467: Investment Opportunities in Build-to-Rent

SHOW NOTES FOR EPISODE 467: INVESTMENT OPPORTUNITIES IN BUILD-TO-RENT

There is a new phenomenon in real estate called Build-to-Rent that is taking the country by storm.  In today’s podcast, real estate investor,  national speaker, Build-to-Rent expert and CEO of Kinloch Partners Bruce McNeilage shares his experience as one of the successful pioneers of this amazing new investment strategy.

What You Will Learn

• What Build-to-Rent properties are and what the opportunities are for real estate investors
• Why Build-to-Rent is one of the hottest areas of real estate today
• How you can buy “discount homes” from developers
• What the key advantages are to renting out a brand new home vs. traditional rental homes
• How to find the best areas to build your Build-to-Rent homes
• Why Build-to-Rent homes require very little landlord involvement
• How you can create Build-to-Rent homes that attract great tenants with high credit scores

About Our Guest

Bruce McNeilage

Bruce is a national speaker and guest lecturer on the topic of single family “Build to Rent” housing. His firm’s assets have been acquired twelve times by private equity funds and publicly traded REITS looking to make inroads in the Atlanta & Nashville residential markets. Kinloch builds and sells its houses to the general public as well as private equity funds and REITS.

Nashville, Tennessee is where Kinloch primarily owns and develops multifamily residential housing. Bruce just completed his latest project, Solo East, a 121 unit condominium complex in East Nashville which is located in front of a 162 unit complex they own called The Park At Five Points. He has recently announced his next condo project, Solo North which is also in Nashville. He has renovated and owned apartment complexes in the 12th South, Jefferson Street and Charlotte Avenue sections of Nashville and complexes in Lebanon, Murfreesboro and Columbia, Tennessee as well as Forest Park, Georgia.

More About Bruce

• Bruce started out as a financial advisor working for individuals and families for about 24 years
• About half-way through his career, he started investing in single family residential houses
• He originally started the expansion to diversify his own portfolio
• He wanted an investment that didn’t go up and down each day with the market
• He also liked having tangible assets where he could control the value of the assets
• Real estate can be the easiest thing to buy and the hardest to sell, at times, but as a long-term asset with cash flow and tax advantages, it’s a tremendous investment
• It’s also relatively inexpensive to get started investing in real estate

Launching His Real Estate Company

• Shortly thereafter, in 2005, he started building and buying homes in Spring Hill, TN
  • 30 minutes south of Nashville
  • One of the last affordable places to live near Nashville
  • Near Franklin and Brentwood
  • GM has a Saturn factory there that still builds other GM products
  • Penske and Bendix is also there
  • Nissan plant east of Spring Hill and Nissan headquarters nearby as well
  • Average home price in Spring Hill is $350-375,000
  • Homes rent between $1,700-1,800
• As his real estate ventures took off, he eventually quit his financial advisor job
• In 2010, Bruce brought his partner, Chris Zachery, into the business
  • Bruce knew Chris since kindergarten
• In 2010, they named their business Kinloch Partners, after the Kinloch Elementary School, where the met
• Chris focuses more on the financial part of the business – banking, taxes
• Bruce is more the “boots on the ground” guy who focuses works with contractors, picking the markets, putting the deals together, organizing the leasing team
• Today, his company is in 4 states
• They have their own private fund
• They have not taken on investors as of the time of this interview
• His company exists to build purpose-built houses and subdivisions for the use of rental houses for their tenants
• They are not buying, renovating and flipping houses
• They build houses to specifically be rental houses

Getting Started

• In 2005, Bruce started buying at a discount and building homes on a small basis
  • Some builders will agree to build a home or homes “at a discount” every now and then and when things are slow
• They also joint ventured with builders
• Within 6 months, they owned 57 brand new houses throughout the Nashville area
• The houses were rented the first month they were finished
• They later ventured into multifamily but have since come back to single family rentals
• Their initial plan was to sell the houses after 5 years but when the Great Recession hit, he ended up holding on to the houses for 9 years
• Even though they couldn’t sell the houses when the recession hit, they were still cash flowing well so they were still doing great
• When they did finally sell, one third of the renters had been in the house for the full 9 years!
• Think about that as a landlord.  For 9 years…
  • No turnarounds
  • No carpets
  • No paint
  • No vacancies for a few months between tenants
  • No advertising/marketing listing costs
  • No commissions to an agent
• They would hold on to the houses for a longer time period but they get approached, on a regular basis, by institutional investors and REITs to sell at a great profit
• They also only build houses for their own portfolio and only manage their own properties

