The 3 Virtues of Winning Portfolio Deals with Clayton Wyatt

Single-family rentals (SFR) are having a moment, with significant momentum in rent levels and values. Build to rent is the gateway drug to SFR, with new groups entering the sector left and right. Aggressive assumptions and favorable deal terms are necessary to execute a portfolio transaction. Considering this, how do investors get in on the action in such a competitive market? Roofstock's VP of Business Development, Clayton Wyatt has answers for you in this episode.

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Transcript

Before we jump into the episode, here's a quick disclaimer about our content. The remote real estate investor podcast is for informational purposes only and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.

 

Michael:

Hey, everyone, welcome to another episode of remote real estate investor. I'm Michael Albaum, and today I'm joined by Roofstock, VP of Business Development, Clayton Wyatt. And Clayton is going to be talking to us today about some of the things investors need to be aware of, and things they can do to win portfolio deals. Alright, let's get into it.

 

Clayton Wyatt, thank you so much for taking the time to join us today. Really appreciate it.

 

Clayton:

Yeah, happy to be here.

 

Michael:

And so I would love if you could give our listeners a little bit of background on who you are as an individual and what your role is at Roofstock specifically.

 

Clayton:

Yeah, who am I as an individual, I don't know if I want to bore the audience. But I mean, I'll give a little bit of background, you know, came from real estate, private equity and investment banking, you know, background, you know, Rich and I both spent a lot of time at Jeffrey's covering the single family rental space, including, you know, waypoint which obviously Gary was the the CEO of and, you know, all the way, way back to when waypoint was ramping up to go public. And we ended up merging them into, you know, a spinoff from Starwood into a public reit, and, you know, covered them as a public company. So when, you know, rich, and Gary and Gregor had co founded Roofstock, I stayed behind and had done some, some read coverage, mostly in the residential space, but also started a cover, you know, some prop tech companies, as we started to see more of these technology companies getting into the real estate space.

 

And so, you know, groups that were like an Opendoor, or an Offerpad, or, you know, Point or Unison, or some of these mortgage companies really starting to see a lot, a lot more of those, those groups come into the space, because residential is a massive asset class. Right. And so similar to, you know, Roofstock there was there was a big Tam available for for groups to cover. So it's been a little bit of time there. And then, you know, finally got an opportunity to come over to Roofstock, about three years ago, and primarily spending, you know, my time in the in the business development team, which, you know, obviously, we handle the portfolio transactions, but also a lot of the, the JVs and interesting relationships that we've got going on there, including, you know, the recent announcement we had with JLL, that made an investment into rootstock, and then obviously, we set up a joint venture with them and with the acquisition of stessa. So I would say, majority of time spent there, but also, you know, at a at a corporate level, you know, any any capital markets activities, so rather that's, you know, US structuring, you know, debt or equity, but also on the investment services side, where we have clients coming in that are looking for advice on putting credit facilities in place or debt products, spending a little time there with with the broader team.

 

Michael:

Right on.

 

Clayton:

Does that work for an overview?

 

Michael:

Yeah, that was great. That was great. And so for those of our listeners that might not be familiar with the private equities market, what is covering something mean, you talk about covering a read or covering SFR? as an asset class?

 

Clayton:

Yeah, So just as an investment, you know, banker, you're, you're really a, it's a client, you know, driven business. And so covering a company is really, you know, you're the point of contact for that company for all the services that, you know, the bank can offer to them. So rather, it's advisory on selling a large portfolio, or accessing the public markets for either equity or debt. You know, we're a coverage officer in the sense that, you know, if, if you want to do any of those services, we sort of help you set up any of those products or access those markets.

 

Michael:

Perfect. Okay. Thanks for clarifying. So today, what I really wanted to chat with you about is what you're seeing in the marketplace, in terms of how to win portfolio deals, both on the institution side of things, and then also for your individual or retail investor. What are some things that have changed in the in the landscape and what are some things that folks are doing to win portfolio deals?

