As interest rates rise in response to spiraling inflation, SFR investors who have reaped a windfall of returns from the Saturn V takeoff in house prices over the past year might start to think to retro rockets, heat shields and parachutes for a re-entry into what could soon become a recession.
Well, maybe a few are.
There’s still a lot of talk in home acquisition announcements in tight markets where it’s assumed supply won’t catch up with demand anytime soon and significant rent growth has been priced into deals at one point. where the national average monthly rent is exceeding $2,000.
Rents can only go up, right? But what if they stop rising and/or are pulled the other way by the severity of an economic downturn? In other words, is it time to start removing rent growth from price calculations for home purchases?
According to a report from one of the fastest growing real estate markets in the country, Dallas, a relatively small player in SFR has an answer to this question and is already deploying it as a growth strategy.
ILE Homes, which began acquiring SFR properties in 2020, currently has about 450 rental units. Despite signs of a slowdown in the domestic housing market, the company remains optimistic that it intends to double its portfolio to 1,000 SFR homes by the end of this year.
ILE, a private company based in Plano, TX, says it takes a “yield-driven” approach to acquisitions based on the rent they can charge tenants after they buy the house and, if necessary, renovate it. .
ILE does not take rent growth into account: it bases everything on current rents.
“What we can afford for a house is 100% based on where we underwrite the rents,” said Dan Brady, vice president of acquisitions for ILE, in an interview with the Dallas Business Journal.
“We are in no hurry. We are not looking for stabilization. We base everything on current rents. If the rents justify acquiring the asset, we make the offer,” Brady said.
Brady said the housing market has made “an incredible pivot in a very short time,” absorbing the reality this month of Fed interest rate hikes. In response, ILE changed its approach to takeover bids.
“We make fewer offers. We adjusted our yield into a bullish position by protecting the yield we needed in the event of a price contraction,” Brady said, in the Dallas Business Journal interview.
Even though it’s making fewer deals, ILE’s “hit rate” — the percentage of deals it closes — hasn’t changed, Brady said. ILE is closing about 15% of its deals, he said.
ILE maintains its competitive edge over other buyers, including those pricing rent growth in markets like Dallas, where average rents rose 14.4% in April to $2,075, paying cash for homes that he buys.
Most of ILE’s SFR portfolio is in the Dallas-Fort Worth and Houston markets. The company recently began purchasing SFR properties in San Antonio, Orlando, Tampa, Nashville and Huntsville, AL. ILE is targeting home sales in the $285,000 to $325,000 range.
Mahesh Shetty, CEO of ILE, told the DBJ the company has a “blue-white” collar tenant profile, including civil servants, teachers and warehouse workers. On average, ILE’s SFR rents range from $1,500 to $2,200, he said.