JF2308: Build to Rent With Austin Good & Loe Hornbuckle #SkillsetSunday
Austin and Loe are partners in Good Horn Capital with a focus on “Build to Rent” developments. Loe’s background is in assisted living and memory care while Austin is a full-time real estate developer. Together they have been tackling their new venture and today they will be sharing it with you.
Austin Good and Loe Hornbuckle Real Estate Background:
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“You have multiple exit strategies with build to rent communities” – Austin Good
Theo Hicks: Hello, Best Ever listeners, and welcome to the best real estate investing advice ever show. I’m Theo Hicks, and today we have two guests – we have Austin Good and Loe Hornbuckle. Austin and Loe, how are you guys doing today?
Austin Good: Doing great, thanks for having us.
Loe Hornbuckle: Doing very well. Thank you for having us, Theo.
Theo Hicks: Absolutely, thank you both for joining us. Today is Sunday, so we will be doing a Skillset Sunday, since Loe was a previous guest… So make sure you check out Loe’s first episode, which was episode 1674. The skill that we’re going to talk about today is the build to rent strategy.
Before we get into that, we’ll quickly go over Austin and Loe’s backgrounds. They’re both co-partners in GoodHorn Capital. Austin is a real estate developer, and then Loe is the CEO and founder of Sage Oak Assisted Living and Memory Care. They are currently working on a 89-unit, 20-million-dollar townhouse development, following this build to rent strategy.
They’re both based in Dallas, Texas, and their website is GoodHornCapital.com.
Starting with Austin and then second with Loe, could you tell us some more about your background and what you’re focused on today?
Austin Good: Sure, absolutely. I got started in real estate in late 2008, early 2009. Prior to that, I was raising capital for oil and gas drilling projects; kind of like you see on Wolf of Wall Street, Boiler Room sales tactics… Pretty high burnout businesses, that I did quite well in, but just got burnt out.
At the time, my brother was a residential real estate agent for several years already, and he had been asking me to come join him, and join forces and put together a company. So I got my license, and we formed our residential real estate sales team, the good home team which we’ve grown, and we should do about 1,5 million in commissions this year. My brother still operates that side of the business.
At the same time that we were growing that business, I started purchasing single-family rentals and flips. At first, just here and there, but as we went on, we started doing that at a pretty high level. By 2012, we actually had an opportunity to purchase our first development, which happened to be a 72-unit build-to-rent duplex community in Texas, which we still own to this day.
After that worked out for us so well, we decided that build to rent was sort of the future. We’re in various stages of two more as we speak. We’ll go more into the benefits of build to rent, but let me kick it over to Loe, so he can get his intro.
Loe Hornbuckle: Thank you. My background – I actually started in business in a car dealership, if you can believe it or not… So I spent the better part of 10 or 11 years working in a car dealership, and spending a lot of time in the finance department, which was very relevant, because you learned about loans, and underwriting, and you learned about risk, and talking to lenders, and negotiating with lenders… So that was a really important part for me.
I got into real estate in 2007. I started off in single-family, acquired a decent single-family portfolio. I thought I wanted to get into multifamily, spent a year being a property manager of a 400-unit complex. I didn’t love it; it was okay, but I really found my passion in assisted living and memory care, and so we started converting large houses into small, assisted living facilities. That’s ultimately how Austin and I met. I’m a man of few talents, but definitely terrible at construction…
And I saw a guy like Austin, that’s got some development and some construction skills, and approached him after we were introduced about partnering up, and kind of bringing my sales skills and his construction and development skills and our operation skills together to sort of form a great partnership and a great team. Then from there GoodHorn Capital was born, which is our company that raises private equity for our projects.
Theo Hicks: Perfect. Thank you both for your backgrounds. Austin, you mentioned at the end of your background that you wanted to get into the benefits of build to rent… So can you explain exactly what build to rent is, the step by step process from A to Z? You don’t have to go into too much detail, but just kind of the main steps in the process.
Austin Good: Yeah, so single-family build to rent – it’s not a new concept, although it’s gaining popularity. It’s kind of the buzzwords now. But basically, it’s taking tracks of land that you find, and either building let’s say a duplex, or a townhouse, or a single-family [unintelligible [00:08:04].24] communities there, and running them like multifamily properties.
In this country there is a big fragment of owners of single-family rentals, mom and pop owners, if you will. There’s starting to be some consolidation from the big REITs and whatnot, but there’s still a lot of opportunity there for professionally-managed single-family rental communities due to the fact that [unintelligible [00:08:33].24] But I always say that lately, the American dream – some say it’s dead; I don’t think it’s dead, I think people still want to live in a house, and have their house in their name, but I think they’ve shifted towards wanting to necessarily rent it, for various reasons; that might be out of necessity, but a lot of times it’s not out of necessity, it’s out of choice. They’d rather rent. A lot of it has to do with perhaps the millennials seeing their parents get foreclosed on, and things of that nature… But it’s just a big demographic shift that’s going on right now.