 

Clayton:

Yeah, so I mean, a couple of things that I would say just stepping back First, you have to recognize the size of this market. Right. And single family rental is not a new industry, it's not a new marketplace, but it's been new to institutions, just over even the last decade. And SFR, we've been saying this for a while, but SFR is definitely having a moment. And the market is very hot, you're just seeing record amounts of new capital, particularly at an institutional level flowing into the space. And if you compare that to, you know, other real estate asset classes, there's there's a massive gap between the the percentage of ownership at an institutional level versus the smaller retail, you know, investors one off investor.

 

So within let's just look at multifamily residential as a comparison, I think the the quote unquote, institutional ownership in that space is 30 35%. And it kind of depends on how you classify institutional investors could be a little bit higher, within SFR, it's still two or 3%. So you've got this, 10x, opportunity or more right, to to capture more of that class from an institutional level. And once use in any of these real estate classes, once you've seen institutional money come into a space, it's not like it retracts and then exits the space, right? It just continues to be more and more institutional, so that that's a huge opportunity, I think from a, you know, from a retail ownership or a smaller, you know, investor ownership, because that means that your portfolio is likely going to be worth more money, you know, tomorrow than it is today, because of this cheaper cost of capital, you know, coming into the market.

 

And so it really has been, you know, from one of the trends, I guess, it's been a supply problem, not a not a demand problem, right? So is with an ever increasing amount of money coming into a, you know, sort of a fixed asset, you know, base, you're going to have more competition at every turn. Yeah. And so I think that's one of the major trends that we're just we're watching closely. And as we take out portfolios for sale, we're just seeing more and more investors interested and more and more, quote, unquote, real buyer showing up to bid on processes. And I think people are looking for ways to differentiate themselves, and for ways to, you know, get get proprietary access to different deal flow channels.

 

I think from a, you know, how do you, how do you win more deals in the market? I think it really is, goes into that differentiator, right. So you can, you know, in any in any process, you could pay more money for a deal, right, you can be a more certain buyer. I mean, ultimately, if you pay more money for a deal, you're gonna win that deal, right? If you're the if you're the, it's kind of, you know, simple to say, but if you pay the most money, in any process, you're gonna win the deal. But I do think that when you're a seller, getting that, that certainty of close is important, as well. And so when we always tell our sellers, and we tell the buyers that are bidding, it's really three things, it's, you know, how do I win a deal, it's price, terms of the contract, and then certainty of close, right, so you can win, win, win or lose a deal on those three deal points. And I think that applies to, you know, anywhere from the, you know, a 10,000 home portfolio deal all the way down to a 10 home, you know, deal or even to a, you know, a single, a single home. So, from a perspective of what are we seeing, and what does it take to, to win deals? It's really those three things,

 

Michael:

Yeah I'm curious to just get your personal insights and opinion as to why do you think SFR has become this explosion? airy, if that's a word asset class, into the institutional world, and the multifamily commercial industrial has always kind of been there. But why now, all of a sudden, are we seeing institutions so interested in the single family space?

 

Clayton:

Yeah, I mean, I don't know if that's a word, but we could we could invent it here. And we could we could try to get it into the dictionary,

 

Michael:

We'll go with it.

 

Clayton:

Well, I think it's, it's it's a couple of things. This has always been an asset class. And it's always been a really important way that investors have been able to to grow wealth over time. It's just now becoming more relevant or, you know, apparent institutions. Because, I would say in large part technology, and companies like a Roofstock that can create a marketplace can eliminate some of the friction Out of the transaction or out of the management and the ownership of these assets.

 

If you, you know, back up to, let's say, you know, 2011-12-13, when companies were, you know, institutions were buying these assets, and then getting ready to take them out as public companies, there were a lot of investors that really do this as a trade for institutions and didn't believe that you could manage, you know, a scattered site portfolio of properties, at the same efficiency, or at the same scale as multifamily properties, which, you know, could be units all in one building vertically, right? Technology, change that, because you could now, and it's been proven out now, like, I don't think that there's any question anymore of, can you can you manage a, you know, 80,000 unit portfolio of single family rental, at the same level as you can manage 80,000 units of multifamily. And so I think you have have that, let me, let me put a pin in that for a second.

