Many of you may have a rental property or two as a part of your investment portfolio. And, if the stats are right, about half of you landlords are managing those properties yourself. So,are we having fun yet? How are those late-night phone calls and delayed rent checks treating you? No stress, right?
An even bigger concern is what’s going to happen now that big private equity and hedge funds are gobbling up properties and turning residential real estate into an institutional investing class. Are they going to crowd you out? For the moment, probably not. But, changes are happening, and this is definitely a trend to watch. That’s where this week’s guests come in.
Atlantic Property Management has specialized in being a one-stop shop for all things rental-related. So, we welcome their CEO, Greg Kurzner, and his COO, David Lightfritz, to share their thoughts on what landlording will look like as the big guys enter the market.
Keep Moving. Nothing to See Here
Right now, there’s nothing to fear from the institutionalization of rental real estate. Several key demographic and economic changes have created a boom market for rentals. According to Kenneth Hackman, in his article for the Crunched Credit blog, “A Contrarian View on the Single- Family Rental Market,” vacancies for single-family units are at a 30 year low. In 2004, more than 70% of Americans owned homes. By 2016, that number had dropped to one of the lowest in the last 25 years – 63.6%. And, it keeps decreasing. This means that the institutional investing will be just a drop in the bucket, leaving plenty of room for you solo landlords.
“There are maybe 15 million residential rental properties in the US,” Kurzner points out, “and that’s a lot” (um, yeah). “Big multi-billion dollar funds, they really don’t move the needle of the percentage of ownership. They make up 2% or 2.5% overall,” he states. “87% of the homes are still owned by individuals.” Clearly, the small, private investors and their retirement ‘nest eggs’ are not being threatened by Wall Street and other major investors. This reality has not gone unnoticed by Atlantic and its team. It’s a shift that has seen their company grow and prosper.
But, there is a change afoot. With the influx of big money, there’s been a desire to “professionalize” the rental market. “Since around 2012, there has been an entrance by these billion-dollar investors,” says Kurzner, “with the goal to try and institutionalize or brand the whole industry.” This has created a need for outside companies ready to step in and run things. It’s what’s happening around the world. “In Australia, 80% of all rental homes are managed by professional managers,” Kurzner states. “In the United States, it’s less than 50%,” he adds, which means there are still a lot of folks doing it themselves, and competition of this kind could be the difference between a successful venture and a bad one.
When it comes to making good investments, Atlantic Properties has its fair share of war stories and the resulting battle scars. This is the company that saw crazy growth (from 300 units to over 2200) before having to shrink back down to 850 units. “Success comes from good judgment; good judgment comes from experience, and experience comes from bad judgment,” Kurzner believes.” Bringing on 100 to 150 properties a month brought on many “hair on fire moments,” but Atlantic persevered.
How? Diversification. In essence, they were ready for whatever the market had to offer. When the real estate bubble burst back in 2008, they were fortunate. “We had different avenues of revenue,” Lightfritz points out, “where a lot of people were struggling, property management seemed to thrive.” Atlantic took this a step further. “We have a full-service sales and brokerage unit,” Kurzner states, “we are also a licensed general contracting company.”
They made this strategic and very wise decision not to “bet the farm” on one segment of service only. “One of the things most of the management companies suffer from, even the big ones trying to scale nationally, is that they are property management companies only,” he explains. “They’re one trick ponies.” His company, on the other hand, prides itself on being a full service, vertically integrated partner for their investors.
Get the Help You Need
So, what does this mean for the portfolio of a small-time property owner looking to maximize their own personal investment by renting? First and foremost, don’t worry about the big boys…for now. “Property management is a people business,” Kurzner argues, “and it’s really important you connect with people on a personal level.” When you have to scale up to serve larger clients with bigger budgets, it’s still a matter of trust. Even as the sales market bounces back, there will still be a need to find outside help in the landlord department.
“We wanted to build a business unit that literally is going to benefit us no matter where we are in the real estate sales cycle,” Kurzner explains. No matter the ups and downs, there will always be those inopportune phone calls, those heated tenant demands and confrontations, and someone other than the owner should be there to smooth over the rough edges and resolve the problems. There will always be disruptors, but Atlantic Property Management is prepared for that eventuality. “We actually have meetings about this [kind of disruption],” he says. “If someone is going to put us out of business, how are they going to do it? Then we become those people.”
It’s something the small, private investors and property management companies need to notice. As the hedge funds step in and sweep up the available homes, as the market adjusts to the new influx of professional landlords, there will be growing pains. A recent Wall Street Journal article entitled “Meet Your New Landlord: Wall Street” argues that many areas around the country will see rent increases, high demand for properties with limited supply, and perhaps, most importantly, a revitalization of formerly blighted areas.
So, if you find your happy-place in taking tenant phone calls and dealing with leaky pipes, your joy will likely go on interrupted. On the other hand, if you (like me) would rather chew broken glass, get a property manager. Seriously. I’ll personally attest that saving the extra money is not worth the lost sleep.