Renting vs. Selling

• They like the build-to-rent space because of the tax benefits
• If they were to sell, they would have to deal with capital gains
• Also, if they sold, they would have to pay sales commission
• They just go from a construction loan to a permanent mortgage loan
• They get tons of applications from high credit score tenants
• And tenants stay longer than they ever expected – 5 years on average
• If you get a 20-year mortgage and a family stays there for 5 to 10 years, the tenant is paying off your mortgage, the house appreciates in value and you get the tax benefits as well
• As mortgages are paid down and homes appreciate, Bruce and Chris’ net worth goes up
• It also generates significant cash flow.  Expenses are fixed.  Rents increase 2 to 3% per year.  Your bottom-line goes up
• Because the homes are brand new, you also won’t have to work about replacing A/Cs, water heaters and roofs for years to come.  You don’t have the kinds of capital expenditures that people would have in an older rental
• Tenants love living in a brand new house and don’t want to move from that

The Build-to-Rent Phenomenon

• Bruce is considered a pioneer in the Rent-to-Own space
• He started a good 5 years before others caught on to do the same
• Rent-to-Own is one of the fastest growing parts of the residential real estate business currently
• It’s been projected that in 5 years, 5% of the houses to be built in the U.S. will be built for the sole purpose of being rental houses
• Because institutional investors and REITs have been so aggressive in buying his houses, it has allowed him the capital he needs for expansion
• His rapid growth has made it possible for him to grow without investors
• He usually sells once or twice a year

Building Build-to-Rent Homes

• They build these homes for tenant/renter use, not single owner use
  • Flooring:
    • First floor is all LVT (luxury vinyl tiles or panels)
      • Don’t have to worry about carpet replacement, steam cleaning, pets, kids, etc.
      • When tenant moves, just sweep and mop
      • Looks great
      • Most people like/prefer it
  • Bathroom
    • Always put in shower doors to protect the floors, water leaks from second floor
  • Other things:
    • Garage door openers
    • Garbage disposals
• Most of their homes are 4 or 5 bedroom homes
• Mostly 2 stories houses recently
• Have started doing more one story
• Number 1 most important factor when selecting an area to build – good, high-rated schools in the area

Biggest Mistake(s)

• With any rental house, the most important decision you make is which tenant you decide to rent to
  • This is your most important decision as a landlord
  • This is the person who will make your payments and create your cash flow
• If you pick the wrong tenant
  • You’ll have frequent vacancies
  • They will destroy your house
  • You will lose money
• In the beginning of his business, they did not do a deep dive into people’s history and that was a big mistake
  • He now has a simple formula that, within an hour or two, they’ll know:
    • Criminal background
    • Lawsuits
    • Garnishments
    • Evictions
• Also, when they first started, they did everything manually
  • Today, they have a portal where tenants:
    • Can apply online
    • New applications
    • Pay rents online
    • Place repair/maintenance work orders
    • Issue evictions
    • Compiles reports
  • Two big helps with this system
    • Tenant selection
    • Accounting
• He also does annual inspections of each house and neighborhood drive-throughs
  • Checks condition of the house
  • Checks A/C filters
  • Annual service call
  • Landscaping
    • He is very stern that they keep the yards up
      • Fertilization
      • Watering
      • Taking care of landscaping items
      • The house needs to look like it’s their own – not look like a rental
      • If the renter doesn’t take care of the items, Kenloch will fix it and bill the renter
    • When you drive through the neighborhood, he never wants his houses looking like it’s a rental house
    • Renters will receive a violation if they let the yard go
  • They also look for:
    • Campers or boats in the driveways or out front
    • Dogs out front in chains are a no
    • Pets that are not supposed to be there
    • Pet policy
      • They used to have no pets but today it is impossible because most families have pets
      • They now allow up to 2 dogs (under 30 pounds) but pay pet fee
      • 7 breeds of dangerous dogs are not allowed
      • No cats (the kiss of death)
    • They also have a no smoking policy

How and When They Build

• They build 5 to 7 to 10 houses at a time (depends on the time of the year they are building)
• They allow for a couple extra weeks in the winter because it is wet and rainy
• They try to finish as many houses as they can between April and August because that is their busiest time of the year
• Late Fall to the middle of Winter is the slowest time for people renting
• They rent the houses as they are finished
• They have to find people who need houses in 30 to 40 days
• They’ll show another house that’s finished or nearly finished or the actual house up to 60 days before it’s finished to get sales commitments before it’s ready
• The houses could be the same model but with different colors, front doors or different model altogether