 

But the other piece of it is, we've just been through a crazy pandemic, where on its face, I think everybody would have thought real estate, you're going to see another massive dip in real estate values, and what actually happened over the last, you know, 12-18 months, values went up, right, and it's, it's a supply problem, we over the last, you know, decade, we have under built in terms of supply. And so why you see a lot of these home builders rushing to build even more, even if you look back at the last decade, we there's, there's so many more homes that need to be built to even catch up with that normal, you know, curve in terms of the amount of product that that we need, as a as a country. So I think that's, that's magnifying the problem.

 

But in terms of this is an asset class, the reason it's so interesting to institutions is because you can manage it at scale, the technology's there to do it. And it's, it's a hedge against, you know, downturns people, the value of home has become so much more important even during this pandemic. And I think it Listen, it was apparent in the last downturn, that the rental income is very durable, even during a real estate depression when prices go down. And so, you know, during this, this pandemic, it was actually it was a huge winner, because not only were the was the the rental income durable, but prices were actually going up, right during a during a downturn. And so, I think those those things have kind of made this an important asset class for investors. And, you know, you also see this, you know, iterating, in, in, in different forms, right, like the build to rent, you know, asset classes has become much more, it's kind of like the the in vouge thing to do right now. Right, is to own build around to go accumulate assets. Yeah, from my perspective. And why is that? Like, that's, that's not a new concept.

 

I mean, if you look at Europe, they've been doing builddirect for decades, right? It's, it's just in the US, where I've been calling it the gateway drug to scattered site, single family rental, because if you're a, you're a residential multifamily investor, you're used to having 200 units in one building. And so you weren't quite as comfortable saying, I'm going to go buy 200 units in Phoenix in a scattered site, where I have to manage all these these assets in different places across the MSA. But if I can buy 200 units that are contiguous, and it's a build to rent community, it's an easy way for you to start getting into that, that single family rental portfolio. And I think that, you know, that's important because it gives investors a comfort level that you can you can own and operate these similar to, you know, other residential asset classes.

 

And so I think in the future, it's not just going to be Is it a single family rental, you know, residential portfolio, or is it a multifamily residential portfolio, it's just residential. And rather, it's, it's it's multifamily or single family, you're owning a house for somebody to rent, right. And that's an that's a very important thing. Because where you wake up and how you feel about your home, like, I think it permeates so many other areas of your life. And, you know, the best thing you can do is provide a roof over somebody's head that, you know, gives them a safe and happy like place to live. And so that's never going away, regardless of if it's multifamily single family or, you know, we figure out ways for people live in, you know, co living situations or what have you. So I think it's an asset class. That's, that's been important for years and years and years, but it's just been institutionalized and technology has helped accelerate You know, our ability to do that efficiently?

 

Michael:

I think that makes a lot of sense. Makes a lot of sense. Alright, so let's jump into talking about a little bit more in depth some of the three points that you brought up in terms of what it's taking to win a portfolio. So, so price terms, and then certainty of close. So let's start with price. Where are you seeing these portfolios go with regards to list price, versus what they're actually being purchased for?

 

Clayton:

Yeah, that's a hard one. Because, you know, list price is difficult. And I think in some scenarios, having a list price could even hurt you particularly in, in, you know, in an appreciating market, right. So if yours, you're setting a list price, you might be setting that list price too low,

 

Michael:

Someone could be willing to pay more,

 

Clayton:

In some cases, it's Yeah, and and on an individual asset basis, I think it's a little bit easier to set a list price, because you've got, you know, sort of some insight into what that looks like. But at a portfolio level, I think it gets a little bit more difficult because you, you're starting to see capital, underwrite the cash flows. And we have this broken system of appraisals or bpos or AVMs, that, you know, generally do an okay job on, you know, just law of large numbers, like you're gonna get some wrong up or down. And on average, it's pretty good.

