Smart Money is Going After New Homes as Builder Desperation Grows

0:00Doug Brien:New construction is reshaping how deals are getting done, and it's changing where the numbers actually work. It's sort of crazy, but right now, on average, a newly built home in the U.S. is cheaper than an existing home, making this a uniquely attractive investment right now. I'm Dave Meyer, and today on On the Market, I'm joined by Doug Bryan to dig into when new builds beat existing homes, how institutional investors are actually behaving and what you can learn from them, and how to negotiate with builders to land a great deal on a newly constructed home. This is On the Market. Let's get into it.

0:43Doug Brien:Doug Bryan, welcome to On the Market. Thanks so much for being here. Thank you. Good to be here, Dave. I am excited to have you on. We've been talking a lot about new construction sort of theoretically on the show the last couple of months, but I'm really eager to have you on since you have so much personal experience with this. But before we jump into the topic, maybe you could just introduce yourself to our audience and explain your background in real estate. Yeah, I am currently the CEO of Roofstock. The company that I founded in 2016 was called Mine. we were more focused on property management.

1:18Roofstock was more focused on transaction activities. We just merged about a year and a half ago. So really the same company for about the last nine years. Prior to that, I founded a company called Waypoint Homes back in 2008. Wrote a book about it called The Big Long. If you want to learn more, we bought 17 ,000 houses between 2008 and 2016 and created a public REIT called Starwood Waypoint. And then prior to that, I spent 12 years in the NFL as a place kicker, which interestingly was kind of my foray into real estate. I was trying to make sure that I was being smart, having that great opportunity and wanted to invest the money as wisely as I could and did a bunch of research and ended up figuring out that real estate was by far the most interesting asset class to grow wealth over time, but also have really efficient after-tax cash flow.

2:17Doug Brien:I love that. I know you and I have gotten to know each other a little bit over the last couple of months. And it does seem we share a similar philosophy. I love the name of the book, The Big Long, because real estate, despite what's happened over the last couple of years where people were able to make a quick buck, the whole point is just long-term risk-adjusted returns, staying in the market as long as possible. And you've obviously found several different ways to do that over the course of your career. Now, you started sort of were one of the key inventors of institutional single-family home investing.

2:53Doug Brien:How has your personal investing or just in your professional career as an executive as well evolved? Because Now you're doing less single family homes, right? Or maybe you've just broadened your scope to not only focus on that. Yeah, I'd say I've broadened. I mean, by far the asset class that I invest the most in, even within real estate, are single family homes, own them all over the country. And that includes some small apartment buildings too. I've done some of those. It's just kind of easier to put capital to work sometimes. Have I been buying a lot the last three years? No, I haven't because it hasn't made a lot of sense.

3:28But yeah, I would say that I enjoy sitting in the seat that I sit in in terms of both, you know, Waypoint Homes mind and Roofstock, because I get to really understand where, you know, the big smart money is thinking about putting their money or actively investing. And so I get to learn a lot about flows of capital. And if you remember back at BP Con, we talked about like, I just think as a as an individual investor, it's important to know like where flows of capital are going. It doesn't mean that you have to necessarily be in front of it, although sometimes that's a smart thing to do, but it's just good to know where it's going and what the smart professional money is seeing in terms of opportunities.

4:10Doug Brien:I think that's really wise. Generally, I think people overestimate the competition that comes from institutional investors, unless you're in one of those markets like Charlotte or Phoenix or wherever, where they're super active. But that doesn't mean you can't learn something from institutional capital because they probably, I assume, have teams of analysts and people who are trying to figure out where the next great opportunity is. So curious to learn what institutions are thinking about and where are they focusing their capital right now? Well, I mentioned that I hadn't been buying, but the truth is institutions really have not been doing much buying over the last two to three years.

4:48Individual investors are, I mean, I think buying 75, 80 % plus of all investor purchased homes these days, institutions are like 5 % or less. And that was very different, you know, two and a half, three years ago. And it's interesting because, you know, I get invited to speak at panels for some of the institutions that deploy capital and their LPs, you know. So a lot of these institutional investors are getting investments from various pensions and endowments. So think like teachers and firefighters and police, they have pensions and that money has to be invested. And some of that likely 10 % or so will end up going into real estate.

