DENNIS CISTERNA EXPLAINS THE INSTITUTIONAL BUYING PROCESS IN THE SINGLE-FAMILY MARKET " Hedge funds and private equity groups buy to a certain return is practically no foreclosure volume. People are moving out of their homes at a much slower clip than they have

discipline. Hedge funds are more likely to have it than individual investors.”

LOOKING FORWARD: MARKETS, DISRUPTION, AND THE BEST INVESTMENTS THIS YEAR Cisterna is not shy about commenting on market conditions around the country, and he often cites Investability data as a key component in his analyses. “One of the main reasons we have so much data to discuss is thanks to the Altisource purchase of RentRange a few years ago,” he observed. “Between Altisource data and RentRange data, we are now one of the largest data providers in the single-family investment sector.” Cisterna emphasized real estate markets are inherently logical, which means there is opportunity in every market if an investor leverages the right system for that market and the right strategy for their own business. “Generally speaking, however, there are certainly some markets that might offer more opportunity than others right now,” he admitted. “I see the most opportunity in the Midwest and the Rust Belt along the Northeast, as well as a couple of markets in the South.” Cisterna also recommended investors not become too narrowly focused on major metro areas. “There are a lot of good-sized, solid secondary and tertiary metro areas that are experiencing either continued expansion or a resurgence of their local economy,” he said, making particular note of these markets in the South and parts of the Rust Belt. These markets may appeal to individual investors in part because they are less likely to have high volumes of institutional investor activity. “Typically, if you’re investing in Dallas or Houston, Texas; Orlando, Florida; or

METROPOLITAN STATISTICALAREA (MSA): A geographical region with relatively high population density at its core and close economic ties throughout the area. PRIMARYMARKET: Any metro with a population of 2.5 million or more. There are 20 primary markets in the U.S. at present. SECONDARYMARKET: Any metro market with a population of 1 million to 2.5 million. There are 31 secondary markets in the U.S. at present. TERTIARYMARKET: Any metro with a population of less than 1 million. There are 61 tertiary markets in the U.S. at present. RUST BELT: The region of the United States beginning in western New York, passing through Pennsylvania, West Virginia, Ohio, Indiana, Michigan, Illinois, Iowa, and Wisconsin. The term is often used to describe any area of the northeastern U.S. or midwestern U.S. that has experienced deindustrialization and subsequent urban decay. Some investors conflate the Rust Belt with the Midwest, but this is inaccurate. Market definitions courtesy of ATTOM Data Solutions.

threshold, so there is no arbitrary purchasing by them in any market. An exception to that could be when homes are trading below replacement cost, as they were in the wake of the foreclosure crisis. At that point in time, all sorts of institutional inves- tors were purchasing opportunisti- cally because they knew eventually home prices would come back up, so you could argue there was much less discipline in 2011, 2012, or 2013. There was not the same need for discipline on the part of the big funds during those years because the mar- ket was essentially near the bottom. “Today, however, big funds are buying SFR properties knowing that they have to meet several requirements: •  A certain amount of annual yield (without factoring in appreciation) •  Minimum neighborhood characteristics such as school score, crime ratings and proximity to employment •  Consistent property characteristics such as property age, bedroom and bathroom counts, and enclosed garages “What we are seeing in nearly every market is tremendous demand and not much supply, even though there is job growth throughout the country in nearly every major metro area. Everyone, both big investors and smaller ones, are essentially frozen out of many major markets. There are next to no new houses being built. There

done historically. It’s important to remember that if institutional inves- tors did not come in when they did to stabilize the markets, we could be in a much worse spot than we are today. The market needed that liquidity they brought to the table. The issue today is a complete lack of inventory.” “When the market crashed, we had too much inventory and not enough capital in the market. Now it is the other way around, and I don’t see the nation suddenly building a lot of new housing to satiate that demand. We’re between a rock and a hard place. “I don’t think we want to see de- mand decline, as that would generally be an indicator of larger economic is- sues. That is leading to investors start- ing to get very creative to source new opportunities – build-to-rent, market expansion, direct mail, more complex renovations. All these methods and many more are being used successful- ly by investors willing to go the extra mile for their investment objectives. “In my opinion, guerilla market- ing can give individual investors access to inventory unavailable to the larger funds by expanding the ways in which they seek leads.” ON RESOLVING THE INVENTORY ISSUE: Dennis Cisterna hosts a regular podcast, “The Investability Podcast,” to provide insight into the evolving SFR investor market to investors on every scale. It may be found at investability.

MAKING THE MOST OF THE INSTITUTIONAL PRESENCE While conventional real estate wisdom often advises smaller real estate businesses against diving into housing markets and sectors with heavy institutional presences already, Cisterna’s unique take on the breadth of the SFR sector leads him to present a very unconventional view on the trend of big investors taking on a larger role in residential rental real estate (see sidebar on p. 27). “You will hear investors say that they do not want to get involved in their local market, for example, because ‘the hedge funds’ are just buying everything in sight. Really, those funds can make a market a lot more predictable for smaller investors because they have certain stated thresholds and they work in a scalable way,” he explained. “The disruption comes into the picture when individual investors see the buying activity from those funds, then overpay for assets themselves. It’s a question of

portfolios in ways that never could have happened prior to big institutions entering the SFR space. The capital markets and the technology available followed the ‘big money’ and evolved to work with smaller real estate businesses,” he continued. “So many of the innovative online tools and services that make being a property manager at any portfolio volume so much easier evolved out of necessity once the biggest players in the ‘field’ were captured. As you can imagine, if I own a real estate- services company and I’m trying to grow my revenue, once I’ve captured the institutional sales I then must go downstream to the next level of investor. That trickle-down effect in products and services for real estate investors benefits every investor at every level, but those products and services, in many cases, would not have been created, refined, or perfected in the first place if it were not for the initial entry of the large investors in the space.”

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