The Technologies that Unlocked Institutional Single Family Rentals
Over the past decade, new tools have brought billions of capital into the SFR sector. What is the next generation of tech that will move the needle?
Today’s Thesis Driven is a guest letter by Aaron Ru, Principal at RET Ventures. It examines the technologies that Single Family Rental (SFR) operators have deployed to accelerate the institutionalization of the asset class. RET Ventures is a leading venture capital firm in the proptech space that counts more than 50 real estate owners, operators and developers as strategic investors (LPs). RET has invested in 40 companies in the proptech space since its inception in 2017.
Today’s letter will explore how technology has enabled institutional operators of single family rental properties to deploy capital and manage disparate, scattered site single family home assets at scale:
The core technologies that have unlocked management of scattered site SFR;
A view on the challenges the industry faces;
How the SFR industry and its associated technology landscape develop from here.
While single family homes (SFH) represent 70% of the aggregate value of real estate in the US, institutionally managed SFR represents a small slice of these properties.
While institutional purchases of single family homes have made a lot of headlines in recent years, they still represent a very small share of the SFH market. According to Moody’s Analytics, 3% of all SFHs in the US are owned by institutions.
However, institutional share of transactions is increasing, and large amounts of funding have been raised over the past decade targeting this asset class, both by large publicly traded REITs (Invitation Homes, Tricon Residential, AMH) as well as private, vertically integrated operators (Progress Residential, FirstKey). Leanprop estimates that more than $40 billion of equity has been raised for institutional funds targeting the SFR asset class since 2020, representing $90-120 billion of purchasing power (with leverage).
Institutional ownership of single family homes was rare prior to the Global Financial Crisis in 2008-9. While a number of factors contributed to the rise of SFR as an institutional asset class, the emergence of new technologies that made the discovery, underwriting, and management of scattered portfolios of homes easier played a significant role.
Technology’s increasing impact has also enabled smaller investors and operators to compete against the largest SFR owners. A significant proportion of investment capital going into SFR has been raised by upstart funds that manage significantly fewer homes on average (1K-15K) than the sector’s largest players. This is due in part to the maturation of real estate technology: An evolving technology stack that enables operators to better manage scattered site, disparate assets has allowed these new operators to manage smaller portfolios relatively efficiently.
Other macro trends also work in SFR’s favor. On the demand side, demographic factors are pushing people toward SFR, as millennials desire more space and backyards for their growing families and more room to work from home. In today’s interest rate environment, there’s an increased spread between average rents and mortgage payments, driving many millennials looking to upsize their homes toward SFR properties.
Multifamily operators who are used to operating and deploying capital at scale are also moving into the SFR space, generally through acquiring BTR communities that resemble horizontal multifamily buildings. BTR specifically is attractive because many of these properties offer apartment-type amenities, including pools and clubhouses, but are also easier to manage as they’re relatively new, built with easy renovations in mind, and typically smart home and IoT enabled.
As venture capital investors, we have a front-row seat to many of the technology innovations that are driving the growth of SFR. We personally evaluate hundreds of startups in the proptech space every year and also rely heavily on our strategic investor base of real estate operators (including a number of the largest SFR operators) for insights. Through our work, we’ve been able to identify several of the most important technology trends impacting the SFR market:
Tech-Enabled Acquisitions
Traditionally, SFR operators have been constrained by their acquisitions teams’ ability to identify and underwrite at scale. While automated valuation models (AVMs) have been popularized by Zillow’s Zestimate and Opendoor on the retail side, institutional SFR funds increasingly have access to technology that helps provide detailed acquisition modeling that enables them to evaluate hundreds of thousands of on-market and off-market opportunities daily. Importantly, while AVMs may allow retail home buyers to scan the market quickly, institutional SFR funds typically want to overlay their own “buy box” onto publicly available data and also supplement public data with proprietary, private data (companies such as Markerr, Cherre and SFR Analytics). Markerr for instance, has worked with some of RET’s SFR LPs to optimize rental rates, find acquisition targets, and reduce data engineering workload by providing a single source of truth for data analytics.
Picket Homes provides another example of how SFR operators are leveraging big data and AI to help institutional SFR acquisitions teams build their “buy box” and set parameters around macro data such as job growth and neighborhood data (school quality, safety and walk scores, etc.) and then overlay specific criteria such as gross yield, cap rate, and cash on cash returns. Their product helps acquisitions teams underwrite at a scale that far exceeds what they have traditionally been able to do. Once teams identify properties that meet their criteria, Picket’s full service brokerage team allows buyers to make bulk offers in their markets. Other companies in the space such as Entera and Haystacks.ai offer similar functionality.
