name is Drumroll.

Hey, that was good. That Drumroll. Lisa, what were you tapping on there?

My stand up desk.

Ah, got it. Hey, stand up desk. Good. That's a good thing. Healthy. That name is Toll Brothers. Toll Brothers, known for building high end homes. They recently announced a $60 million investment in a joint venture with BB Living on a Build to Rent as a Build to Rent company based in Phoenix. Okay, so this is a big deal, folks. This is a kind of an amazing trend. So let's listen to a little audio clip about this.

Now they want a whole new type of home. Diana olek is in D.C. with that story. Diana?

Yeah, John. During the foreclosure crisis, investors scooped up millions of distressed homes and turned them into lucrative rentals. But foreclosures are mostly gone now and the regular market's very pricey. So investors are now turning to builders in a big way and the builders are responding. Today, Tampa based ERC Homebuilders is offering investors private shares in a so called Soft IPO, hoping to raise $100 million to build more than a thousand new rental homes across Florida. The homes will be in contiguous tracks and they will be sold in bulk to big investors.

That's pretty interesting because it's so different than the fear that developers used to have, right? And many still do, where they don't want investors in their communities. They want home buyers. You know, they fear having a bunch of for rent signs up things like this. But I can just imagine now they're replacing the sales office that you usually see at a new home community with a leasing office that will be permanent. And they're probably going to act just like the salespeople, the new home salespeople where they're driving people around in golf carts and showing them homes. They're just not for sale, they're for rent. So yeah, interesting. Let's go on here a little bit more of this.

We think that the, that there is a consumer rental demand that is driving these institutions to want much greater levels of inventory of this product. And we feel that they have, they are learning or have learned that new inventory is, is a much safer and more official rental product.

The build to rent business is exploding. Several companies, including big names like Toll Brothers and Lennar, are dipping into it. 37,000 homes were built to rent in 2017.

That grew to 43, 37,000 homes as build to rent. That doesn't include all of the other rentals that were purchased, maybe purchased new and then turned into rentals. These were specifically built with a purpose of renting. And that's of course, in addition to all the apartment units that were built new for rental, obviously. And then obviously there's the resale rental.

Market as well last year and some estimate that could hit 100,000 homes this year and into 2020. Buying new has a Lot of benefits.

For investors from some of the typical repair factors that come in at 15, 20 years of ownership. There's also general contractor warranty, there's limited product warranty of your appliances.

And the rents for single family are growing fast, 4.5% annually now. Compare that to 3% rent growth for multifamily apartments. There's also much less turnover in single family rentals, and the rental market is much less volatile than the new home sales market.

Morgan, pretty interesting stuff there, isn't it? So what is the con? Right? There's a bad side to this, and the bad side to it is that it's more expensive. You gotta pay to play. The new homes cost significantly more than the resales. But as a long term bet, many investors think it is a better way to go because, you know, they view it as better quality tenants. Obviously fewer repair and maintenance problems for quite a while. Lisa, what are your thoughts? And you had some pros and cons that you wanted to mention as well?

One of the other cons that I thought of was that a lot of these homes are coming with an hoa. The HOA subsequently cuts into your cash flow, but it also comes with a lot of benefits. I think you have someone policing your lawn for you. You know, you could be across the country and you don't have to really worry as much about are they taking care of your house, because that HOA person is going to do that.

Otherwise known as the HOA Nazi. No offense, Nazis. But yeah, you know, they really do. They can get a little annoying, you know, One of my properties, for example, I get, you know, maybe twice a year, I get always a thing that, oh, the lawn isn't mowed. You know, I get a letter from the HOA and you gotta, I send it to the tenant and say, hey, look, clean up the lawn. You know, it's your responsibility. You got to take care of this. But, but yeah, you know, it's got, it's, it's good and bad, right? What I like, Lisa, as you've heard me say before, is what I call HOA light. It's a third less filling than your regular hoa. And what I mean by that, taking from the Dos Equis beer commercial or no, that's Amstel light, right? A third less filling than your regular beer. The concept being that when, when it's just a small HOA with a nominal fee, it's not an overbearing hoa. I think that's kind of the best of both worlds. You get some degree of control. They maintain the community, but it's not crazy. Like they're driving you out of your mind and they're not costing you a fortune every month.

