JF1587: Finding More Deals Than You Can Handle & Scaling Your SFR Portfolio #SkillSetSunday with Greg Rand

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Today we welcome back Greg Rand who has told us about investment markets before on the show (link to that episode is below). Now he is the CEO of a platform that has an abundance of deals for single family investors. At the time of recording, they had $200 million in assets for sale on their website. Hear how they find all these deals and take notes to use for you own deal searching, or buy something from their site. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

 Joe Fairless:  Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. As you can hear, this is not Joe, this is Theo. Joe is taking a break, because he just had a baby, so congrats to him. Today I will be speaking with Greg Rand. Greg, how are you doing today?

Greg Rand:  I’m doing great, Theo. How are you?

 Joe Fairless:  I’m doing amazing, and thanks for joining us. Today is Sunday, which means it’s Skillset Sunday, so we’ll be discussing a specific skill with Greg, that you can apply to your real estate business. Before that, a little background on Greg. He is the CEO of OwnAmerica, which a single-family resident investment company with 21 billion (with a B) in total assets on the platform; they have 200 million dollars in assets for sale, as well as 490 million dollars in total assets sold. He is currently based in Charlotte, North Carolina, and you can say hi to him at ownamerica.com.

Greg is a repeat guest. He was actually one of the first 300 people to be interviewed on the podcast, so make sure you check out his first interview, which is episode 300, “Why every market you invest in is essentially the same.”

Before we dive into the very specific skill, Greg, do you mind giving us a little bit of an update on what you’ve been up to since we last had you on the show?

Greg Rand:  Sure. Thanks for having me on again. Yeah, so that was three years ago, the episode that I joined you on… A lot has changed. We recognized right around that time that there was a segment of the real estate economy in this country that was unrepresented, and that was the single-family home that was already occupied by a tenant. So the realtors of our country and their MLS and the Board of Realtors, all the way to Zillow and Trulia and Realtor.com presumed that a home is going to be vacant when it sells. So the whole super-structure that sells houses presumes that an owner-occupant is gonna be the buyer of the house, and so those houses are vacant, and you can test that theory by going to any real estate broker, agent or major portal and try to search for occupied rental properties. In other words, don’t buy a vacant home and rent it out, but actually buy a rental home that’s already being occupied and rented, and has a performance history, which has a lot of advantages.

We realized  that that product was kind of an orphan, so we’ve built OwnAmerica.com to represent buyers and sellers of rental properties that are already rental properties. We focused initially on the institutional and professional investor, because that was the world we were in, those were the people that we had the relationships with; Wall Street came in about 6-7 years ago, and came in very strong into the single-family space for the first time… So we had the opportunity to build the data sets and the analysis techniques and the systems to help those companies analyze the whole country, figure out what pockets they wanted to invest in, find assets in those pockets, analyze them, size them up, acquire them, renovate them if it’s necessary, rent them out and then manage them. Doing that at scale was unprecedented, so we had the opportunity of being part of that innovation bonanza that took place back in 2011-2014…

But then we realized that only 2% of all the single-family rentals that exist in the country are owned by institutions; the vast majority are owned by entrepreneurs, or just everyday people that see single-family home rentals as the ideal way to secure at least part of their financial future… And there was no marketplace to buy and sell these occupied properties. So we built version one in 2016; it’s been a success, and it’s largely a testament to the fact that if you’re gonna buy rental homes, buying houses that are already rental homes is a really good way to go, because you’re cash-flowing from day one, and you’ve already got a track record, so financing rental homes that are already rental homes is easier than financing vacant ones, where the income is not proven.

And of course, if you wanna sell a home that’s already a rental property, it’s a really good idea to sell that home as an occupied rental, if you can, because then you cash-flow all the way through the closing. So the seller wins, because they have no vacancy issues, they don’t have to spend any money fixing the place up in order to sell it; the buyer wins because they can buy a property and they’re starting to make a profit on day one, and the tenant of course wins, because they’re being kicked out of a house they like at the end of their lease just because the seller wants to liquidate. So it’s kind of a win/win/win situation; we saw that back then, built a platform for it, and people like it so far.