 

But it's really built for, you know, the one off home that that's probably going to be occupied by an owner occupant, it doesn't take into account, you know, what folks are willing to, to receive in terms of cash flow, like on a yield basis, right. And I think that's a huge problem. Because if you're not evaluating what that cash flow stream is worth, to any institution, and in a market where institutions are, are looking for yield, or you know, where debt is so creative, that they're able to pay lower cap rates and cap rates are compressing, then you're gonna miss the valuation of these portfolios. So, you know, again, I think it's very difficult for, for, for me to just bogey like what what are all portfolios trading at in terms of like a quote unquote, list price, because a lot of times these AVMs are, are actually not very helpful in terms of determining where the price is going to go.

 

And I do think it's actually a little bit of a tale of two cities here, because there are the portfolios that fit very well, for an institutional investor in terms of, you know, what are the top 10 markets in the US that the portfolio is in? What's the vintage of the house? What are the areas that it's located in? Is it a high school score neighborhood? You know, is it a high neighborhood score, is it you know, is it in a market where rents are appreciating very quickly.

 

And I think groups are very willing to pay up today, for those dynamics in a in a well defined stabilized portfolio, and we are starting to see groups pay up, pay a premium, quote unquote, for a stabilized portfolio. So, you know, there's cases where we're seeing, you know, if you back up two years ago, I would, you could say, you might see us pricing portfolios, or guiding on pricing and portfolios at a at a discount to a BPO value. Today, I would argue that for the best portfolios, you're actually seeing a premium to BPO. And, and on an individual basis, it might be a little bit a little bit closer to, you know, that appraisal or BPO. But on a portfolio level, you've got a couple dynamics that are are working in your favor in terms of being a seller of portfolios, because the cost of capital today is is very low. And it particularly on the debt side, you're seeing institutions able to, you know, securitize these portfolios and get debt at a leverage point that's in the mid to high 80s. And at a sub 2% cost of capital.

 

Now, obviously, there's some some expenses in terms of structuring that dealing and and and selling it into the market. But if you've got a 2% cost of capital on the debt side, and you can get very high leverage, that's gonna make, you know, a portfolio very, very accretive on a current cap rate basis, and so we're seeing compression of cap rates. We're also seeing That because rent is, you know, accelerating in some of these markets very quickly, that groups are able to really underwrite the loss to lease, or that discount to quote unquote market rent. Because there's a there's a real tangible increase, you know, year over year or lease over lease in terms of the, those rental bumps.

 

And so I think it's, it's a combination of all those things to say, you know, don't I, the one warning, I would say is, you know, don't don't miss price the portfolio or set your, your bar, you know, necessarily too low. But I do think it's helpful for sellers to be realistic, you know, I'd be remiss without without hitting the other side of that coin, which is, there are portfolios where it's a little rougher, and if it's not right down the center of the fairway for these these institutions on where they want to buy, what markets they're in, you know, what the product type is, as soon as you start to, you know, diverge from that a little bit, you're, you're starting to see bigger discounts, you know, to a, quote unquote, market value for those portfolios.

 

So rather that, you know, small multifamily units or townhomes that don't necessarily fit a investors buy box, or is it you know, lower rent band homes or a little bit older homes. So I do think those things come into play. But for the very best, you know, well located portfolios, we're seeing premiums to, to to a BPO or quote unquote, market value.

 

Michael:

Man, that's awesome. So in a nutshell, to wrap that up with a bow, that we are seeing premiums being paid on the best located and best manage portfolios, because we are seeing rental increases shoot through the roof, coupled with very low cost of capital for these buyers, institutional buyers. Is that a fair way to sum it up?

