For all its popularity, the single-family rental business is notoriously difficult to penetrate and operate at scale. Sourcing, buying and managing hundreds or thousands of dispersed homes requires massive financial and human resources.
Private funds that lack them have two options to gain exposure to one of real estate’s hottest segments: build a position in publicly traded names or buy properties and get someone to do the dirty work.
Second Avenue, a Tampa, Florida-based firm founded in 2017, is among the firms seeking to do the latter: building and managing single-family rental portfolios for institutional investors who otherwise would not be inclined to take the leap.
“We’ve been flying under the radar for a number of years as we built out a vertically integrated platform,” said Michael Laser, Second Avenue’s chief investment officer and managing partner.
This week, Monroe Capital, a Chicago-headquartered boutique asset manager with some $13 billion under management, committed $250 million in debt and equity capital to invest through Second Avenue’s “technology-enabled operating company,” as Laser described it.
“We do everything in-house,” Laser said. “We have our own data analytics and our own sourcing technology, as well as a new construction strategy. We manage renovations, lease-up, reporting, accounting — we do all of it.”
Some accounting handiwork is involved. Clients such as Monroe don’t invest in Second Avenue, but rather through it, typically funneling money into special-purpose vehicles to put the capital to work. It takes two to three years for Second Avenue to devise a strategy with a client and deploy the funds, followed by a hold period of at least five years.
“They hold the assets and debt on their balance sheet, and we execute the strategy on their behalf,” said Mike Rothman, Second Avenue’s founder and CEO.
Monroe’s commitment brings Second Avenue’s assets under management to around $2 billion. The firm, which has 120 employees, expects that figure to grow “significantly” as it deploys investor capital at an expected rate of about $1 billion a year, Rothman said.
Earlier this year, Second Avenue entered a $500 million joint venture with Waterton, a Chicago-based multifamily landlord, to buy single-family rentals — and potentially build communities of them — in the Sun Belt. It also recently raised $150 million from BLG Capital, another Chicago-based investment firm.
Second Avenue’s purview spans 10 states across the Southeast and Southwest and the firm plans to push into 10 more over the next year. It collects acquisition, property management and “incentive” fees for its services, but the company declined to offer details.
It’s easy to see why so many want in on the business. Steadily rising home prices over the last decade have priced many out of ownership, and others want to live in houses but can’t get a mortgage or prefer not to buy.
More than 14 million of the 123 million U.S. households lived in single-family rentals in 2019, the latest year for which there is comprehensive data, according to Statista. More live in single-family rentals than any other classification of rental property.
Technology startups in and around the asset class have been raising capital hand over first. Roofstock, a single-family rental investment platform for retail and institutional investors, secured $240 million in March at a $1.9 billion valuation. That same month, the California-based Poplar Homes, a property manager in the space, raised $53 million in a Series B round at an undisclosed valuation.
Home prices’ resilience during the pandemic drew more institutions into the fray looking to repeat the early successes of private equity giants like Brookfield, Starwood and Blackstone, who have amassed formidable positions in recent years.
There is room for more consolidation, experts say. The single-family rental business remains highly fragmented, with roughly 7 million “mom and pop” owners — those controlling no more than a few properties — commanding an estimated 90 percent of it.
The total addressable market of funds that want to deploy to the single-family rental market, but don’t want to deal with the logistics of doing so, is “huge,” Second Avenue’s Laser said.
“Small funds, medium-size funds, large funds — all of them,” he said.