 Joe Fairless:  Yeah, I totally agree with those benefits of the buying the single-family home that’s already occupied. Before we went live we were talking about a new development that you’re working on, but before we get into that, since it’s Skillset Sunday, let’s talk a little bit about how you find these deals. Obviously, you’ve got a ton of assets for sale… What types of systems and automations do you have in place to make sure that you always have a consistent pipeline of these single-family deals?

Greg Rand:  That’s a great question, thanks for asking it. I mentioned a moment ago that we learned how to sort of get our arms around big-scale data on housing valuations, rental valuations, analytics on yields, analytics on forecasting and projection and price appreciation… We learned all that stuff with the big REITs, as they master this asset class on the Wall Street scale. So we spun that around and created something that takes all that institutional expertise and makes it available for free to anybody who wants to use it.

So the way that we tracked people, number one, is that we give a bunch of cool stuff away. It’s the age of Google, right? You wanna get people to use it, give it away, and figure out a way to monetize them later. So we had something we called The Portfolio Visualizer. If anybody who is listening wanted to go to OwnAmerica.com, you can look at the way we present portfolios for sale, and there’s a version of that Portfolio Visualizer that you can have for free for your own portfolio, or for a fantasy portfolio you’re thinking about building. You basically can put any address in in the country, or upload a spreadsheet of addresses of a portfolio and get charts and graphs and maths and photos and projections and interactive calculators and all this really cool stuff about the market fundamentals, like population growth, employment trends and long-term price appreciation trends.

You  get all of that for free, and you tend to appreciate us for giving you all that cool, free stuff… And then some of you, around 9%, will wind up saying “Hey, I think I do wanna sell.” And about 15% will say “Hey, I think I wanna buy.” So by virtue of giving away the portfolio visualizer in a free account, we’ve been able to build just a level of appreciation out of the gate, that somebody says “Hey, these guys cared enough to spend the money to build this technology, they’re giving it to me”, and that little level of appreciation has a chance to turn into loyalty over time, by virtue of the people then being able to use it over time, and then become sellers of buyers… And we began targeting them.

We offered this out through traditional marketing means, but because we have a good handle on the data, we know who owns what investment property in America, and we’ve been creating accounts for them by the thousands.

Let’s say you own 17 rental properties in Orlando. We know that, because it’s public record, and we’ll go out and get our hands on that public record data, create that online investment account around your 17-unit portfolio, and then try to track you down and tell you about it. So we’ll send you mail, we’ll telemarket to you, we’ll try to find you digitally via social platforms to say “Hey, you’ve got 17 units in Orlando. We think it’s worth about 2.45 million. Go to this URL to check it out”, and that’s worked. People are like, “How do they know all this about me?”

We haven’t gotten the reaction, Theo, that I thought we might, from some people, like “Big Brother is watching me… How do you know this? How do you know I own these properties?” I think most folks know that it’s public record. We just go through the trouble of creating the account for them, and then try to track them down to show it to them. They smile, and then if they wanna take any kind of action to buy or sell, now we’ve got the beginnings of a relationship.

 Joe Fairless:  So you actually create an account for them in this portfolio visualizer? Is that what you’re saying?

Greg Rand:  That’s right. We create the account for free, with their properties in it, and basically they can just look at it. We use automated valuations, automated rental analysis… So if we think the rental is is $1,125 and it’s actually $1,200, they can change it, to see a more accurate depiction of their yield… And they do. We kind of give them a starting point. We make it so that 80% of the way there, their portfolio is now loaded in.

It’s almost like — imagine you go to Schwab, or Fidelity, or some other site that sells investments, and if it knew what stocks you owned, and you went there and you opened up a free account and you saw your stock portfolio staring you in the face, and you could track the value of it… It’s kind of like that, but it’s with real estate instead.

 Joe Fairless:  Let’s say for example I want to find all of the single-family portfolio owners in Tampa, Florida, because that’s where I live… How exactly are you going about doing that?

Greg Rand:  How do we find the owners in Tampa?