 

Clayton:

Yeah, I think that's right. And so to, to just highlight maybe the two points, I think that we even shot out, there's like, you got to really underwrite the upside, because it's real. It's not just, you know, theoretical upside. And there's embedded, you know, gains in some of these portfolios. And it's, it's, you know, don't focus on these these AVMs because these AVMs are flawed. And it's really about the cash flow that you receive. So, you know, real cash flow matters to institutions. And that's what's important versus you know, what some automated valuation methodology tells you.

 

Michael:

Yeah, interesting. It's, you know, I back in 2014, or 15, I bought a portfolio for four duplexes right next to one another, and they were bank owned. And so we were able to get them at a discount. And it sounds like So Long gone are the days of Oh, well, you're buying multiple properties and the portfolio, you should be getting a discount, because you're doing the seller favor. The Costco effect, if you will, buying in bulk. It sounds like that's, you know, that's no longer in play here, which is so interesting.

 

Clayton:

Yeah, I don't want to say that completely gone. Because obviously, like a distressed portfolio, a, you know, some of these loan pools that are purchased, where it's a non performing, you know, loan pool, you're still gonna see discounts like that, and where there's, there's quote unquote, hair on a deal. You know, you're gonna have to work through to get get those portfolios, but I'm just saying, like, you know, previously, where you might have a perfect, quote, unquote, perfect, you know, SFR portfolio where it's, you know, great rents, great real estate, new product, and SFR was getting a discount, just because it was a new asset class, like those days are gone. Right there, you're gonna, you're seeing a convergence of multifamily cap rates and the SFR cap rates.

 

Michael:

Got it. Okay. All right. And do you think the same is applicable on the retail side of things for retail investors and maybe looking at a portfolio of 510 15 properties? Should they expect the same things? And would you advise, recommend folks looking to underwrite in a similar fashion? And that the upside is, is this tangible as well? Or does does the dynamic shift? When we go into that smaller retail investment scale?

 

Clayton:

I gotta be a little bit careful here, because you know, that that individual investor, you know, still has to be fairly disciplined in terms of, you know, what their cost of capital is and what their return thresholds are. Right. So I would say you still have to think about that on a personal, you know, level. But yes, I mean, if there's, if you're buying a group of 10 properties that's in you know, Phoenix, Arizona, and the, you know, the in place rent is 12 $100. But you know, that the market rent is 15 $100. You should be underwriting the upside, right? Because that's a market where it's a very tangible You know, upside in the market rent and and it's not as big of a risk to to underwrite that upside if it's really there, right.

 

So I think that those sorts of things matter, and then finding ways to operate your portfolio even more efficiently, you know, that we always talk about, you know, the gross yield or the net yield, right? Like, what's your noi margin? Well, if you've, if you've found a way to operate a portfolio at a, you know, a 70 plus percent margin, and somebody else is underwriting it at a 50% margin, right to be extreme, you're going to more often than not beat out that other that other buyer, because you've got a more efficient way. And it's actual more dollars of cash that are coming into you as an investor.

 

Michael:

Yeah, yeah, I talked about that all the time in the restock Academy is look at the current rent, but also look at what the true market rent is. And if there's a huge disparity there, there's real potential there for true value add, and maybe you don't even have to do anything. So I always look look to see if you can't see those those opportunities through that lens as a positive, as opposed to Oh, well, the market rents 1500 but the property in places only getting 1200. That's a demerit sure, if you can switch your thinking, you really have a lot of opportunity.

 

Clayton:

Yeah, I think that's right.

 

Michael:

Okay, great. So let's move on and talk about terms. What are you seeing now? And how folks are winning portfolios with more aggressive terms?

 

Clayton:

Yeah, it's super interesting, because I think, you know, early on, in structuring these deals, we may have done, you know, all of ourselves a little bit of a disservice, because we, you know, we viewed these, these portfolios of assets, really as individual assets, and they are not getting priced or sold today as individual assets, right, like, in early days selling a portfolio, rather, it was, you know, $500 or 5000 homes, buyers? Well, number one, there was there was a smaller group of buyers, right, so So, you know, if it was any sizable portfolio, there was probably a handful, three or five groups that you could go to, and really hope that, you know, you'd have two or three of those groups, you know, in a, in a final round, sort of bidding against each other to take down the portfolio.