Biggest Success(es)

• Picking areas that have new schools being belt or the best schools in the community
  • They try to choose locations that are as close to the elementary school as possible – walking distance, if possible – (most of their tenants have elementary school aged kids)
  • Good schools are a strong selling point
• They also love new areas where there are new parks and shops on main street
• Good proximity to good schools and shopping is key
• Also, their floorplans, appliance packages, cabinets, lighting are nicer than most rentals.  It costs more but they get higher rents and returns that they recoup quickly

Tip for Buyers Who Are Looking for Brand New Homes

• Look for new developments that are about to close down
  • They are closing models
  • Sales people are leaving
• The developers are very likely to give closing credits, discounts because they want to sell quick and move on

Amenities

• They try to pick areas that are close to amenities (parks, pools, dog parks, etc.)
• As they build larger and larger subdivisions, they will likely offer amenities
• Usually, the cost of amenities is $1 million
• It’s a good selling point
• Amenities allow for higher rents

Advice for Old Dawgs Looking at Real Estate Investing to Help Them in Their Retirement Years

• You can use your IRA, 401K, or retirement savings to buy a Build-to-Rent or regular rental house
• If you buy a $200,000 house, you would normally put $40,000 down, if you finance through a credit union or local bank
• If the home appreciates at 3-4% annually, you are earning that return on the $200,000, not the $40,000
• So you are earning $6,000 to $8,000 per year on a $40,000 investment – that’s a 15 to 20% return on your $40,000 investment year-after-year!
• With interest rates at an all-time low, this is a great time to buy rental properties
• His company invests only their own funds but they are starting to talk with investors and their may also be opportunities at $100-200,000 down the road
• But you can buy more houses for the same money for just regular rentals, get good appreciation and cash flow too
• Buying your own Build-to-Rent houses
  • With investors with less than a million dollars, it would be hard to do
  • It is also high risk
    • Development could go up in price
    • Land development costs
    • Construction and construction materials could go up in price
      • For example, for cost of lumber alone, for a 2,000 sq ft house, the price has doubled, from $7,000 to $14,000
    • You could get stuck with increasing costs
  • You would do better to partner with someone like Kinloch
    • He’s already gone through the mistakes
    • Getting the homes at a discount

Current Business

• The “death of the American dream” means that less and less people are buying and more and more are renting
• There’s a whole new demographic who are renting out of choice, not out of necessity
  • Grandparents are chasing their families around the county and they don’t want to buy a house every 3 or 4 years
  • Sons or daughters get promoted in their corporate jobs and the grandparents want to be with their grandkids
• There are also those renting out of necessity
• The pool of renters is currently growing at too rapid of a pace to keep up with
• The need for affordable rental houses is exploding
• He’s getting better quality of renters with high credit scores as the need grows
• He also wants to hold on to houses for a longer period of time
  • Bruce wants to hold on to as many houses as he can
• He feels that this is not even work – he’s having fun!
  • He’s helping people with housing
  • They’re happy with a brand new asset
  • He never sees himself retiring
• He’s currently in Nashville area (where he lives), Atlanta area and Greenville, Columbia and Raleigh areas in North and South Carolina
• In North Carolina, housing is incredibly inexpensive, much less than Nashville and Atlanta

Rap-It-Up

• Favorite real estate book: The Art of the Deal by Donald Trump and The Millionaire Next Door by
• Favorite business book: Autobiographies about people he respects in business
• Most valuable web site for success (other than your own): Biggerockets.com, ThinkRealty.com
• Favorite app: His calculator or mortgage calculator.  Also Realtor, Zillow and Trulia
• Favorite quote: He has two: “Shy salesman’s have skinny kids.”  “Empty houses make me no money.”
• If you lost everything – all your assets – and had to start all over, knowing what you know, and you only had $1,000, what would you do to launch your real estate investing business? I would look for someone like me, who would like to invest invest in real estate but didn’t want to get their hands dirty. I would take a number of people out to lunch and I would share my credentials and explain what I want to do in the future. I would ask for referrals and get in front of people that have money and do my presentation.  I would use the $1,000, network, take people to lunch, ask for referrals and get in front of people who would be potential investors and to do my presentation.

How to Reach Bruce

• Website: KinlochPartners.net
• Google:  Do a search on his name: Bruce McNeilage Build to Rent
• Email: Bruce@KinlochPartners.net

DISCLAIMER:  Many of the above strategies take knowledge and have a higher degree of risk.  You need to do your research and/or work with someone who is experienced to reduce your risk.

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