 Joe Fairless:  Yeah, how do you find not only the owners, but know that they have this many properties? Are you doing a search on the auditor sites? Do you have access to some paid software? How are you going about building this database?

Greg Rand:  It’s paid data. The national housing database was digitized back in ’90s and 2000s. It was done mainly by title insurance companies. I was around back then; they were literally going by municipality and digitizing whether it was index cards, or microfiche, or some of them even had it in a database. So they created that public record database, and of course, whenever you buy a property, the deed gets recorded, and there’s an indication of whether it’s owner-occupied or non-owner-occupied. We’re able to track the non-owner-occupied properties, and then we focus on people that own at least five.

If you have an entity – either it’s your name, or it’s Theo LLC, and you own 16 properties under that LLC, our data sifting allows us to identify you, your entity, your address, the addresses that you own, and then we add to that what they’re probably worth, what they probably rent for, what they probably cost to operate, and the population and market trends and so forth.

So we pull data, starting with who you are and what you own, which is in the public tax records, and then we append it with all this other data, to create the Portfolio Visualizer for you.

 Joe Fairless:  That makes sense. Going back to your giving away a bunch of free stuff to generate leads – obviously, the majority of people listening to this won’t have a very technical portfolio visualizer to give away, which can be very impressive… What types of tips do you have to someone who’s maybe just starting out and wants to apply this concept of giving  before you receive? What advice would you have for that person?

Greg Rand:  I have to think about that… If you’re starting out in real estate investing, the first place to start is to try to figure out what market you wanna invest in, and what your long-term goals are. I’ve never been that obsessed with the idea of finding a deal, and that makes me kind of unusual in this space. I approach investing in real estate as – you’re buying the market, you’re buying Tampa, or you’re buying some subset market of Tampa. That’s why we call the company OwnAmerica. We have this philosophy that you’re literally accumulating an ownership stake in the country. The country is in demand, the population is growing, so if you hone in on a place like Tampa, which is in demand and growing, and you find neighborhoods and school districts within Tampa, you’re gonna win no matter which house you buy. In fact, usually the risk that people take when they buy the house that’s discounted — I’ve seen a lot of people focus on what they wanna buy before they worry about where they wanna buy it… So they buy a house they’re getting a great deal on, but they’re buying a junker, and they’re taking renovation risk, and they may not be capable of doing an efficient renovation. They may be new at this, so they’re going with the riskier approach to investing.

I’ve seen professional investors make the mistake of choosing what to buy based upon getting a deal on and finding out later they wish they hadn’t had bought that, because they bought something in the wrong place. So my advice would be not so much using our methodology of using public record data to attract leads to them for buying property, but use the data that us and other people are now willing to give you to identify the markets that you think have the best lift-off in the future, based upon your own intuition of the trends of people – where are people going, why are they going there, are they staying, are jobs going there, what are those macroeconomic trends that are gonna give an entire market lift in terms of property value and rental demand?

And then honestly, I don’t think I’ve ever gotten a great deal on a property in terms of the price. I get great deals on buying properties in places that I have intuition are gonna rise in value and be in more demand rent-wise, more than the other markets around them. I’ve got a sixth sense by having spent so much time looking at this data over time, that my approach has been proven at least to me and my clients to be spot on… And I’m not forecasting the future. I’m just watching what people are doing right now, and if businesses are moving in and people are moving in and they’re staying, and the data reflects that, and then the human intelligence on the ground, people that you actually talk to kind of validate and reinforce that, that’s what we call a winner. That’s a  buy. And then you can just go buy a nice house in a good school district in that area and you’re going to win because you picked a winning market and just got a standard property in that winning market.

 Joe Fairless:  Okay, so let’s talk about the market for a second then… And I guess this is multiple questions in one – let’s say you are going to enter a new market; I know you mentioned a ton of different metrics and factors that you look at, but what would you say would be the top three macro factors you would look at?

Then my secondary question is, do you look at these factors just for the MSA or the city level, or would you then after analyzing these three factors for the entire MSA or city hone in on a specific neighborhood and submarket, and do the same thing? Or do you analyze the MSAs and the neighborhoods differently?