5:35And so we talk to those investors a lot and they're big fans of the fundamentals of single family housing. The fact that we have a structural shortage in supply by anywhere from three to five million homes. I mean, it's good to invest in asset classes where demand exceeds supply. We have the largest population cohort in U.S. history, the millennials, entering their home living stage of life. And a lot of those people tend to want to wait to purchase a home. So there's a lot of rental demand out there and, you know, just like fundamental principles that make investing and owning single family rentals very attractive.

6:21Now, what's made it highly problematic is most of these institutions use leverage. And with the way that interest rates went up and the cost of your debt, in most cases, exceeding the unlevered return that you would receive, it just doesn't make sense to use financing. And so they've really been kind of pencils down. But that's really changed quite a bit in the last, I'd say, three to six months.

6:46Doug Brien:What has changed? What has spurred them to start thinking about getting back in? Yeah, well, it's really perception of where interest rates are going. So obviously, the Fed recently lowered 25 basis points. And some speculate that they'll do another 25 basis points at the next Fed meeting. And so obviously, you know, that hasn't brought down rates enough to make them accretive. But I think that there is a perception that rates will be coming down. So that's part of it. The other part of it is we're seeing excess supply buildup from builders. And so a number of builders have gotten pretty aggressive, understanding that retail homeowners Owners are not going to be able to buy all the homes that they currently have on their books.

7:36And so some of them, including large public builders, are getting pretty aggressive with selling this excess supply to investors and making it really, really compelling. For example, my company Roofstock has a partnership with Lennar, and we're currently selling homes on our Stessa marketplace where they're buying down the rates to 4.99%. It was pretty interesting. And I was literally just on Stessa on our marketplace this morning, just kind of checking things out. And we're about to get a couple thousand more homes from them. But even like literally today, there's 300 homes that are currently listed at north of a five cap, meaning with that 4.99 % financing, it's a creative.

8:23Plus, these houses tend to trade 15 to 20 % below the asking price.

8:31Doug Brien:Oh, interesting. Okay. So it's even better. Yeah. So it's like, you know, what you'll see on Stessa for these, I mean, they're brand new homes. There's a list price, but on average, they're trading between 15 and 20 % down from that. And then to make things interesting, we're also paying two months of rent so that the investor has time to get the home leased and giving three months free of property management and a 12-month subscription to Stessa. So some interesting deals. And I think part of what retail investors should know is these same homes are being actively looked at. Literally right now, institutions are running through tapes and there's a little bit of a race right now because, again, like I said, a number of institutional investors see rates going down and they want to deploy more capital.

9:27And they're seeing this excess inventory out there. And so they're aggressively looking at it. So if you are in the market today, you should definitely be at least taking a look at what's out there on the market.

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12:38Doug Brien:welcome back to on the market i'm dave meyer here with doug bryan let's jump back in this seems to me to be a very interesting intersection between what institutional investors are doing and what our audience here and on the market could be doing because a lot of times in the last couple years you hear them you know institutions are doing these 300 unit build to rent communities which is cool, but the average BiggerPockets investor is not going to be pulling that off or even really interested in that. But this individual buying of new construction does seem like a way that our audience can overlap with institutions.

13:18Doug Brien:I know some of the creators, other personalities here at BiggerPockets who have started buying new construction as well. So, Doug, maybe you can tell us a little bit about the market fundamentals and why new construction is appealing right now, both to our audience and to institutions. When, to be honest, 10 years ago, I would never have recommended to someone to buy new construction over an existing home. But right now, it does seem intriguing. And I'm hoping you can tell us a little bit more about what you see in it that makes this sort of a unique opportunity. I mean, I first have to just say, like, it depends what your goals and objectives are, right?

