\n
Dave:
Hey, everyone. Welcome to On the Market. I\u2019m your host, Dave Meyer. And I am joined today by James Dainard. James, what\u2019s going on, man?<\/p>\n
James:
Just grinding out deals, Pacific Northwest, trying to get more inventory in the door.<\/p>\n
Dave:
How\u2019s that going? You pretty active right now?<\/p>\n
James:
Yeah, we are staying fairly active right now. What we\u2019ve been doing is fixing all of our systems, pivoting all our systems. And we\u2019re wrapping up all the inventory we\u2019ve bought over the last year. And then we\u2019ve been aggressively \u2026 actually, we\u2019ve gotten contracted over on $16 million in deals the last four weeks. I just closed on two fix-and-flips. And they\u2019re all sizes: fix-and-flips, small guys. One big one, I paid 400 for, one, 1.5 for. I just got a duplex for 1.1. And then we locked in a pretty big deal for little above 10 mil, so moving things along.<\/p>\n
Dave:
That\u2019s awesome, man. Well, keep it up. That\u2019s great to hear. Today for the show, we have Ben Miller, who is the CEO of Fundrise. And full disclosure, Fundrise is a financial sponsor of this show. But Ben is an incredible wealth of knowledge. It was so fun having him on. I feel like you guys have a lot in common. You\u2019re both deal junkies and just love talking shop about individual real estate deals and strategies. What\u2019d you take away from the interview that you think the audience should listen for?<\/p>\n
James:
He definitely is a deal guy, which is always good to invest in a deal guy, because when I said I stayed at the office till midnight, his eyes perked up. He\u2019s like, \u201cYes, I get you.\u201d<\/p>\n
Dave:
He\u2019s going to make you a job offer after this interview.<\/p>\n
James:
Hopefully not. I don\u2019t know if I can take on anymore. But it was just nice talking, because as small investors, we go toe-to-toe with some of these big guys. And just to see where their strategy is and how they\u2019ve pivoted out and are doing things, I was really excited to hear about their efficiencies and how, basically, they make the return by being efficient. And that\u2019s the kind of product they\u2019re looking for. They\u2019re not just looking for the best deal, what fits inside the box. And that\u2019s so key in today\u2019s market right now. As the market flattens out, you have to be really good at what you\u2019re going to do to hit your return. And that\u2019s the same with these big guys. The small guys are no bigger than the big guys. They\u2019re doing the exact same thing. How can they be efficient? How can they deploy the money and deploy it in the right area?<\/p>\n
Dave:
Yeah, absolutely. And Ben, in addition to talking about these efficiencies, gives some really good advice about what markets he\u2019s investing in, a whole new asset class in buy-to-rent. We had a really good conversation about that, that I was super interested in. And just shares his thoughts on where the market\u2019s going over the next couple of years. So definitely stick around for this interview with Ben. And we\u2019re going to invite him on in just a minute, but first, we\u2019re going to take a short break.
Ben Miller, CEO of Fundrise, welcome to On the Market.<\/p>\n
Ben:
Thanks for having me.<\/p>\n
Dave:
Thanks for being here. We\u2019re super excited to have you. Before we get into some of the market conditions and what\u2019s going on in your business, would love to just hear a little bit about your background and how you got started in real estate investing.<\/p>\n
Ben:
All right. Well, so I\u2019ve been in this business about 23 years. I started out in real estate, private equity, and then moved to the real estate development sponsorship side. So worked for a large mixed use development company in DC. We were building about half a billion of real estate right when 2008 financial crisis hit. And so I have scars and burn wounds from that experience. And after that, I came out of it thinking, \u201cWell, there\u2019s got to be a better way,\u201d and conceived of the idea of raising capital through the internet for real estate. And we essentially invented that concept in 2012. And Fundrise was birthed with the idea of basically creating a future of real estate where individuals can invest in real estate the same way institutions or high net worth investors can. Before Fundrise, large real estate was only available to large investors.<\/p>\n
Dave:
So yeah, you have experience, obviously, on the large institutional side of things. And I\u2019m curious, what sort of advantages do institutional investors like private equity or these developers that you\u2019re working with have that retail investors like myself don\u2019t have?<\/p>\n
Ben:
I think there\u2019s two. I mean, one is just the type of products you can buy. So if you thought that skyscrapers were great investment, only institutional investors can do that. So there\u2019s certain types of asset classes, like data centers, that basically are only institutional investors. And the separate is just the type of financing you can get, the type of operations. There\u2019s a lot of economies of scale. So from an operations point of view, let\u2019s say we own 20,000 apartment and residential units. That\u2019s very different than owning three.<\/p>\n
James:
So Ben, when I was looking at your guys\u2019 fees and structure, because you guys are large and you\u2019re deploying out so much and buying, is that how you guys can control your fees so much throughout, is because you\u2019re just doing the bigger skyscraper deals, the larger deployed capital? Is that how you guys are so competitive in what you charge?<\/p>\n
Ben:
I think it\u2019s a combination of things. We definitely operate at scale. And that\u2019s something that we are now. In the beginning, we had to grow into that. And in the beginning, we basically were just subsidized by our investors. So we had lower fees and we were losing money in order to basically get to scale. So our fees are super low, much lower than other institutional. If you were comparing us to Blackstone or Starwood, their fees are five, 10 times higher.<\/p>\n
James:
Is that your typical competitor on a deal, like Blackstone or one of the bigger, bigger institutions?<\/p>\n
Ben:
Yeah. On the buy side, when we\u2019re buying apartment buildings, we saw Carlisle a lot. Yeah, those types of institutions were \u2026 not so much Blackstone. Blackstone buys platforms, but so other private equity funds.<\/p>\n
Dave:
For those in our audience who aren\u2019t really familiar with the traditional real estate private equity business model, like Blackstone or some of the people you used to work for, can you just explain how they make money, what their objective is, just in a general sense how this sort of market of raising money for private investors to buy large scale real estate works?<\/p>\n
Ben:
Yeah. I love that question. So I put a lot of thought into that because to understand how to disrupt an industry, you got to understand how it works. So there\u2019s really a lot of value chain in the industry. So you start with large pools of money, typically pension funds, so maybe California State Teachers, they run $20 billion \u2026 sorry, $200 billion. They have all these advisors, all this bureaucracy. They basically allocate money to private equity funds, or private equity funds raises money from those big pools. And then private equity funds turn around and invest it with real estate companies in local markets.