Greg Rand:  We do it slightly differently. The data that we have — to your first question, the three things that we look at, in this order… Number one is the long-term price appreciation performance of the market; and there it’s helpful to go at the MSA level, or at least the county level. The reason is that when you get too close to the ground you could see some wild swings in median price growth, because if one really cheap house or one really expensive house sells you get this weird blip on the chart and you lose the trending on it.

We use 20-year price appreciation data. You can actually see a place like Tampa during the late ’90s, into the wild times of the early 2000’s where it went up like a rollercoaster on the way up, then it crested in 2005-2006, and then it came down… But what you can see is when it came down it kind of made its way back down to where it probably would have been had there never been a rollercoaster ride in the first place. That gives you a sense of equilibrium that the market is very healthy; it deviated from a trendline on the high side, it came back down to the trendline on the low side, and then made its way back to the gradual upward trajectory, which tells us “Okay, the market remedied itself”, and I can get a sense of how Tampa performed during a stress test.

When you have a heart murmur, they put you on the treadmill; they wanna see how your cardiovascular system handles the stress. Well, I can see over a 20-year period how a market handled the stress test of the last 20 years, and it tells me a story that if I compare Tampa to, say, Oklahoma City or Cincinnati, I can see and draw different conclusions based upon the way the peaks and the troughs actually play out. But it also then gives me a 20-year average. We focus on that average, and here’s why.

In most places in the country, if you combine the 20-year price appreciation average – for the country it’s 3.4%. Let’s say in Tampa you’re gonna get 4.6%. Okay, so now you’re beating the country; that’s a good thing. But when you add the price appreciation to the yield – and most of your listeners probably know that yield is what your cap rate is, what your percentage of profit in a given year is, compared to how much money you have sunk into the property. Most places around the country are ranging between on the low side a 4% yield, and on the high side an 8% yield. That’s all-in, every expense counted, even a maintenance reserve, a very conservative and responsible expense load will give you somewhere between 4% and 8%. When you add the yield on a property with the long-term price appreciation that market has performed at, you usually end up at about a 9%… Meaning Tampa is gonna be today a 5.75% yield and a 3.75% or 4% price appreciation average – it puts you in the 9% range. Between 8% and 10%.

You go to Charlotte, North Carolina, you’re gonna get a 5% and a 4%. Same thing with Dallas. You go to Raleigh or Austin, you’re gonna get a 4% and a 5%. 4% yield, prices have gone up kind of high, but at the same time the prices have gone up kind of high, so you get a higher appreciation rate.

Think of the United States single-family homes are around a 9% ROI, yield plus appreciation. So when you find a 10%, you found a winner. When you find an 11%, like Charleston, South Carolina – it’s north of 10%. The combination of yield and price appreciation puts you into the double digits even before you put any leverage on, you put a mortgage on, or anything like that.

So that’s what we do, we take a look at that combination of things – the cashflow yield, plus the appreciation, and try to find a place that is already performing, above a 9%, or even above a 10%, and then I wanna try to understand why, so I’m gonna look at the job growth. The job growth is a great harbinger of population growth. Companies come in, they plan on being there for 25 years or more. They don’t do that stuff frivolously; they’re gonna go in based upon cost of living, quality of live, advantageous tax situation, a pro-business environment… When they do that, people come for a lot of the same reasons, but with an additional reason they come for the jobs that are going there… And if you can get a feel for how the property and the market perform as a baseline right now and you get a 10%, and then you get a sense of “Are the reasons why the market has done so well likely to continue? Are they still in favor, are they gonna continue?” and you focus on population and job growth and all the things that go into that, that’s going to give you a really comfortable place for a 25-year hold, which is what we’re all focused on here. None of what we do is about flipping; it’s all about owning America, building your own little real estate empire, however big you want that to be – 3 properties, 300 properties, whatever.

Those are the techniques that we use with big Wall Street funds, and now we’re teaching it and providing the tools for everybody else to use it.