 

Today, I mean, there's 30-50 groups that can take down very sizable portfolios, I think the terms really matter. Like before you could cherry pick, and, you know, if there was 500 Homes for sale, you could bet on, you know, 300 or 400. And, and, and really, the seller would figure out, Okay, what I do with the remaining assets, do I sell it, you know, these 300, this, this buyer and these 200, to another buyer? Or do I sell, you know, some of those on a retail basis, it's a seller's market. And so you're, you're definitely seeing contracts become more seller friendly, to get to get deals done.

 

So, again, that and those terms, it can can differentiate you as a buyer in the market, if it's a quicker closing, it's a you know, a shorter diligence period, more money that's up, you know, in escrow that becomes hard, you know, sooner in the process, there's, you know, no kick outs to a portfolio, you're buying the entire portlet portfolio that's there for list. I think that that has become key in all these contracts. And I think that, you know, without getting into the, the individual details of what a PSA looks like, on these portfolio deals, I just think it's becoming much, much more seller friendly.

 

 

Michael:

So you're seeing institutions willing to overlook some of the warts, if you will, to take down the portfolio, because they're seeing the value upside, potential there.

 

Clayton:

Yeah, and some of it was just kind of, you know, like, you know, I know, there's a bad example now, but like having like, a huge environmental indemnification on a single a pool of single family rental assets, is is not going to be received well from a seller. Because these are homes that have gone through, you know, environmental checks, right? Like, is there a possibility that you've got, you know, some massive, you know, spill on a on a property, maybe if it's a vacant lot, but like on a on an at an in place, single family home, like, that's a limited risk. So just kind of eliminating some of these quirky things that maybe buyers got got away with in the past. It's pushing more of that, that risk from the seller, to the buyer in these deals.

 

Michael:

Got it. Right. It's really interesting.

 

Clayton:

And it makes sense, right? Because if you're a seller and you've got you've got two buyers and one's telling you I'm going to give you, you know, again, let me just be extreme like I'll give you a 10%, you know, deposit up front, no closing in 10 days. And, you know, there's, there's no, you know, liability post close or anything like that I'm buying it as is, versus someone that's saying, I'm going to give you, you know, a half a percent upfront, and I'm going to take, you know, 90 days to close. And you know, I've got all these other hooks and options in the deal, like, you're going to choose the one that has much better terms, and that that is a differentiating point in these processes.

 

Michael:

Yeah, I know I having recently sold a couple of properties, the path of least resistance is so often the easiest choice. And it's interesting, because you were mentioning these talking about these three different points, and one is the the price the terms and then the certainty of close, which we're going to get to in a minute, but you can really play around with two out of the three, to get a better to do better on that third, right. So if you come in with super aggressive terms, and a very high certainty of close, even if you're not the highest price, you still have, you know, the opportunity to win those bids. So I think if you can really be creative around structuring your deals, there's a lot a lot to be had here.

 

Clayton:

Yeah. So if you that's why that third point, I think, is very important, right? It's certainty of close, which is really saying, like, are you a credible group? Or, you know, do you have a reputation of closing deals? Or do you have a reputation of, of retreating and not closing deals. And so that's, that third point really ties the first two together, because if I gave you the best price, and the best terms in a deal, but I was a high risk to close, because you've never done, I've never done a deal on the sector before. And, you know, I'm just a new entity that that, that doesn't have that reputation of closing, that's gonna hurt you. Right. And or I should just say it the opposite way, if I've got a reputation of being a bad trading partner, and re trading deals, or not closing on time, or anything like that, that matters to a seller.

And so, you know, is that worth, you know, 1% 10% in a deal, I don't think it's 10. But, you know, maybe it's worth 1%, I think the each seller has to individually sort of weigh that risk. And they might say, Listen, I've closed with this, this buyer before, I know, they can get something done quickly. And so even though their their price or their terms may not be, you know, as good as some other unknown buyer, I'm going to close with them because I know they can get the deal done. And so that I think that does matter in this market.