Right. The HOAs are typically about 20 to $50 a month for single family homes. I'm finding the townhomes are a little bit more expensive, but that's because their HOA comes with Internet, you know, comes.

With some maintenance of the exterior of the building. And usually, you know, there's not like, really, you don't have your own lawn in a townhome, so they'll maintain right up to the front door or right up to the front step. And so that's, you know, why you see the increased fees. So, you know, some investors even think that's worth it. And many times it does make sense because, you know, it's one less thing to think about. You don't have to think about a yard. Yeah. What else? Any other pros and cons you want to share?

Do you think that these new construction homes hold their value more or appreciate faster than the remodeled homes that we typically offer?

Yeah, I do think so. Typically. You know, on the whole, of course, it's a generalization. There are exceptions to everything. But yes, I generally think you're going to see better appreciation in the newer properties. However, you're going to pay for it by paying a higher price up front, which is going to mean lower cash flow, lower cash on cash return, lower cap rate, etc. But overall, when you see that greater appreciation over the years and the lower maintenance costs, that's where you get it back. You know, it's a trade off. Different investors have different styles. I don't want to say one style is better than the other because I've seen people win or lose at either alternate style of anything. Right. I'm always saying shy away from the class C and D properties because those just never seem to work out as well in real life as they look on paper. But then I, I see people win with them too. So it's just sort of what's your style, what's your tolerance level for active versus, you know, on the spectrum of active to passive management, nothing's passive, that's a lie. But there's a spectrum of things get more passive and, and things get more management intensive too.

So what sort of returns do you like to see on a pro forma for new construction? As we mentioned, the cash flow is a little bit lower. So overall the numbers are going to be lower across the board.

Yeah, good question, good question. So we had Adam on the show recently and he was talking about a new construction property and the cash flow on that one was projected at just over $200 a month with, you know, minimum down. I think he had 20% down on that one and I thought that was phenomenal for new construction with a small HOA in there. That's fantastic. Of course I wouldn't really pay attention too much to what I call the crap rate, which is cap rate, but we jokingly call it the crap rate over here because it's really not a very good metric. I know it's commonly used by commercial real estate investors, but it doesn't account for leverage or appreciation. And those things are huge, especially the leverage and the inflation induced debt destruction which none of the performers account for. And that always adds to your return. But I would look at cash on cash return. That is a better metric than the crap rate cap rate. Again, that's capitalization rate is the capitalization rate. I'm being snarky, but the overall return on investment will when you can exceed an overall return on investment with all in everything in. And you can see these performas and understand them@jasonhartman.com in the properties section or watch the free video which is an excellent primer of how to be a great real estate investor. How to analyze a real estate deal in 27 minutes. You watch that video, that will be the best education you ever, ever get on how to analyze a deal in 27 minutes. Right on the front page of Jason Hartman.com and it's totally free. You know, if you can get a cash on cash return though of somewhere around, you know, 7 to 10%, that's pretty great. And you can do that on some new construction properties. It's not bad at all. And then your overall return will be probably into the mid 20% range annually. So try beating that in other investments, especially a topped out stock market, you know, which many say is on the verge of a correction. But who the heck knows? I don't even want to try and predict that. What do you think?

Sounds great.

Do you want to switch gears to market profile or what were you going to say, Lisa?

I was going to ask you what markets do you like for new construction in 2020?

Well, we've got a bunch of markets and a lot of it depends on on the team as much as it does the property itself. But I think today you wanted to talk about Florida generally and then maybe mention some specific markets in Florida, right?

Yes.