13:55Like, you know, you're always going to do better if you find that like really well located, really junky home that you can come in and put 20, 30, 40, 50 ,000 or more into it, reposition it, raise the rents. Like you create a lot of value if you buy it right and you do all that work. buying new homes is is different it's it's a little more vanilla it's a little more cookie cutter i think one of the interesting dynamics in the market that we're seeing is just there's a

14:24Doug Brien:strong preference from renters they like yeah they like new homes and and builders have gotten smart i mean some of these are purpose built for rental and so they work better as rental you know meaning in some cases smaller lots like smaller lots often work better as rentals i mean i've looked at new homes in the past, but then they have these giant yards that you have to maintain and it just, it just eats into the, you know, to, into the return. And so to me, the thing that's most interesting now is a, there's more demand from renters for new homes and there's excess supply so you can buy them well.

15:02And so what you get in a new home is a more predictable return, right because what do new homes come with they typically come with you know warranties for like the first five years so if any of the major systems of the home break then they're covered by warranty and everything is new and so you know you often will see new homes running at 70 percent or higher noi margins whereas you know you're usually more kind of in the you know low to mid 60 range with an older home just because the cost of maintenance is higher. So you sort of buy into this window of time where you have pretty steady and predictable cash flow streams.

15:48And normally, with that lower risk, you would see a lower return. But it's interesting because of the discounts you can buy it and the accretive financing, you can actually do quite well. Again, so looking at Stessa today, I mean, there were some properties in Oklahoma, so we're using that 4.99 % is plugged into our calculator. And I'm seeing properties with 7%, 8%, 9%, 10 % plus cash on cash. Wow. And that doesn't include the two, three months and the discounted property management. So there's some interesting deals out there. I kind of got actually excited looking at them this morning.

16:26Doug Brien:I think that's a really important point for our audience because a lot of times you hear people knock on real estate and say, oh, yeah, it looks like you have great cash flow till a system breaks or you have a month of vacancy. And for those who listen to the show frequently, I like to point out that if that is your understanding of cash flow, you're doing it wrong because you need to be underwriting and understanding and setting aside money for CapEx or setting aside money for vacancy. That is part of being a real estate investor. But what Doug just said, I think is really true, is that the predictability, even if you're underwriting well for an existing home, you might have thought, hey, I got seven years left on this roof.

17:09Doug Brien:And actually, it's three years left on this roof. And even though you thought about that and set some money aside, you might have a little bit of a cash crunch. Realistically, when you buy a new build, the cash flow you see on paper is probably what you're going to get. I think it's just a little bit more stable, not just on a year-to-year basis, but even on a month-to-month basis, which is, I think, something people struggle with early in their investing career or early in any hold of a property. You get in there and you thought, oh, it's going to be$5 ,000,$10 ,000 to stabilize this. Actually, it's$17 ,000 to stabilize this.

17:43Doug Brien:You don't have those question marks with new homes. What you see is sort of what you get because you're probably outside maybe some minor things that are probably covered by warranty. You're really not going to have many surprises, which to me as an investor is super appealing. I'm curious, Doug, one of the things I've always worried about with new construction, I'm curious if you've thought about this at all, is how you compete for tenants. Because if you're in one of these build to rent communities or new construction communities, everything's kind of the same. And I'm always thinking as an investor, like how do I position my single family home or my duplex to attract the right kind of tenant for this type of property?

18:31Doug Brien:When new construction, or at least when you're in these big sub-developments, it seems to me that you're sort of at the mercy of what everyone else around you is doing, what they're offering as rents. Does that introduce any risk to this kind of purchase? It does, but with risk, there's also opportunity. I would say this. I think it's really important to understand the demand dynamics around build-to-rent communities, right? So like what's typically true about build-to-rent and new homes, they're built kind of like out in the excerpts. You know, they're built farther away from city centers. And sometimes those areas can be close enough to where the jobs are and where people want to be so that it works.

19:15Doug Brien:And sometimes they're so far out that there's really tough commutes and there's not as much demand. So I think you really, really want to understand demand. You know, let's assume we are buying in a community where there's strong demand. And then there's this potential issue that you introduced of like, well, there's their new homes and they're all being sold and there's five or six on the market and there's exactly the same. And I say, yep, that's true. But the way you execute the marketing and leasing process becomes really, really important. So it's like the vast majority of individual investors manage on their own.

