mixture of strategies, including buy- ing homes from distressed builders at a discount, building homes with the express purpose of building a rental business, and building entire subdivisions — creating entire rental communities. Each of these strat- egies comes with its own inherent risk. As a developer who also wears the homebuilder hat, our risk started right out of the gate. We were tasked with land acquisition, the entitlement process, design and engineering, among other items. All of those tasks took time and money, even be- fore the first yard of dirt was moved. Once we got rolling with grading, we had to install utilities. Once those initial stages were completed, we had to put on our homebuilder hat. At that point, we were on the hook for material and labor costs and we had to meet our own construction

deadlines. If we weren’t meeting deadlines, we were paying interest on loans that weren’t bringing in any rental income. As they say, time is money, and missed construction deadlines add up to lost money daily. That whole process, from initial in- ception of an idea to completed con- struction, represents multiple steps where something can go wrong. And, of course, everything that goes wrong equals a cost overrun that erodes profit margins even before the first renter signs a lease. Traditional builders manage these risks on their own as a routine course of running their business. Bringing a project in on time and under budget is the builder’s area of expertise. But, when traditional builders go to sell, they pay commis- sions, incur marketing costs, and assume the risk of the bottom falling out of the market and no one willing

to purchase their homes. In tough times, it’s easy for builders to end up with houses sitting vacant, with a big bank loan coming due. I have purchased hundreds fore- closed properties over the years from subdivisions to building lots to single-family houses, townhouses and condos. The majority of these have been purchased from banks and the loans that went bad were from build- ers and developers. In my experience, very few single-family rental owners have gone bankrupt or lost their houses to a bank. It would be tough to do, as the business is relatively simple — buy a house, find renters, then hold for long-term appreciation or package and sell a portfolio of rental homes to institutional funds. I do both. But, to be truthful, instead of buy- ing distressed properties, we’d much rather have long-term relationships with builders that are mutually prof-

78 | think realty magazine :: june 2020

Made with FlippingBook Online newsletter