So there might be a local developer in Seattle who knows all about office or apartments in Seattle. And that private equity fund will back them in sort of a 90\/10 deal, 90% from the private equity fund, 10% from the local sponsor. And so it\u2019s really like the whole industry is made up of sort of three major players: the funds that allocate the money, the real estate operator who runs the deal, and then the actual large pools of capital, like the Norwegian sovereign wealth fund, for example, trillion dollars. They have to put that money to work. So it\u2019s actually really a lot of it\u2019s about getting those flows into real estate.<\/p>\n
Dave:
And what are the sort of benefits that either an individual investor like myself or James, or someone as large as the Norwegian sovereign wealth fund, why would they choose to allocate funds into real estate private equity when they have every option in the world for where to invest their capital?<\/p>\n
Ben:
Yeah. Well, I mean, okay, so these large institutions will allocate their money everywhere. So they typically diversify across every single asset class. And so, real estate typically gets about 10% of all their assets. And so, it\u2019s really about diversification. So that\u2019s how these big institutions think first. First, diversification. And then once they get diversification, they go inside of a subsector, like real estate, or maybe it\u2019s venture capital, and say, \u201cOkay, I\u2019m going to allocate X percentage to this sort of asset class. And inside that asset class, I\u2019m going to find experts who are best at investing in real estate or infrastructure or green power,\u201d whatever the asset might be.
And so it\u2019s a very special problem having to invest a $100 billion. It\u2019s hard for most people to imagine, how is that a problem, right? It doesn\u2019t like a problem. But when you get into it, typically, private equity is achieving pretty good returns. It\u2019s usually beating the stock market, for the last 30, 40 years. And so, that\u2019s why they invest in it, right, because it\u2019s been historically better outcomes than public stocks.<\/p>\n
James:
So on BiggerPockets, there\u2019s a lot of active and passive approaches to how people want to invest in real estate. And obviously, on BiggerPockets, there\u2019s a lot of new investors or people like me that we\u2019re trying to grow our portfolios. And we\u2019re very active. It requires a ton of work on our side. I know I was at my office till midnight the last three nights, just getting my hands dirty, getting things done.<\/p>\n
Ben:
My kind of guy.<\/p>\n
James:
Yeah. I will put in the hours, but it does have some wear, right? And a lot of investors are more passive where they don\u2019t want to stay at the office till midnight worrying about their construction budget or crunching numbers and getting that next deal done. Is your typical client mix more of a passive larger fund, or these bigger institution, or do you have a lot of smaller investors too, that just are \u2026 For me, after a certain amount of years, I will be sick of keeping my hands on everything. And I just want to put the money out, right? But we\u2019re just trying to build that huge [inaudible 00:11:08]-<\/p>\n
Dave:
No, you won\u2019t, James. You\u2019re addicted. You know you\u2019re addicted.<\/p>\n
James:
Probably not. I am a true deal junkie [inaudible 00:11:15].<\/p>\n
Dave:
You keep telling yourself that.<\/p>\n
James:
That\u2019s the theory, right, the whole financial freedom I\u2019m chasing. Who\u2019s your typical client that goes \u2026 is it larger funds, or is it smaller investors also looking for that passive income?<\/p>\n
Ben:
Yeah, so we have 350,000 active investors. So we have a huge number of people. And so, that basically it\u2019s hard to describe any one persona. There\u2019s all different kinds of people. There\u2019s a lot of software engineers who want to invest in real estate. There are a lot of financial professionals. I go in to meet investment banks. I was meeting with some investment bank before COVID. I was sitting in the room. And it was their investment banking group. It had the real estate group and it had their tech group. And the older 60-year-old managing partner was trying to ask me about Fundrise. And I was like, \u201cWell, who in this room are investors in Fundrise?\u201d Everybody under the age of 40 raised their hand, so half the room was actually my investor.