 Joe Fairless:  That’s great information. Last thing before we wrap up is something that — I guess me personally, and I’m sure others might have this same thought, but I accumulate a massive portfolio of single-family homes, and I own them for 25 years let’s say, and I get ready to sell… Will I be selling them one by one, or will I be able to sell them as an entire portfolio?

Greg Rand:  That’s a great question, because that has changed a lot since we spoke last. It used to be — and today, if you call up ten real estate companies in town and say “I have 25 houses I wanna sell”, after they get done celebrating, you tell them “Oh, by the way, they’re all occupied by tenants”, they’ll probably tell you, 9 out of 10, if not 10 out of 10, will tell you the way to sell those houses is to wait till the leases are up, boot the tenants and then fix them up and sell them on the MLS.

What’s changed about that is that we’ve been able to demonstrate – not just us, the industry has been able to demonstrate that occupied rental properties are a thing; there are 16 or 17 million – depending on whose data you look at – existing rental properties in America… Just to put some context around that, that’s 12% of the population. So there are more people living in single-family rental homes than drive SUVs. So it is a big market segment, much bigger than most people thought.

Now that Wall Street has gotten involved, there is a massive, decades-long consolidation underway, where right now only 2% of all the single-family rentals are owned by big Wall Street firms. But 55% of all the apartment buildings in America are owned by big Wall Street firms. It didn’t use to be that way in multifamily either. I know it’s hard with numbers sometimes over the podcast, but there’s around 3,5 trillion dollars worth of apartment buildings in this country. There’s around 3,1 trillion single-family rentals. So they’re both 3 trillion dollar asset classes. More than half of multifamily is institution-owned, only 2% of single-family. The reason for multifamily’s consolidation is there was a big commercial real estate distressed situation that went on back in the late ’80s into the early ’90s. That distressed real estate situation caused a lot of capital to come in, to buy up all this distressed real estate; Wall Street bought a lot of real estate, liked what it saw, continued to acquire… And then you blink your eyes, two decades go by, and now more than half of all the apartment buildings are owned by big pension funds, insurance companies and other institutional sources of capital.

We see all the indicators that the same kind of thing is happening now. The housing crisis was distressed real estate, Wall Street came in to buy up distressed property, liked what it found, learned how to operate it at a very, very high margin, and now all the major companies that owned thousands and thousands of single-family homes are freshly capitalized, but have billions (with a B) more capital into the space now. They’re all doubling and redoubling their holdings, and I don’t see it changing.

What that means is that if you have three properties and eventually you have 50, there’s going to be an exit for you when the time comes where you don’t have to disassemble and destabilize your 50-unit portfolio; you can actually package it up and then roll it up to a larger player intact.

 Joe Fairless:  That’s good to know. I was actually attempting to wholesale a single-family portfolio, and I wish I would have known what you’ve just explained now. Greg, I really appreciate you coming on for our Skillset Sunday. In fact, it was more of a skillsets Sunday, as you provided a lot of skills. You’ve talked about how you find deals, which one way is to give away things for free, in the hopes that they will appreciate that free giveaway and will use you to sell their property or allow you to buy their property.

You also talked about how you would use the digitalized public record information from the title companies and you would find non-owner-occupied properties that had the owners owning at least five properties, and then you would add other datasets to that, to reach out to those owners to buy their properties.

We also talked about the metrics that you use to analyze markets, you talked about the long-term appreciation trends for 20 years, and using that as a stretch test, as well as a comparison tool to other markets. You talked about the yield, and combining the yield and the appreciation together, to determine what’s a good market to invest in… And also you wanna look at the job growth, because it’s a great indicator of population growth, because massive companies aren’t gonna move to a bad market, because they plan on being there for a while. And you talked about how it’s important to understand why those trends are happening, and if they will continue. And then lastly, we talked about the new trend of the ability for these single-family portfolio owners to sell their portfolios to institutions, rather than having to sell them off one by one.

Lots of information. I could definitely keep talking to you, but you’ve gotta go. It was great having you on the show. Have a best ever day, and we’ll talk to you guys tomorrow.

Greg Rand:  Thanks very much.

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