Theo Hicks: So you find land, you build single-family homes, and then instead of selling them off, you keep them and then you rent them out and manage it like it’s an apartment community, basically.
Austin Good: Yeah, you have multiple exit strategies with a build to rent community, which is another reason why we like it so much… Because you could sell it one at a time to retail clients, or you could sell it one at a time to investors. Or you can sell the entire project, just like you would sell a multifamily property. And lastly, you could refi out your initial investment and just keep it, which is my preferred way of doing things.
Theo Hicks: So, start from the beginning and kind of tackle each step one at a time. You’ve already hit on why you selected this strategy, and that’s because you’ve identified people still wanting to live in a single-family house, as opposed to multifamily… But now they’re choosing, or by necessity renting instead of owning it.
Obviously, you’re targeting a specific demographic, and so when you’re looking for land, how are you picking the market? What are some of the metrics you wanna see in a market you’re buying land in?
Austin Good: For what I’ve actually done, it’s a little bit different than most build to rent communities, in the sense that I’ve kind of found a lot of luck and strength in college towns that also have great underlying economics for just regular folks who are in the workforce that wanna rent. That provides an extra layer of recession resilience for essentially what is a step down from student housing. We don’t call it student housing, but that’s kind of what it is. That’s been a big pillar for us.
But generally speaking, if you’re just looking for a build to rent market to enter, it doesn’t have to have a college population at all; you’d wanna look for obviously a lot of population growth, and you would want to look for the best school districts. That’s kind of the way that you would pick a market.
Theo Hicks: And then once you’ve selected that market, what types of strategies are you using to find land? Is it just the same way anyone finds land, or is there a special kind of land you want, that’s zoned a certain way? Or is there anything we need to know about the type of land that you’re buying?
Austin Good: Well, there’s various strategies… For me in particular, I don’t like to take a whole lot of entitlement risk. I don’t wanna typically go in and try to rezone. I’ve had some situations where a rezone made all the sense in the world for a particular development, just to meet opposition at city council… And not necessarily community opposition, just a city council member who really didn’t like it, and everybody got behind him, even though the planning and zoning commission was all about it. So I stick to properties that are by right.
Now, it’s becoming harder and harder, and a lot of times you have to be careful, because unfortunately with these cities, they don’t really want rental housing stock. Even though there’s this big affordability problem out there, every city seems to think that they want bigger lots of regular single-family houses, and for nobody to ever rent them out.
So it’s kind of important that you find cities that will work within the existing zoning codes, so you don’t have too much trouble getting what you’re wanting, and not having to ask for a whole lot of specific use permits. However, that’s getting harder and harder, so we’re looking at several different potential developments right now, and the majority of those are going to require a plan development, which is basically you going in and dictating “I want this”, and negotiating with the city, and hoping that you can get what you want.
Theo Hicks: And then how are you finding your land deals? Is there a broker that you work with, or you’re finding them online, off-market?
Austin Good: A little bit of everything. Once you kind of get entrenched in certain communities, there’s what I like to call the good ol’ boys network, and any sort of properties you see on LoopNet in Denton, for example, the prices they want for those properties I would never, ever pay… Just because in the beginning I didn’t really have much of a choice — I kind of lucked into the first deal, and then from there leveraged that deal into relationships with other key players, and land owners, and developers… And it helped that I had a mentor that was really deeply entrenched in the community, so I was able to kind of get this good ol’ boy pricing… Because they knew I was able to close, they knew they weren’t going to have somebody trying to retrade at the last minute… So I’ve been fortunate there.
But now, I’ve been expanding and looking for new opportunities, and it’s been quite challenging; of course, I have wholesalers that bring me deals, which most of the time they’re not even close to being what they need to be… And I’ve also looked at CoStar… I’ve found a couple opportunities here and there, so they can still be found through places like CoStar here and there… But it’s getting harder and harder, especially because right now, despite all this Covid here in DFW, there is still a housing boom going on… And it’s very difficult to compete with build to sell developers for a build to rent project. You need a unique type of market, where the rents are high enough to get you to the valuations where you can pay the same amount that the build to sell developers are paying.
Theo Hicks: I know for apartment communities – when you’re developing an apartment, you’re not only building the individual units and all the interior amenities and things like that, and the mechanicals, and the roofs etc. but also shared amenities. So do you guys do that tier as well? Is there a clubhouse, and a shared pool, or is it really just individual units?
Loe Hornbuckle: I think it’s probably something I would love to chime in on, because it’s kind of what got me attracted, in part, working with Austin on the build to rent project… In multifamily, especially in some of your nicer areas, you kind of have this amenities arms race. It’s basically just this situation where all these apartments are offering more and more and more amenities. Some of them can be turned into revenue streams, but a lot of them are just expenses. So pools, and gyms, and things like that.