So it\u2019s a lot of different kinds of people, but I find the thing about real estate, there are new real estate investors who are interested in learning. They want to get their feet wet. Maybe they want to take a small amount of capital risk. So maybe they\u2019ll invest a thousand. They don\u2019t want to go put $50,000 into one deal. But you know who loves to invest in real estate? Real estate people. So you have all these big real estate people who also like to say, \u201cWell, I have my real estate where I\u2019m active, but I have also other real estate I invest in. Sometimes I invested in Fundrise. Sometimes I help other people in the industry that are rising stars.\u201d So it\u2019s so diverse. And that\u2019s one of the interesting challenges, because we have this range of people who want tons of information and are really sophisticated, and people who don\u2019t know what a cap rate is.<\/p>\n
Dave:
That\u2019s a really good point. We talk about on the show a lot about diversification. And I think a lot of people assume that means diversification between different asset classes, like stock market bonds. But I at least, I think James is a living example of diversification between real estate assets, right, like being able to buy single families and short term rentals. And so it sounds like a good portion of the people who are investing in these passive deals might also have an active portfolio and are just trying to balance how they\u2019re spending not just their capital, but their time, right? Because probably people don\u2019t have unlimited time to go acquire deals at the rate James does.<\/p>\n
Ben:
Yeah. It\u2019s actually the easiest people for me to talk to is a real estate person. And they get comfortable with investing in things they know. So a real estate person can underwrite real estate, like, \u201cOh, I get this.\u201d But if I were to bring you machine learning, \u201cDo you want to invest in machine learning?\u201d
They\u2019re like, \u201cI don\u2019t know. I\u2019d have no idea how to make that decision.\u201d So a lot of times people invest in things they understand. And so, a real estate person would start with us and say, \u201cOh, hey. Actually, you guys really have a deep specification here. I\u2019m interested.\u201d And they might want to invest in a geography they\u2019re not active in, or a product type; as you said, they\u2019re an office guy and they want to go invest in residential.<\/p>\n
Dave:
I invest passively, I mean, primarily at this point. And one of the things I like most about it is being able to get into geographies that I\u2019m not in currently. What markets are you heavily invested in? Geographically, are flooding the Sunbelt, just like a lot of people are on this show, or-<\/p>\n
Ben:
Like everybody else?<\/p>\n
Dave:
Yeah, exactly. You don\u2019t have to give away your trade secrets, but are there any geographies you\u2019re particularly interested in?<\/p>\n
Ben:
Yeah, it\u2019s funny. So Fundrise has been around since, as I said, after the financial crisis. And we were all in on urban infill in 2012 and \u201913, \u201914. Anybody who was in real estate knows that the emerging neighborhood was where everybody was investing. And then 2016, we pivoted and started really investing in the Sunbelt and selling all this stuff in Brooklyn and DC, and so we went heavy Sunbelt. Our 20,000 residential units are all Sunbelt.
And so now, I still think Sunbelt\u2019s where it\u2019s at. It\u2019s just I think it\u2019s all about build-for-rent rather than multifamily. I mean, I think both are good. But yeah, I still think Sunbelt\u2019s got the runway. I still think that an Austin or a Nashville will just keep on building. The only place I\u2019m interested now is new. And really, Columbus is interesting. I think Columbus could be \u2026 I mean, not interesting to go to [inaudible 00:16:15] not. I work with somebody from Columbus, so I always like to tool on Columbus. But yeah, I think Columbus has got a huge amount of growth coming that\u2019s really going to be interesting, because of the Intel chip plant they\u2019re going to build there.<\/p>\n
Dave:
Oh, okay. I\u2019ve been to Columbus once. It was pretty fun. I had a good time.<\/p>\n
James:
Hey, Ben, how often do you guys analyze that strategy and look at pivoting? Because I mean, at some point you made a pivot in 2016. Do you guys audit that once a year for your strategy, or how far down the road are you forecasting when you\u2019re looking at making that \u2026 That\u2019s a big change, right, going from what \u2026 that\u2019s a totally different type of market, emerging cities to Sunbelt. How often do you guys do that in forecast?<\/p>\n
Ben:
Yeah. I mean, back then we did it because we were investing across the country, but mostly in urban infill. And we were learning from doing deals. One of the things you do is if you invest in a deal, let\u2019s say in a new market, you learn a lot. And if it\u2019s going well, then you can actually double down. And so, we were invested in a few emerging markets, which at the time \u2026 I remember actually I had a person who used to work for me. And they were like, \u201cYou got to sell everything in Florida, because the next recession, Florida\u2019s going to get killed, and New York\u2019s going to basically do great,\u201d because that\u2019s what happened in every other financial \u2026 Every other financial crisis, going \u201908, 2001, the sort of Sunbelt got killed. And this was totally upside down of how it normally happens.
So if you like an intuitive answer and an analytical answer, analytically, we have a hundred software engineers. So we\u2019ve been building software into our system so we actually start getting real time data from all of our properties and also, I don\u2019t know, like 14 million other properties, some huge number. So we can really see what\u2019s happening on the ground and have a good sense of where growth is, and essentially where rent growth is, and occupancy delinquencies. So, that\u2019s a huge part of it.
And the other part of it\u2019s what I call is top down. It\u2019s really easy to see that when something\u2019s getting really expensive \u2026 like if you\u2019re in New York and there was a two and a half cap back in 2017, people assumed rent growth had to go to like $8 a square foot. They just don\u2019t believe that, right? So at some point, the Sunbelt will get too expensive relative to the gateway cities, to the New Yorker and LA. And that\u2019s when it\u2019s over. That\u2019s when it\u2019s topped. And so it\u2019s really a question of, you do bottom up analysis in the weeds, and you do top down analysis, looking at the big picture. You have to do both.<\/p>\n
Dave:
And how do you make decisions about that? Do you have an investment committee? I guess I\u2019ll say I hope you\u2019re not just making algorithmic decisions like Zillow was doing, and failing out for a while.<\/p>\n
Ben:
Yeah, yeah. Right, right. So Fundrise is 325 people, and so we have a lot of real estate people. And we\u2019re in a lot of markets. So it\u2019s driven by the people first. The software just makes it easier to see the information. But the idea that software is going to replace people in investment decisions, I think that\u2019s a big mistake. That\u2019s not where our software will make improvements. Our software can make improvements on the operations. It\u2019s really the operations where the software can improve, basically all the work that\u2019s done after you buy it. But whether or not you buy it is a human decision.<\/p>\n
James:
So you use the software to increase the return, but not analyze the return?<\/p>\n
Ben:
Yeah, and manage it. I mean, we actually intend to roll the software out to third parties, probably in about a year, because there\u2019s actually nothing really like it out there. But we built it for ourselves. And we know it\u2019s good. We know it works. And so, we\u2019ll make it available more people, but it\u2019s like, this is going to take time. We just don\u2019t have the bandwidth.<\/p>\n
Dave:
You said something earlier, Ben, about build-to-rent and liking it better than multifamily. We just did a show with the national \u2026 God, I\u2019m going to butcher this. It was Multifamily Housing Council. And they were talking about just huge demand for multifamily units. And that, I think, bodes well for the future multifamily. But I\u2019m curious if you have a different take. What do you like about build-for-rent as an asset class, going into the future?<\/p>\n
Ben:
So we got into that build-for-rent around 2019. We\u2019ve been trying to get into single-family housing since 2017. We couldn\u2019t find a way to do it at scale where it was efficient. And the reason we went into it was we saw our office is made up of mostly millennials. And the millennials are turning 30, having kids, leaving cities. They need more space, and a house. They want a house. And the second thing that happened that we didn\u2019t expect was work from home. And work from home, I think, is the biggest social revolution happening. If you go back a hundred years, people used to work on farms. They moved to cities to work in factories and office buildings. Now, they\u2019re leaving cities and they\u2019re leaving office buildings. It\u2019s that big a social change. And so work from home, I think, is going to drive residential value. It\u2019s going to take a trillion dollars out of office and put it into residential value.
