From small private entities to large, publicly traded institutions, it seems as if everyone is getting into the single-family rentals (SFR) investment business.
As the competition for acquiring quality rental housing increases and inventory continues to dwindle, SFR investing remains challenging unless a company finds the right investment partner or partners. Finding the right partner can be done by creating a joint venture (JV), a business arrangement in which two or more parties agree to pool their resources to accomplish a specific task. In virtually any type of economy, a great way to invest in SFR housing at scale is to create a joint venture.
Forming a JV, or a fund to invest in single-family rentals, can bring many benefits to all parties involved, not to mention the residents of the properties. Combining the resources of two or more companies in a JV partnership, typically results in faster growth for all of the entities. While one company may be responsible for putting forth more debt and/or equity capital than the other or others, that investment will likely pay off in multiples. That growth can manifest itself in a variety of ways, including the ability to target new markets for acquisitions, the ability to increase the number of properties on a company’s radar screen, and much more.
Faster growth has enabled property owners and operators to focus more on the resident experience, and to make it one of their top priorities. As a result, resident benefits have become increasingly prevalent. Rapid expansion may also provide the partner with greater leverage to renovate properties with environmentally-friendly features and amenities, for instance, or to develop cutting-edge, tech-enabled properties for residents who work from home every day.
Atlas Real Estate recently executed a $1 billion JV with DivcoWest to acquire and renovate SFR nationwide. This JV enables us to achieve scale at a much faster rate than we would have been able to without a JV partner. Before we achieve our desired scale, we need to ensure that our processes are locked in, otherwise, the inefficiencies will be exacerbated. Our mission statement at Atlas is to “uplift humanity through real estate,” and we believe that we will have a positive influence on the communities and residents we serve throughout the United States. .
Not All of a JV’s Benefits Are Monetary-Related
In addition to being able to grow faster with an infusion of both equity and debt capital, there are other advantages to forming a JV. As an example, throughout Atlas’ history, our JV partners have many connections in the real estate industry, and creating a fund allows us to tap into those resources. In addition, the risks and costs involved in a JV structure are allocated among all parties. Therefore, the liability does not fall solely on one company; it’s diversified. Savvy companies structure JV agreements so that only a portion of a company’s business is associated with the risk.
While a JV does not bind two or more companies together for perpetuity, the relationship can turn into a long-term one, filled with even more investment opportunities in the future. If the JV achieves its goal, the entities can add additional phases and monetary funds to invest in, renovate or develop additional properties, for example. The right JV partnership can open many doors and even result in massive expansion for a company.
JV Investment Partnerships Have Grown Exponentially
For many reasons, joint-venture structures are increasing in popularity, even among companies that aren’t traditional single-family rentals players. In today’s tight market, companies seeking to accumulate a large portfolio of properties need to have capital at the ready. Most companies, however, cannot fund a portfolio acquisition alone, thus they require a partner to make it work. Increasingly, entities outside of the SFR industry are deploying capital into JVs because of the significant upside this type of investment opportunity brings.
Across the country, SFR homes are filling a void that starter homes held for previous generations. As a result, professional operators in the residential and commercial sector are eager to place their money in such a promising sector. A recent Trepp report states that 2020 was the most active year for SFR securitizations on record, with new issuance topping $8.3 billion — a whopping growth of 99% from 2019. Through April 2021, there were more than $3.1 billion of newly securitized SFR CMBS, keeping 2021 on pace to break a new record. According to The Altus Group, institutional SFR operators acquired between 55,000 and 65,000 single-family homes last year, with 2021 expected to net upwards of 70,000.
Find the Right Partner
Finding the right partner should be a methodical, well-thought-out process since it’s the most important step in creating a successful JV. Not putting enough effort in this step could make or break the entire process. There are many potential partners out there, but it may be difficult to find one on the same page, or to find one with shared values. Begin by interviewing different partners to see who aligns the closest. Two of the most critical questions to ask during the diligence process are: 1) Does this potential partner have reputable leaders on their team? 2) Is this potential partner a cultural fit? Make sure to understand—and clearly establish—non-negotiable items when commencing these conversations.
Examine each partner’s business goals and values to ensure that they are complementary. Reach out to other companies, investors, and employees that this potential partner has worked with in the past to provide better insight into how they run their business. Get to know the leaders personally, and find out what makes them tick. What are their hobbies, dreams and passions? Uncover their professional and personal value systems, as well. Then, run through scenarios to determine how they would react to stress, if they would remain calm under pressure, how communicative they are, their level of loyalty and reliability, etc. A partner that responds favorably to these scenarios is a good partner to trust in a JV relationship.
Some Considerations to Ponder Before Executing a JV
While the terms of each real estate JV are structured differently, here are some general considerations to make before entering into a partnership:
- Identify all of the parties involved. (A JV can consist of more than two partners).
- Clearly set forth the goal of the JV and how it will achieve those goals operationally. For instance, if the goal of the JV is to purchase and renovate single-family homes, what is the geography/location of these rentals, what technology will be used to achieve the goal, etc.
- Determine the amount of capital and/or resources each party will contribute to the JV.
- Establish the terms, such as the amount of debt or equity capital each partner will front
- Determine the upfront contributions each entity will make and understand the ownership split
- How the JV will be managed, controlled and operated and by whom.
- What will happen once the deal is complete/exit options.
As with any relationship or partnership, there are risks associated with forming a JV. Both companies should be on the same page, and possess the same vision and goals at all times. Trouble begins when the objectives are unclear, the lines of communication are poor, or differing sets of expectations exist. If a JV doesn’t work, that can put strain on other parts of a firm’s business. The clashing of cultures and imbalance of workloads can lead to disagreements and rifts within the partnership. A JV requires significant work and time to develop, and in many cases, it can take years to agree upon the terms of a deal.
With home prices at peak levels and inventory at a minimum, forming a joint venture is a great way to invest in properties. When making a pitch to a prospective partner, be persistent, memorable, and personalized. In the real estate industry, a partner could be looming just around the corner. Who knows when a business associate, longtime mentor or even a competitor could approach with an offer to form a fund, so always be prepared for that possibility to arise. Although the single-family rentals investment sector is a huge, $3.8 trillion industry, it’s still a very small world.
About the author:
Vincent Deorio is the Vice President of Corporate Development at Atlas Real Estate. Contact him at firstname.lastname@example.org, or (303) 902-4785.