 

And and I should say all else equal, all else equal on if you had the same price and the same terms, then you the certainty of clothes definitely matters as well, because that's the thing that's going to tip them over the edge.

 

Michael:

Right, right. And I think it's such an important point to drive home and for all the sellers listening, even that, you know, the one off individual sellers or retail sellers, it's so important to weigh this in your calculation when looking at offers that you've received. Because I know that I did it, I got multiple offers on a property I was selling, the first day it hit the market, and somebody offered way over ask. But they were known to do this kind of janky thing where then they jerked around a little bit once the appraisal came in. And then I got another offer that was slightly above ask, but they put some terms in there that are really attractive. And I said, you know, let's go for that, which technically, at the end of the day was less money, but I knew that the deal was going to get done. So I think it's important not to get shiny object syndrome and just look at the number when there's so much more that goes into a deal, a real estate deal.

 

Clayton:

Yeah, and this, and this is an important point for especially new investors coming into the market that say, Well, you know, I don't have a track record. And so, you know, is that gonna hurt me in my first deal? And, and maybe it does, but like, the best way to, you know, to overcome that is to, to do some deals, and, you know, make sure that you're building a good reputation as a buyer, and you're not re-trading in any deal. Yeah, like if that that is kind of like a poison pill. If you go into a deal, and, you know, listen, absent something that's really material that wasn't you know, understood or there from the seller in the beginning, you should not be retrading deals, you should avoid that at all costs, because that is really going to hurt you, as a buyer in the market. If If you come out of a deal. And you you you agree to go in at x, let's say it's 100. And then you you you change the terms it during diligence or closing to you know, 100 minus x, right? You You really have to start now building a reputation as a good buyer and not retreating deals because I think that's just your poison pill to the market.

 

Michael:

Yeah, that makes a lot of sense. And so How do you think about retraining with regard to kind of individual investors retail investors with one off properties that are now getting an inspection report to review after they've made an offer? So they made an offer at 100, they get the inspection report, it's got some hair on it, let's call it $10,000 worth of work that needs to be done to get the property safe and rent ready for your next tenant? Are you still thinking that re-trading is off the table at that point? Or is that something that you would you would consider?

 

Clayton:

It's such a dangerous game to play, going into a deal thinking that I'm going to get an inspection and bring the price down? After I get an inspection? A couple things like that's nitpicking on inspection list is is just trouble, right? Because you you inspect any house, I don't care how perfect it is a brand new builders inspector can find, you know, anything wrong with it, right.

 

Michael:

It's what they're trained to do.

 

Clayton:

And I think it's got to be, yeah, I think it's got it Well, there's no, there's no upside for them to miss things. Right. Like, it's, it's a cover your ass sort of analysis. And so I think, you know, there are going to be circumstances where you've got a material issue, and you're going to need to, you know, solve that. And if that's an a material issue, issue to you, as a buyer, it could be, it's going to be a material issue to another buyer and the seller, you know, items that the seller is going to have to fix, regardless, I think, are items that are up for discussion, but it all depends on, you know, sort of level setting going into a deal, right? Because if the seller saying, Hey, here's the deal, we know that it needs a new air conditioner or something else, and then you get in with a with a buyer. And the buyer says, well, it needs a new air conditioner. So I you know, I need another, you know, 5000 bucks.

 

Well, it's it's all I think just kind of level setting when you go into the deal. So you know, kind of, here are the items if any of it's a problem. I'm just telling you like that easy going buyers are going to win more deals. Right.

 

Michael:

Yeah, I think that that perfectly sums it up. I think that perfectly sums it up. Man Clayton, this was awesome. This was awesome. Any final thoughts you think for for investors out there that are looking at picking up portfolios or starting to think about investing in portfolios?