And so if you\u2019re going to work from home and you have kids, are you going to do it from a one-bedroom apartment downtown, or are you going to do it from a house? So I think the house is a better consumer product. It has a backyard. It has light. It\u2019s actually cheaper per square foot. And you\u2019re willing to basically commute, because you don\u2019t have to commute as often anymore, because you\u2019re working from home. So basically, it\u2019s like an iPhone is a better product than Blackberry. The home is a better product than the apartment.
And so we said we wanted to invest in that, but we didn\u2019t want to go buy single-family homes, because basically that would put us in competition with our customer. Our customer wants to buy a home, and they don\u2019t want to compete with a billion dollar institution to buy it. So we said, \u201cOkay, well we can\u2019t compete with our customer. Well, let\u2019s build it.\u201d And if we build it from scratch, we can build it designed to be this new thing. So it\u2019s like an apartment building laid down on its side. It\u2019s got amenities like a swimming pool and a clubhouse, and all the things you would have in a really cool apartment building, but instead in a hundred-unit community where you have a dog park, running trails, all these cool neighborhood features. And we run everything. You don\u2019t have to deal with lawn care. You don\u2019t have to deal with maintenance. So it\u2019s like a really cool product. And I think it\u2019s just going to become a big part of the industry.<\/p>\n
James:
Did the build-for-rent have anything to do with implementing the plan, too, and efficiencies? Because we build 50 homes a year in Seattle. We renovate about a hundred homes a year. And I can say renovating is substantially less systematic than building. Building, you go through the plans, permit, you\u2019re hiring professionals. It\u2019s managed all the way through. And you can actually control it a little better. Whereas remodel, every house is so different. Does it have anything to do with that and keeping your deferred maintenance down? Because I know on our new build apartment buildings or rentals, we have way less deferred maintenance and way less issues, because the remodel, there\u2019s always those trades that do things a little bit different, a little bit wrong. And then you have to come back and fix those things. Does that have any impact in making that decision, remodel versus \u2026 or was it all about who your consumer was and what they were trying to do?<\/p>\n
Ben:
Yeah. Yeah, totally. So you know more than most people about this. So we started out in the remodel. We bought about 50 homes in LA. And it was a nightmare. Every home was different. The permitting was just horrible. We constantly had squatters breaking in. It just didn\u2019t scale it. We couldn\u2019t pull it off. And we were like, \u201cOkay, well, we still think this is a huge macro trend.\u201d And so we went to home builders. We actually also bought land and said, \u201cOh, this is zoned for 400 suburban apartments. Let\u2019s build 200 single-family homes instead.\u201d And so we went to a home builder and said, \u201cHey, we want to build 200 single-family homes here.\u201d
And they\u2019re like, \u201cOh, interesting. You want to buy homes? We build a lot of homes.\u201d And we found that the home builders can build homes for way cheaper, because they build 10,000 homes a year. So they can build homes way cheaper than even if I sat down with a development company and did it. We might build for $200 a square foot, and they\u2019ll build for 150 a square foot. So we partner with home builders. And those home builders basically build us. We\u2019ve built like 5,000 homes so far. And we\u2019ve really built a lot, and we intend to build more. And so the home builder at scale can deliver basically a bespoke product that\u2019s designed for long-term ownership rather than, as you said, the renovations, which are mostly like, make the renovation and sell the house before the deferred maintenance comes home to roost.<\/p>\n
Dave:
The type of development you\u2019re describing sort of reminds me of some of these planned communities that honestly I\u2019m more used to seeing older people, retirees live in. Are you appealing to the work from home demographic and younger families? You were talking about the impetus for this being millennials buying homes. Is that who you\u2019re building the product for?<\/p>\n
Ben:
Well, that\u2019s who we thought we were building it for. It turns out it\u2019s like everybody. It\u2019s so diverse. Here, here\u2019s one interesting stat. A typical apartment building, 25% to 30% of people have a dog. And in build-for-rent, 70% of people have a dog.<\/p>\n
Dave:
Whoa.<\/p>\n
Ben:
Right? Because you have a backyard, right?<\/p>\n
Dave:
Yeah.<\/p>\n
Ben:
So guess what? People who have dogs want to live in a house rather than apartment. So there\u2019s all sorts of drivers for why you want to live in a home with a backyard and more light. So when we compete on apartments.com for renters, you\u2019re selling basically a different experience. And I think for a lot of people, they didn\u2019t even really know that was available, the idea of renting a home that\u2019s not from some random mom-and-pop who\u2019s not going to have that good of a property management capability. So it\u2019s a new asset class.
