So, you want to be a landlord? Well, you are not alone. It is no secret that generations of wealth have been created through the ownership and management of real estate rental properties.
Traditionally, being a landlord has meant personally owning properties such as single-family homes or apartments. However, over the last decade, large Wall Street investment firms have also ‘discovered’ the value in owning and renting individual, single-family homes and apartments for rent, and managing those properties on the behalf of investors.
The business model of owning and renting property has been around for generations and has experienced very little change. While the benefits of owning rental properties are widely known, the opportunity to do so has been out of reach for most. Historically, the ability to own rental real estate has required a sizable balance sheet. Unfortunately, that is something that average investors simply do not have. Therefore, this has always served as a significant impediment to wider ownership of properties among average investors.
That may be beginning to change. The startup world is stepping in to see if they can disrupt the space and democratize the ownership of rental properties. As reported recently in Bloomberg.com, “Jeff Bezos and Marc Benioff are backing a startup that lets regular people invest small amounts of money in single-family rental properties, as the pandemic-fueled housing market continues to attract a flood of capital. Arrived Homes, which offers shares in rental properties for as little as $100, raised $37 million in equity and debt from a group of investors that includes Bezos Expeditions, the personal investment company of the Amazon.com Inc. founder, and Benioff’s Time Ventures.”
As we have discussed at length over the past year, the single-family residential real estate market is red-hot. Potentially the hottest market that we have seen in our lifetime. Residential housing for rental and purchase is experiencing an historic shortage. Large national home builders either delayed or cut back new construction following the financial crisis of 2008/2009. In addition, millennials are forming families and seeking residential housing in greater numbers. Also, the pandemic accelerated the trend of household formation in the suburbs.
All of these factors – among others – have combined to create an overwhelming demand for homes to purchase and rent. We suspect that it could take years for this supply and demand picture to reach a more-healthy equilibrium.
Given the situation, it is not too surprising to witness greater investor capital moving into the space. With real estate prices continuing to rise, an increasing number of average investors want to enter the market. However, these investors face challenges. As mentioned in the article, “Ryan Frazier, who founded the company with Kenny Cason and Alejandro Chouza, sees three main impediments that would-be investors face: The cost of buying a rental property, the time it takes to find one and the confidence to take the plunge.” If startups looking to disrupt the rental property space are successful at alleviating some or all of these impediments, it could translate into greater ‘investment democratization’ of the rental income market.
The last two decades have witnessed staggering changes and innovation in the investment industry – particularly with respect to offering Main Street greater access to stock and bond markets at lower costs.
However, innovation in real estate investing has lagged. Historically, these markets have been the domain of wealthier families, accredited investors and more recently of institutional investment firms. Startups like Arrived Homes are trying to change that dynamic. As detailed in the article, “His solution was to embrace a regulatory framework that allows the company to sell shares in individual properties to U.S. residents, regardless of the investor’s wealth or income. The company hires third-party property managers, so it can spread acquisitions across markets, allowing investors to buy shares in homes that vary by geography or expected rent.” These types of innovations, if successful, could certainly open up real estate investing to an entirely new demographic of investor.
Like many things, change takes time – even change that is clearly beneficial. While exciting, these innovations in real estate investing are still in their infancy. Like many markets, residential real estate would most likely benefit from greater access to capital and a more democratized investor base. It will be interesting to watch as these startups grow, and the business model matures.
Steve Sapourn is an active real estate investor, Aloha Capital’s co-founder, and portfolio manager. At Aloha, Steve has overseen more than 1300 real estate investor loans in 35 states. He has managed alternative investments in a variety of asset classes for over 25 years. He has deep experience in designing low-risk portfolios that reliably outperform benchmarks. Over his career, Steve has served as portfolio manager for a Fund of Funds, where he analyzed hundreds of alternative investment strategies. In addition, he has developed and implemented quantitative trading strategies in the futures, stock, and volatility markets. Steve’s long and diverse career benefits Aloha’s investors.