Okay. So I think all of you are going to be pretty amazed at this video. And forgive me if we may have played a little clip from it in the past or talked about it at least before. But, but as I like to kind of say, if you don't listen to the show regularly, this may not make sense to you, but Florida is the new Texas, meaning that Texas has been phenomenal as an investment for many, many years. And we've been active in Texas markets for like 15 years now. But it really seems like much of that attention has shifted to Florida. It just seems like Florida's kind of a hot deal right now. And, and it was 52 degrees this morning when I walked my dog. So it's not that hot in terms of weather, but hot in terms of investment. So we'll just play another clip here for you. And again, pretty amazing and exciting stuff happening in so many areas around the state of Florida. When someone talks about Florida, it's like talking about Texas or California. It's a big state. The there are very distinct markets in Florida. The east coast and the west coast very different. The Panhandle very different. Some really good stuff happening. So here's an example of that.

At first, at 5:30, the population wave hitting Florida tonight. New numbers dropping today and just how much the Sunshine State is expected to grow in the next few years. And the projections are nothing short of staggering. ABC Action News reporter Sarah Hollenbeck with the story.

Bumper to bumper. It's just all around crowded cars crawling. Tampa Bay streets are already.

So here's the complaint about the traffic and the growth. So I'll speed past that a little.

Bit window to our state year after year. I'm a new Floridian here.

Yay.

Michelle Hartman and her husband are among our state's newest residents.

Another Hartman. Amazing.

From Pennsylvania to Clearwater, she's already noticed the traffic. That's horrible. EPCOT and our local counties are preparing for the massive influx of drivers, putting.

In better time traffic signals so that we can move traffic better.

Some of the biggest projects in the works, adding new overpasses, longer turn lanes, replacing aging bridges and brainstorming transit options on major corridors like U.S. 19. But it'll cost us in Pinellas county alone a whopping $392 million over the next 25 years.

We're probably going to need to look at some form of gas tax or.

Sales tax, the price to pay for living in paradise. Tampa bay now the 9th most popular place to move in the entire nation.

The lesson I think that people need to hear is the action is where the Weather is warmer. Okay. Certainly there have been a few markets where we have gone north. Okay. And they've been fine. But by and large, when you look at like retiring baby boomers, they're moving to warmer climates. So that's a big part of it. So you can have great metrics in more northern places. And we've had some very big investor successes in them, and that's fine. Overall though, everything else being equal, if it is. And it never is, by the way, but if it is, in a perfect world, I would gravitate toward the warmer climate. So with that said, anything else on Florida before we talk about Oklahoma City?

Just, you know, we have so many people moving to Florida. There's projections that say the space between Orlando and Tampa, that county between them is going to fall victim to urban sprawl.

It's just gonna fill in. Right. And be sprawl.

Yeah, exactly. So there's gonna be a lot of growth in that area. It's called Polk County.

Yeah. And that's what Orange county used to be. Orange County, California, where you live, Lisa. And where I used to live, which is, you know, it was like this little nothing place between LA and San Diego. Now it's a big deal. Right? So, yeah, yeah, it all fills in. It's amazing. What did you want to share about Oklahoma City?

So Oklahoma City is another area that is growing. It's also a market that we are relaunching. We have job growth there ranked as number 54 best places for business and careers by Forbes. And the homes that we've found there, the builder is paying the closing costs. However those homes are. We're relaunching that area. So it's not available for everyone just yet. Hopefully we can get there.

So that's kind of like a pre launch, right. In other words, limited inventory.

And these are class A neighborhoods. It kind of reminds me a lot of Irvine, California. It's ranked as one of the best school districts in the state. So I'm excited for those.

Fantastic. Well, good stuff. All right, well go to jasonhartman.com to learn more. Be sure to subscribe to our YouTube channel as well. We're putting more and more content out on YouTube where you can see visuals of some of the stuff we talk about. Properties available@jason hartman.com in the properties section. And then of course, check out the 27 minute video. Even if you've seen it before, it's a good review every once in a while to just go back and watch that video again. 27 minutes. A great overview on how to analyze a real estate investment. So good stuff. Until tomorrow, everybody, happy investing. And Lisa, thanks for joining us.

It's great being here. Thank you.

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