Real estate, if you go back 20 years or longer, as long as I\u2019ve seen, right, real estate actually births new asset classes every decade. So 20 years ago, there were zero data centers. Now, data centers are a huge part of the business. 20 years ago, cold storage wasn\u2019t a thing, self-storage wasn\u2019t a thing, cell tower rates weren\u2019t a thing. Single-family rental as an asset class got birthed by Blackstone, with Invitation Homes. So these new trends show up, and the old trends like retail and office die. So it\u2019s a key part of real estate, is being part of the new trends.<\/p>\n
Dave:
That\u2019s very interesting. James, I\u2019m curious, would you ever build for rent at your scale, or does this only work at scale, like Ben is talking about?<\/p>\n
James:
I think it works more for large short plats, because the larger the plat, the cheaper it gets. It\u2019s like when you build a home, if you build a 4,000 square foot home versus a 2,000 square foot home, your price per square foot\u2019s going to be a lot cheaper on the large, because your core areas are still the same. But when you have these big plats, they can really cut the cost down. So we build infill. Our largest sites\u2019s probably 12 units, 12 town homes. We do all town homes, mostly four to 12 unit sites, because that\u2019s what you get in infill. Our build cost around Seattle\u2019s about 275 a foot, from development to finish. And it\u2019s getting you a higher end product, too. But if we look at our tract home, like my clients that are tract homes that are buying more like hundred plat sites, they\u2019re building in the low 200s.
And so it makes a huge difference in your bottom line when you can get scalability. Plus, you get the efficiencies out of the renting, the property management, the maintenance. Everything\u2019s in one central location. And so yeah, the larger the plat, the cheaper it\u2019s going to be.
And the other good thing about the building to rent on these large plats is the typical timeline for purchasing these is to close on permit. When you\u2019re negotiating a lot of these deals, you get a close with the permits, and it could be a year or two down the road. But you can get building day one, whereas in infill, on the smaller stuff, it\u2019s such a hot market that sometimes we have to close half the time that we would need for the permits. And so, you can systemize out the bigger plats just substantially better. But the downside is you\u2019ve got to have Fundrise money. You can\u2019t go buy it. I\u2019m not going to go buy a 100 unit plat, because I\u2019m going to be putting everything into one pot. And so yeah, the bigger the money, the bigger the scale.<\/p>\n
Ben:
Yeah, that\u2019s exactly what we found, because we have a mentality we hate to outsource anything. We always do try to do things ourselves. And we started out trying to build these things with our own capabilities, and the home builders just crushing our execution. So they\u2019re building $150 a square foot. We couldn\u2019t build for less than 200 a square foot. And they\u2019re building for 150. I mean, we\u2019re literally buying homes right now in Austin, above Pflugerville, for 130 a square foot. They just have such scale. And they buy like 10,000 countertops. They just have such control over their supply chain.
Now that I understand that business, it\u2019s really a factory. It looks like a real estate company, but it\u2019s actually a factory. And everything is about how something moves through the factory floor. The plumber is coming exactly on time. If you\u2019ve done renovations at home, like one project, there\u2019ll be this massive downtime between when the electrician is supposed to come and when the guy\u2019s supposed to close it up with drywall. And then people won\u2019t come, and it\u2019ll be delayed. You can\u2019t actually close up the wall because the electrician hasn\u2019t shown up. And so, it\u2019s all about coordinating the trades. And you can do that with a home builder in a way that you just can\u2019t do that as \u2026 Even a hundred homes, it\u2019s not scale.<\/p>\n
James:
Yeah. It\u2019s like the whole premise of the Toyota manufacturing plan, where they build the cars that are constantly moving; or Boeing, same thing, where you get so much more \u2026 Because your labor guys go, \u201cHere\u2019s my house. I got to walk next door. Here\u2019s my next house.\u201d Whereas with remodels, you got to drive an hour down the road, and you don\u2019t know exactly when it\u2019s happening.<\/p>\n
Ben:
Right, right. So a lot of times people ask me about cap raises and stuff. And we buy on basis. If we can get a C of O for $150 a square foot in Tampa, I\u2019m feeling pretty good about that. And exactly what cap rate it\u2019ll end up leasing up to is \u2026 cap rates come and go. I mean, when I started in the industry, you\u2019d be like, \u201cOkay, we build to a 12?\u201d
And I was like, \u201cWhat? A 12?\u201d Now, people are building to a five, maybe four, maybe a six. So cap rates will come and go, but your basis is forever.<\/p>\n
Dave:
So I mean, just for people listening to this, it sounds like there\u2019s not really a good way for a retail investor to go out and get into this asset class of buy-to-rent, with the exception of Fundrise, I guess, they could get in it. Or are there other ways that people can hop on the build-to-rent bandwagon?<\/p>\n
Ben:
I mean, it\u2019s really new. It\u2019s a new space. I mean, seriously, there are probably 50,000 units across the country. I think there\u2019s like 50 million apartments. I mean, this is really new. I mean, I\u2019m talking institutions, because they want to do it too, they can come in and co-invest with our customer. I love the idea of a multibillion dollar institution investing next to a $10 investor. That doesn\u2019t happen in normal life. But the platform we built basically is a platform that they want.<\/p>\n