What’s really great about the build to rent model that Austin has successfully executed is that you don’t have to have as many amenities. Obviously, you have a place to walk dogs, things like that, but we don’t have any pools, or any clubhouses. The main reason why is because families are really oftentimes more so comparing us instead of with apartments, rather other single family homes. So they’re looking for a small yard, because maybe they have a small dog, or they don’t want any upstairs neighbors, they’re looking for 3-4 bedrooms…
So even though we manage it operationally like a multifamily projects, it often really more so competes with other single-family homes. We do of course get cross-shopped, but the type of person that wants the 3-4 bedroom townhouse or duplex is not necessarily cross-shopping us with multifamily, and it allows us to stay out of the amenities arms race, so we don’t have to participate in that sort of escalatory “I’ve got dog yoga/I’ve got dog washing stations” and so on and so forth, and spending tons of money.
Theo Hicks: Dog yoga. That’s funny.
Austin Good: And I think there’s a limited time period where that’s going to be the case, because build to rent has become such a national obsession now with the big guys… They are adding in amenities; not quite as heavily as apartments… They’ll drop a very small — not even a clubhouse; it’s just a pool with a little, tiny clubhouse, and maybe a dog park. But as competition in this field increases, there is going to become a time where we’re going to have to fight that arms race. In the meantime, while the going’s good, we’re getting after it.
Theo Hicks: So once the single-family home or the duplexes are built, could you walk us through the last aspect, which is renting? What are some of the best practices that you guys are using to fill these units, and what does that process look like?
I’m assuming for multifamily you can’t really rent anything out until the whole thing is done. So do you need for every single unit to be created, or like a single-family development where it’s built to sell, where they are selling them one at a time? Or do you have buyers beforehand, and you’re building for a particular buyer?
Austin Good: No, that’s the big advantage that this has… Typically, a [unintelligible [00:18:37].01] is on a unit-by-unit basis, not the entire facility. So we are able to get income quicker. Typically, just to give you an idea, let’s say I’ve got an 89-unit townhouse development, which is one of the ones we’re doing right now… We’re doing this one in phases. In the first phase we’re bringing on 30 units, and we may after six months drop the first eight units, and then the next month another eight units, and then another eight units, and then another eight units, and six units. So we’re able to kind of stagger/stair-step income there. You don’t have to wait till the very end.
And as far as marketing and things of that nature, although we do certain marketing, a lot of online marketing, and this being student-oriented as well, that we have some listing with some of the student housing books that are given out on campus… But because the amenity itself the fact that you have a single-family home, with a yard, is huge… Because pet ownership, especially dog ownership is increasing, and it’s one thing to have a park, but it’s another thing to have your own backyard. We’ve found that in a lot of our models, backyards are kind of essential to this model.
Theo Hicks: Is there anything else that, Austin or Loe, you wanna mention about this rent to own strategy? We’ve hit the starting point, find the land, to building on the land, to renting on the backend… So is there anything else you wanna mention before we wrap up?
Loe Hornbuckle: Yeah, I think it’s always important to talk about the ways that various investments are sort of de-risked. One of the things that’s really great about what we do is all the units are individually platted. What that does is if you sort of imagine let’s say ten years from now, and we’re going to consider selling our project, we have three options. We can sell the community to someone else that wants to buy the income stream, wants to buy the business, like a multifamily transaction… We can also sell individual units or blocks of buildings to investors; so you have an investor that says “Hey, I’d love to own ten townhouses or ten duplexes, but I can’t afford the whole thing.” You could break it up and sell it in chunks, and maintain common management.
Another thing that’s kind of great about the model is that you can individually sell them to individual homeowners? So you go in, do a minor flip on them at the end of ten years, make a couple improvements… If homeownership is all the rage in 2030, and everyone’s wanting to buy houses and not rent, then we have the option to do that as well.
So it’s an investment that has a lot of exit strategies that aren’t always possible in sort of traditional multifamily or single-family; because of the way we’ve set it up, it’s got a great de-risking profile to it.
Austin Good: It’s worth mentioning taxes are typically lower whenever [unintelligible [00:21:32].20] Furthermore, on a build to rent project things like cost segregation and long-term capital gains, versus build to sell are subject to ordinary income taxes. So there’s a lot of benefits there as well.
Theo Hicks: Yeah. Austin and Loe, thanks for joining us and walking us through the build to rent strategy. I’m saying it right this time; it’s not build to own, it’s build to rent… And you guys went through the benefits and the step by step process for how this strategy is implemented.
If you guys wanna learn more about Austin and Loe, again, the website is goodhorncapital.com. Thank you guys again for joining me today. Best Ever listeners, as always, thank you for listening. Have a best ever day, and we’ll talk to you tomorrow.
Loe Hornbuckle: Thanks, Theo.
Austin Good: Thank you.
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