Leasing
As Brad alluded to in his letter on Essential Tools for Scattered Portfolios, managing a portfolio of small, scattered assets is operationally complicated and arguably more difficult than managing a dense multifamily building. As a result, SFR operators have had to lean into technology since day one, and operators such as Invitation Homes now have over a decade of experience enabling scattered site leasing. 3D mapping and visualization through tools such as InsideMaps and Matterport, combined with self-guided tours and digital access / leasing through tools such as SmartRent or Rently, have created a better resident experience and also led to significant cost savings for operators by enabling scattered site leasing with fewer employees.
Maintenance
Post-leasing, tenants largely interact with maintenance as their primary point of contact for the length of the lease. Servicing large portfolios in sprawling cities such as Phoenix and Houston can be complicated, especially when one takes into account the disparate nature and age of SFR assets as well as the wide swath of trades (handyman, roofing, HVAC, plumbing, etc.) that play a role in home maintenance. As a result, maintenance has long been a major pain point for operators and has played a significant role in slowing the emergence of SFR as an asset class. Tech enabled solutions such as Lula, Lessen, and others are allowing SFR operators to scale territories and markets quickly by offering access to a vetted roster of tradespeople.
This allows SFR operators to scale property count and enter into new markets without a complete roster of full-time maintenance technicians. Additionally, new technology solutions such as Mezo, Oyster Data and InsideMaps allow SFR operators to better diagnose maintenance issues and track the status of capital equipment such as HVAC systems and roofs to get a better sense of age and potential problems. This enables preventative maintenance and helps owners budget capital expenses.
What’s Next?
Forward-thinking operators such as Invitation Homes and Progress Residential were among the first to grapple with the many operational challenges of managing SFR portfolios, and they were early adopters of many of these technologies (in addition to investing substantial dollars in building in-house solutions).
However, as the sector continues to institutionalize and technologies mature, we can expect to see a trickle-down tech effect that enables even sub-scale owner/operators and property management companies to deploy the same or similar technology solutions to make their SFR operations more efficient.
But technology hasn’t solved all the challenges facing SFR operators; challenges and new opportunities remain. Naturally, startups are emerging to address these yet-unsolved challenges. . For example, companies such as TurboTenant, Hemlane and Azibo are enabling retail landlords to use software to screen tenants, enable self-touring, collect rental payments, and even offer financial services such as deposit replacement and embedded renters insurance. Tools such as Lula, which started by servicing institutional SFR operators, are now also partnering with these platforms to offer their solutions to the “long tail” of homeowners–which still are the vast majority of SFR landlords.
Investing in Software and Services
While technology will continue to enable operators to scale and improve operating efficiency, SFR management is inevitably messy–truly a business where picks and shovels meets bits and bytes–and will continue to rely on a blend of technology as well as tech-enabled services. Companies that can thread the needle between both offering a strong software layer as well as coordination of services in the real world will be the ultimate winners in the space.
RET Ventures portfolio company Lula provides a strong example of how this may play out. The company initially began as a platform that vetted tradespeople and matched them to one-time jobs that SFR property management companies sent over when they didn’t have the capacity to handle the jobs themselves. Over time, as Lula built market density both on the demand (more maintenance jobs coming in) and supply (more vetted tradespeople using the platform) side, the company has been able to expand its service offerings and entrench its software layer — which provides maintenance coordination between residents, the property management company and tradespeople — as a core part of the technology stack of their SFR operator customers. By leveraging technology and its managed marketplace, Lula has been able to deliver a customer net promoter score (“NPS”) of ~80 and has convinced many of its customers to hand over all maintenance coordination to Lula’s software.
Other companies in the space such as Roofer, Pipedreams and Turno are investing in similar approaches that marry software with real world services.
Navigating the coming years
Currently, elevated interest rates have led to a tricky situation in SFR in which there is “negative leverage” (that is, interest rates exceed the expected returns from an investment). This, combined with continued retail investor interest in the asset class, has led to a slowdown in institutional SFR purchasing. But it’s likely that the SFR slowdown is largely due to these macro factors; once interest rates decline meaningfully, we expect a significant bounceback of institutions looking to acquire and operate SFR at scale–especially considering the large amount of dry powder currently sitting on the sidelines.
On the tech investing side, we continue to spend significant time and resources diligencing startups in the space with a particular focus on technologies that enable operational efficiencies and centralization for SFR operators, next-gen property management software, tech-enabled maintenance, and ancillary revenue opportunities. These technologies will continue to generate efficiencies and a better resident experience for SFR owners of all sizes, positioning SFR as a compelling asset class for investors in the years to come.
—Aaron Ru