James:
And what kind of investor \u2026 for the smaller investors, they have to be accredited to invest in your-<\/p>\n
Ben:
No.<\/p>\n
James:
No?<\/p>\n
Ben:
No, no. Anybody can invest, yeah.<\/p>\n
Dave:
Oh, cool. So how does that work? Because normally on a syndication, you have to be accredited. There\u2019s a minimum of, I don\u2019t know, usually 50 or 100 grand. How do you get around that?<\/p>\n
Ben:
By going through it. So our vehicles are publicly registered. So we actually go to the SEC say, \u201cWe\u2019re going to have a strategy to invest in build-for-rent. And we\u2019re going to basically allow the public to invest in it.\u201d They work us over, to no end. And then we get it cleared. And so that\u2019s why anybody can invest in it.<\/p>\n
Dave:
Oh, so basically the reason you have to be accredited for a syndication normally, correct me if I\u2019m wrong, Ben, is because they\u2019re unregistered securities, right?<\/p>\n
Ben:
Right.<\/p>\n
Dave:
It is not vetted by any government entity, like stocks, for example, which are regulated by the SEC. And so you\u2019re saying you register your investments with \u2026 is it the SEC, or is it a different-<\/p>\n
Ben:
Yes, the SEC. Yeah.<\/p>\n
Dave:
It is the SEC. Wow. Are you the only people who do that?<\/p>\n
Ben:
I mean, it\u2019s-<\/p>\n
Dave:
You don\u2019t have to tell me your trade secrets.<\/p>\n
Ben:
No. I mean, I don\u2019t want to say categorically there aren\u2019t people who doing it. But I mean, yeah, the idea of going direct to consumer, registering the funds \u2026 I mean, again, that\u2019s a scale thing, right? You\u2019re not going to do it for a 50-person syndication, but with 350,000 investors, the cost to do it is significant, right? I mean, we have 50 accountants in house. We have five in-house attorneys. There\u2019s a lot of grind on it. But across enough people, the marginal cost is almost nothing.<\/p>\n
James:
Yeah, because they look under your hood a lot more at that point, right, the SEC [inaudible 00:35:46] the big difference is-<\/p>\n
Dave:
You\u2019re feeling violated, Ben?<\/p>\n
Ben:
Yeah.<\/p>\n
James:
But that\u2019s why so many people set up these syndications with unregistered securities, because I mean to Ben\u2019s credit, that\u2019s a lot of work. And if it\u2019s not worth the headache if you\u2019re doing a 50-unit apartment building, because the cost and the audits and the qualifying is pretty good. But that means that your investor can feel pretty good about putting money with you though, because I mean, it\u2019s getting an extra pair of eyes in audit, compared to a lot of other syndicating platforms.<\/p>\n
Ben:
Yeah, yeah. I mean, we\u2019ve been doing it for a while. And our CFO, my CFO was chief accountant at the SEC. So we have expertise. After a while, you know what you\u2019re doing. And just like anything, I\u2019m sure with real estate when you first started \u2026 You talked about doing an 80-unit apartment building before we started this show. When you started, you were like, \u201cHow would I do that? I wouldn\u2019t know how to do that.\u201d But once you know how to do it, it\u2019s not that complicated. It\u2019s just knowledge. And so, working with regulators, understanding what they care about, giving them what they need. Once you understand it, it\u2019s not rocket science.<\/p>\n
Dave:
I can\u2019t imagine what the SEC would do if they looked at my personal real estate investing and the way I\u2019ve kept my books over the last 12 years. I\u2019d probably be in jail. Not that I\u2019m doing anything illegal. I\u2019m just a little disorganized, okay?<\/p>\n
James:
We\u2019re going to have to edit this part out. Hey, Ben, have you guys had any problems with inflation and supply chain issues in this build-to-rent? Because obviously that\u2019s been tough for us as builders, controlling our cost. Actually, randomly, it\u2019s been easier for us to control our costs more as a builder than a remodeler. The remodeler has been tougher, because I think the labor market\u2019s less experienced, and so they charge more. But what\u2019s inflation been doing to your returns if the build cost goes up, or how do you mitigate that, or how do you deal with inflation?<\/p>\n
Ben:
Yeah. There\u2019s a lot of complexity in what you\u2019re asking, so let me just pick a few things because, yeah, it had a huge effect on everything. I mean, everything was going crazy last year, especially. So I\u2019ll just give you \u2026 so the reason we broke through with build-for-rent is we went to these home builders in 2019. And we were talking to them and they were maybe interested, but mostly they weren\u2019t interested. Then March, 2020 happened. If you remember March, 2020, when the stock market collapsed 40% and people were locked down, guess what people were not doing in March, 2020? Buying homes.<\/p>\n
James:
Except for me. I was buying.<\/p>\n
Ben:
Most people were not. So the home builders had all these homes. And all of a sudden, the industry just stopped on a dime. And they turned around to us and said, \u201cDo you want to buy these homes?\u201d
And we said, \u201cYes.\u201d So we went under contract for half a billion dollars of homes that summer.<\/p>\n
James:
That was a good month.<\/p>\n
Ben:
Yes, because then they had to deliver them. We\u2019d go under contract, and they\u2019d deliver \u2026 You know home builders, we go under contract, and they deliver them over the next \u2026 It took them like 18 months to deliver all those homes. And so yeah, our contract price was like scorchy. And they would come back and they would be like, \u201cI know we\u2019re under contract, but every single cost is going up. Can we talk about this?\u201d So we had a lot of complexity there.