19:55And, you know, most of them are, you know, don't have marketing backgrounds and sales backgrounds and are busy doing other things. I mean, some of the things I've seen from the various sites that, you know, you syndicate your listings using professional pictures and professional property descriptions, by the way, AI does a great job of writing those very quickly for you. How do you deal with leads that come in? I mean, if you pick up the phone or call someone back within 10 minutes, like your chances of converting that person into a lease are like significantly higher. So, you know, to me where the opportunity is, if I was in that kind of location, I would seriously look at professional marketing and leasing because from what I've seen, good companies can out execute bad companies with bad processes and bad setups, as well as individual investors who, you know, are amateurs at doing this and are busy doing other things and can't pick up the phone and call someone back within 10 minutes.

21:02And that is how you stand out and get the best tenants in your home as quickly as possible.

21:08Doug Brien:Very well said. And I think one of the flip sides to that too is I would imagine in some of these exurb kind of areas, the tenure of the average tenant is probably longer. I've always bought and sort of specialized in buying properties that I think young professionals will buy. Just because that's who I was when I got started and I sort of understood where young professionals wanted to work, the amenities that they were looking for. That was easier for me. But as I've matured as an investor, I'm starting to like some of these exurb suburb areas because young professionals, they move every year or two.

21:44Doug Brien:You know, they're constantly moving and you always have this turnover. Is that what you saw? Like, did you have enough sample size? Because apartments, I mean, the generic high level metric is apartments turnover is roughly every 18 months. So people spend on average a year and a half. For the average single family home, it's three years or more. Yep. Now, if you get into, you know, families with kids and schools, you're probably on the higher end of that average. And maybe in the young professional realm, it's more like, you know, a year and a half or two, two and a half. But for sure, that is a thing.

22:18And it's a very attractive aspect of single family rental. In fact, it's interesting, Dave, because when we first started Waypoint, so this is like 2008, I mean, the banks are giving away homes, no one's buying them. we see an opportunity we're talking to like the big multi-family operating companies and investors thinking well they're going to get this they did not get it they looked at houses and said these things are all spread out it's unmanageable like you have no economies of scale and the cost to maintain and manage these properties is going to be so high but they were wrong about one thing or nobody knew about this one thing was that the turnover rate was twice as high with apartments, meaning people stayed twice as long.

23:03So yes, even though they are a little bit more expensive to manage because of the scattered, disparate nature of where the homes are located, because the turnover is three, four years, you don't have to go in and spend as much because there's less frequent turns. And if you look at a P &L, it actually makes a big difference and makes single family rentals in many cases more financially attractive than multifamily.

23:31Doug Brien:A hundred percent. I feel like there's this evolution of real estate investors. When you first get started, you're really focused on rent growth and like what the max rent you can get is. And at least for me, over the course of my career, you realize that vacancy is really what kills deals. Like if you could just reduce your vacancies, you're probably going to be doing pretty well. And that's why I still buy single family homes and like the asset class as well. It's just you're just going to have less turnover costs. This is anecdotal, but in my experience, single families, people take a little bit better care of them.

24:03Doug Brien:They're usually a little bit older tenants, maybe a little bit more mature than my average tenant. When I was one of them, I was 24 and also damaging my own unit. So I'm not judging, but I just, you know, I think it's those sort of secondary costs that once you're in this industry, you understand very well. But when you're first getting into, you might overlook a little bit. And you realize if you could control those costs a little bit more, it really, like you said, when it comes down to the P &L at the end of the year, it really makes a big difference on if you're fully occupied or you have a month or six weeks or eight weeks of vacancy.

24:39Doug Brien:It doesn't sound like a lot, but it could kill your whole year. And I think this is kind of one of the attractive things about not just the single family asset class, but being in a new property, I would have to imagine would have a little bit higher retention rate than even an existing home, single family rental, because things break. I have single family homes that I've renovated, but they're built in the 1920s. These things have issues and I fix them quickly, but I would imagine if you have this sort of flawless experience as a renter in a brand new single family home, you're probably going to want to stay.