 

Clayton:

Yeah, I mean, listen, I would, I don't want to come off like, too negative here. And in terms of like just saying, Hey, this is this is a too hot of a market. And it's too hard to compete, because institutions have a cheap cost of capital. And so you know, you should, you should just not even invest. That's not the like takeaway at all, I think the idea is like, as a bar is having a moment, but I still very much view this as a 10x opportunity for investors, because, you know, we should be an aggregation mode, because the asset class works at the numbers that are out there today. Even though you see cap rates compressing, like, again, this market is going to go from a two or 3% institutional penetration all the way up to 20 or 30%. Over, my prediction is over the next, let's call it seven years, right?

 

So if you just stand back and say, you know, how many homes need to be purchased? It's in the millions, right? Over that period of time. And so there's a lot of homes that need to be purchased. And, you know, don't don't feel like you're not the institution, because guess what, you might not be the institution today, but you're the institution, you know, tomorrow, right. And so, you know, we can define institutional ownership at different levels, rather that, you know, you own 100 homes or 1000 homes. The smaller investors today are the institutions of tomorrow, right? If you look at multifamily, that's a very real thing. You know, the these groups can grow over time, we're still in a very attractive market for investors to own this, this asset class. And it's, it's only going to be you know, it's it's going to make more and more attractive over time.

 

At some point, are we going to hit like too hot of a of a market? And it's going to, you know, go back down? Yes. Because that's, that's, that's what real estate does. And it might be, you know, for some other reason that we're not anticipating today. But I do think that owning residential real estate is just a very durable way to collect current income and to build wealth over time. So it should be viewed as more the takeaway should be, it's still an attractive market to go out and own this asset class. Right.

 

Michael:

Love it. But no, and I couldn't agree more. And I'm just curious from your perspective, I mean, what size portfolio is really gaining traction and interest from institutions because we, we talk about institutions, we throw that term around a lot, but I think a lot of listeners might not be familiar with what that is or what size portfolio those institutions are. are interested in investing in So do you have a gut feel or a sense for kind of where where they look at what size either in dollar amount or door count?

 

Clayon:

Yeah, it's changing, it's kind of the wrong question anymore. Because, you know, before institutions didn't have the capability, the platform, the technology to buy, you know, portfolios that were smaller than, you know, let's just say 100 owned. Today, you know, there are institutions that are buying, you know, upwards of 1000 to 2000 homes per month, on an individual basis, one by one by one. So I don't think that it actually matters anymore. It's, it's more like the channels that you can deliver. So if you're a seller, and you've got one home, don't think that you don't, you know, you can't sell it to an institution. They're, they're buying homes on a one off basis. Right.

 

Michael:

Interesting. Okay. I would have I did not know that. Very cool. Well, maybe call depending on how you if you're a buyer or seller,

 

Clayton:

Yeah, I mean, obviously, Market to Market matters. But no, I mean, it's, it's, it's, it's a very efficient market. And, you know, you can sell and you can buy on a one off basis, or you can buy and sell on a, you know, a portfolio basis.

 

Michael:

Awesome. Well, Clayton, this was great. Thank you so much for taking the time this was gave me a lot of really great insights. And hopefully, our listeners got a lot out of it, too. I hope you have an awesome and we'll have to have you back. Because before the episode we were chatting about some of the additional topics we could cover and I think you'd be a great person to do that. So look forward to picking up the conversation then.

 

Clayton:

Yeah, absolutely. All right. Appreciate it.

 

Michael:

Alright, everybody, that was our episode. A big big, big thank you to Clayton for coming on the show today. A lot, a lot. A lot of meat on the bone there. Lots of good, interesting topics. I learned a ton. Hopefully you did too, as well. I know that I've been in the portfolio purchasing space for a little bit. If you are thinking about that, definitely give us episode a listen to and we look forward to seeing on the next one. If you liked the episode, please feel free to give us a rating or review or subscribe wherever you listen your podcasts and look forward to seeing on the next one. Happy investing

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