And then they\u2019d deliver \u2026 we\u2019re talking about delivering 100 homes a week. We were buying a lot of homes. And they\u2019d deliver them without refrigerators, without a kitchen. We\u2019d go in for the inspection and it\u2019d be missing a kitchen. They would just not be able to get certain things, like in Texas, we couldn\u2019t get door hinges. They would deliver the home and be like, \u201cWe put these hinges on,\u201d but you knew the hinges, the hinges opened out. And so you can\u2019t have the hinges open out because then somebody can walk up and just unscrew the hinges and take the door off the house. So there was just all these little things that they had these problems around. We had a person driving around buying refrigerators at Costco so we could actually rent the houses, because we had these houses without refrigerators. So yeah, there was all sorts of chaos happening.<\/p>\n
James:
When they say timing is everything, that\u2019s the best time. So you bought it cheap. So the build costs were locked in too, when you committed to that?<\/p>\n
Ben:
Yeah. There-<\/p>\n
James:
Oh, that hurts.<\/p>\n
Ben:
Yeah, yeah. There was one deal we were under contract with, and the builder had a $5 million liquidation. To break the contract with us, they had to pay us $5 million. And they literally just broke the contract: \u201cWe\u2019re just breaking this contract. We can\u2019t\u201d-<\/p>\n
Dave:
Whoa. It was that bad? Oh, my God.<\/p>\n
Ben:
It was that bad. It was in Austin. And the price of the homes had inflated so much, they\u2019re just like, \u201cWe\u2019re just walking away from this contract. Forget about it.\u201d<\/p>\n
Dave:
Wow. That\u2019s insane. Are you starting to see that level off now? Are things getting better in terms of supply?<\/p>\n
Ben:
Oh, yeah. Well, supply chain\u2019s still a little messed up, but the home building industry\u2019s now flipped again, and sales are falling. And I\u2019m like, \u201cOh, I\u2019ve seen this movie before.\u201d But this time, like last time, there was nobody doing this. Now there\u2019s more money now chasing build-for-rent. So we\u2019re not the only sort of buyer in the space. But yeah, as you know, the market is shifting a lot right now. There\u2019s a lot changing.<\/p>\n
Dave:
I know you don\u2019t have a crystal ball, but where do you see things going over the next year or so?<\/p>\n
Ben:
Yeah. I mean, in some ways, the next year\u2019s easier than the following. We\u2019ve been saying since January that interest rates are going to be higher for longer. And Powell last week at the Jackson Hole meeting said 4% Fed funds rate for all of 2023. So that means basically you\u2019re going to be borrowing at 6% or more, where you used to borrow at 3%, or at least that\u2019s where we were borrowing.
So I think the industry\u2019s going to grind to a halt. I think most things don\u2019t pencil at more than 4% interest rates, I mean, base interest rates, like the Fed funds rates. And our expectation is the surprise is going to be that inflation doesn\u2019t come down as much as people expect, interest rates stay higher for longer. And it\u2019s almost like people are like, \u201cWell, how can that happen? That\u2019s so bad.\u201d And it\u2019s like, \u201cBecause it doesn\u2019t care how you feel about it.\u201d<\/p>\n
Dave:
Sorry, but that\u2019s the truth.<\/p>\n
James:
Well, and it\u2019s also history repeats itself. That happened in the \u201970s, right? It just stuck, and then they had to get it worked through the economy, and on to the next thing.<\/p>\n
Ben:
Yeah. I mean, I don\u2019t know what you\u2019re seeing, but we have 300 people, wages. It\u2019s super competitive for labor; food, everything. =I\u2019m not seeing inflation come down in any meaningful way. So why do I think it\u2019s going to all of a sudden just shift? It just doesn\u2019t seem likely to me. So the thing we did, we really slowed down investing back in January, and we started building up cash. So we have like $700 million of dry powder right now. So we were ready and fairly ready for the shift. And then the shift\u2019s going to be you need to go and to invest in credit. That\u2019s another learning, because I\u2019ve been in this for a while. In a financial crisis, all the action happens in the liquid credit markets. Like in 2020 or 2008, you couldn\u2019t really buy properties, but you could buy the paper. And so the paper is where the pricing shifts a lot faster, and you can get way more distress. But that\u2019s a whole different part of the real estate industry that most people don\u2019t see, CMBS, RMBS, asset-backed securities, that kind of stuff.<\/p>\n
James:
Oh yeah, because they\u2019ll dump that paper cheap. I remember one of the best deals I ever did in 2009, I didn\u2019t even know how good of a deal it was when we did it, someone came to us \u2026 they had a 10-unit in foreclosure, and it was a private lender. And they\u2019re like, \u201cHey, we want out of this.\u201d They sold it to us for 50 cents on the dollar. And then we were running it like, \u201cOh, okay, cool. We\u2019re going to be able buy this. We\u2019ll foreclose it. No one wants it.\u201d And it ended up getting bid up.
We bought it a week before the auction. We bought the paper. We took it down to the auction steps. We foreclosed it. And then it got bid up. They were stepping it against us, because we wanted to keep the building. We had no intentions of selling it. And we made like a 300% return on our investment in 10 days, because someone really wanted it. And we had no intentions of selling it, but we\u2019re like, \u201cThat was the easiest.\u201d We didn\u2019t have to touch it. We didn\u2019t have to do anything. The guy gave it away. We got it escrowed, and it was just a win all the way around. It\u2019s amazing what that can do.<\/p>\n
Ben:
Yeah. So we\u2019re all in the real estate business, but there\u2019s this shadow real estate industry that you don\u2019t know about, where all of the things you do where you borrow money, you buy an apartment building, you buy a house, eventually, most of that asset\u2019s actually financed. And then there\u2019s this whole parallel real estate world of credit markets where people are buying your paper and levering it up too, right? So actually, when you buy a house, you buy an apartment building, you\u2019re borrowing maybe 75%. And somebody behind the scenes has bought that paper and levered it up 10 times as well. And then somebody bought their paper and levered it up 10 times more. And so, the shadow industry of trillions of real estate, just the debt, it\u2019s become much more attractive than the equity.<\/p>\n
Dave:
That\u2019s super interesting. Yeah. I actually was just looking last week at investing into a note fund. It seems like a really good place to be investing right now. Ben, I know we only have you for a couple more minutes, so maybe we\u2019ll have to bring you back to talk about note investing and [inaudible 00:46:04] the credit markets. That would be super interesting. But before we go, can you just tell our audience about where \u2026 obviously they can find you on fundrise.com, but if anyone wants to connect with you, what\u2019s the best place that they can do that?<\/p>\n
Ben:
Well, I am active on Twitter, so my Twitter handle is @BenMillerRise, like Rise, @BenMillerRise dot \u2026 So you can hit me out there, LinkedIn, contact at fundrise.com. Anytime anybody emails me at the main email address, I always get it. So I\u2019m always interested in hearing people. You learn a lot. Our actual investor base is constantly communicating with us. And we\u2019re always learning about really interesting things. We basically have people everywhere at this point. And they\u2019re really generous with sharing information. So I love to hear from people.<\/p>\n
Dave:
Awesome. Great. Well, Ben, thank you so much for being here. This was a lot of fun, and learned a lot. And we\u2019ll have to have you back on the show sometime soon.<\/p>\n
Ben:
Great. Excellent.<\/p>\n
James:
It was good meeting you, Ben.<\/p>\n
Dave:
Well, that was a lot of fun. James, what did you think about the conversation with Ben?<\/p>\n
James:
It made me realize how small I am as an investor still.<\/p>\n
Dave:
Oh, dude, don\u2019t even start.<\/p>\n
James:
But you know what? I don\u2019t get to talk to these big institutional guys that often. And the only time I really get to talk to them is when I get notified their offer\u2019s way higher than mine. And so, it was nice to talk to them and figure out \u2026 but it\u2019s very interesting how they are moving things around, looking at things. And it has the same core principles as us, be efficient, buy the right deal, don\u2019t let your procedures maximize yourself out. So I mean, the core principles were the same. I think the money is different, is what I realized.<\/p>\n
Dave:
Dude. You talking to Fundrise and feeling small is how I feel every time I talk to you. So now you know what it actually feels like. Yeah, man, I thought it was super interesting. I\u2019m really just fascinated from an economic standpoint about build-to-rent. Like he was saying, it\u2019s this whole new asset class that just never existed before. Previously, you either built multifamily to rent or you would reuse single-family homes that were previously owner-occupied into build-to-rent. And so, it\u2019s a really interesting phenomenon. And you read a lot about it. But to his point, he said there\u2019s only like 50,000 units. So it\u2019s really not like taking over the market, but that\u2019s something I\u2019m definitely going to be watching for the next couple of years, to see if that makes an impact on the markets they\u2019re doing it in.<\/p>\n
James:
I think if we go into a little stall too, and dirt gets a lot cheaper \u2026 The reason they\u2019re not doing build-to-rent is dirt\u2019s expensive and build\u2019s expensive. But both those are coming down right now. So maybe it hits a sweet spot and they start doing more and more of it.<\/p>\n
Dave:
Yeah, that\u2019ll be interesting. For everyone listening, before we record, usually the guests and us just talk for a couple minutes to get to know each other. And James was telling Ben and I about this 81-unit deal he just did. And Ben was completely amazed at what a good deal you got. Can you just tell us quickly about this deal and how you landed it, because I\u2019m very curious?<\/p>\n
James:
Yeah, so we\u2019d been looking. We do small syndications, 30 to 40 units in Seattle. And then we\u2019ve been trying to get into 50 to 100, because what he was talking about, the efficiencies of remodeling property management, it really does make a big difference in your bottom line. And recently what we\u2019ve noticed is those deals are now \u2026 they were trading at like a three cap, three and a half cap, because of guys like Fundrise coming in and buying them all. And that has slowed down. And so actually, it was a seller that we gave an offer to at 11.8 million about six months ago, and he turned it down, turned it down, turned it down. He went to market, found his new exchange, got tied up twice at 11.8 \u2026 or no. He went all the way up to 12 million at the time. Financing blew up both times. And we just kept \u2026 well, actually, our 11.8 number dropped to 10.8, because of the rates and the cost of the deal.
And so we just stayed consistent with him the whole time for six months. And we kept updating our offer, too, saying, \u201cHey, based on rate, here\u2019s our new number.\u201d And we always had that logic of our number has changed only because of the rate with this guy, because he\u2019s a bigger seller. And we ended up locking it in, though, 81 units. About 10.9 million. We have to put about 25 grand, 30 grand into each unit. We\u2019re going to be doing a soft cosmetic with windows, hitting siding, hitting roofs, but nothing too, too crazy. Mechanicals are good. And we\u2019re excited because we have some more opportunity now. But that\u2019s the key right now, is just stay with your numbers. And if you have to change your numbers, just educate the people while you\u2019re changing so they don\u2019t think that you\u2019re just trying to take one over on them. And it all came together. But obviously I was happy to see that it looked like I blew the return socks off him.<\/p>\n
Dave:
Yeah. Ben asked James what cap rate he bought at. He said 5.8, which is just unheard of, especially in Seattle, right? You said a couple years ago it was three, 3.3, or something like that.<\/p>\n
James:
Yeah, they were down in the low threes. Now, granted, the 5.8 is after stabilization. So after we\u2019ve done the hard work, we\u2019ll be at a 5.8 to six, right in there. So it wasn\u2019t on existing.<\/p>\n
Dave:
So that\u2019s where you\u2019re underwriting it at?<\/p>\n
James:
Yeah. Stabilized, we\u2019re at 5.8.<\/p>\n
Dave:
But still, that\u2019s pretty damn good.<\/p>\n
James:
You know what? And I think we could do better.<\/p>\n
Dave:
You\u2019re insatiable. You got to do better.<\/p>\n
James:
Got to do better.<\/p>\n
Dave:
All right. Great. Well, great job today, James, as always. Always asking good questions and telling really very relevant and funny stories about your own experience. So thanks for joining us. Everyone out there, thanks for listening. And we\u2019ll see you guys next time for On the Market.
On the Market is created by me, Dave Meyer, and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Ascarza and Onyx Media, copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team. The content on the show On the Market are opinions only. All listeners should independently verify data points, opinions and investment strategies.<\/p>\n
\u00a0<\/p>\n<\/div>\n
Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
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