Exclusive Report: Back to Reality with Buy to Rent

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1 A brief history of rental investing The business of buying, renovating, and renting single family homes has seen tremendous growth over the last few years with the entrance of institutional investors. Long dominated by small mom-and-pop investors and service companies, rental property investment is a relatively straightforward business at the local level. such as Blackstone and Colony recognized the opportunity and put their capital-generation machines to work raising huge funds dedicated to buying SFRs. In the wake of the financial crisis and housing bust, many investors saw an opportunity in the increasing stock of distressed single family homes. Prices fell precipitously across the country during the bust as defaults stacked up while banks tightened credit availability. As the market forces began to stabilize the free fall in home prices, investors recognized an opportunity to buy and hold homes as Single Family Rentals (SFRs). Consequently, a tidal wave of institutional investors have accumulated hundreds of thousands of homes over the past few years, creating operational challenges and complexities never seen before. RealtyTrac data shows that institutional investors (defined for these purposes as entities purchasing at least 10 single family homes within a calendar year) purchased a combined total of 366,206 single family homes from January 2011 through November 2013 (see chart below). At the beginning there was no lack of supply. Single counties hit hard by the foreclosure crisis yielded thousands of potential distressed home purchases every month. Markets such as Memphis, Fresno, Charlotte, Atlanta and Phoenix saw large volumes of purchases from institutional investors early on in But as availability of inventory particularly distressed inventory started to dry up in some of those first-wave markets, primarily in the west, institutional investors moved into a second wave of markets, many in southeastern cities such as Jacksonville, Fla., Winston-Salem, N.C., Tampa, Fla., Lakeland, Fla., and Macon, Ga. Investors saw the potential of SFRs to generate steady cash flow, with some resilience to inflation, while also participating in the expected home price appreciation in the aftermath of a burst housing bubble. Large institutions

2 Assembly-line acquisition Large and mid-sized firms that raised pools of capital to invest in SFRs quickly realized that SFR portfolio acquisition is a resource-intensive proposition. Each opportunity must be evaluated independently for property condition, local hazards, and fit with investment objectives. Proper due diligence is critical, as operators embark on a long term relationship with every home in their portfolio. Unlike an apartment building where an investor can acquire multiple units using a common set of resources, every SFR is different even when they re purchased as part of a pool of homes. the box or the shared attributes they wanted each of the homes in their portfolio to possess. These challenges were compounded by the geographic dispersion and a wide variety of home formats these investors now owned. As a result of these factors and the pace with which these homes were acquired, a new type of service provider has emerged to address the scale problems inherent in assembling large portfolios of SFRs the SFR institutional aggregator. Institutional aggregators of SFR properties can complement the analytical capability of an investor with feet on the ground to source a supply of distressed homes, assess suitability, consummate transactions, and then renovate and manage a large pool of homes. Many institutional aggregators have built networks of brokers, agents, construction resources, inspectors, and insurers needed to consummate a large number of acquisitions quickly. Leading single family institutional aggregators develop full pipeline management software systems as well as operational and management reporting systems. Investors need access to on-the-ground resources and experience to source a steady supply of homes, understand the appropriate value, assess the cost of required renovation, establish clear title, manage the escrow process, understand any HOA restrictions or other tax considerations that would impact the investor s return on their home. Further, for every property they acquire, investors have to start with a pool of many more as the housing market is very competitive. Even the most aggressive buyers only win a fraction of their homes. Instead of trying to build this infrastructure from scratch, investors often sought out local brokers and agents, giving these commissioned parties a list of criteria which define These systems allow institutional aggregators to become efficient at scale, purchasing hundreds of properties each month across the country. Consolidated systems also allow institutional aggregators and their clients to gather data consistently and effectively for later analysis. Best practice firms are able to achieve impressive timelines for the critical purchase-to rent cycle. Below are approximate timelines from acquisition to lease that Pintar Investments is able to achieve with its clients. Approximate Timelines, Purchase to Rent Purchase to Possession 20 days* Renovation 20 days Marketing to lease 20 days *Auction properties are sometimes purchased with an existing occupant

3 What is next for this nascent market? Some observers of the SFR space raised concerns about the long term impact of large investors in the market. What is long term strategy of these investors? Is the SFR market merely a short term trade or will it be viable in the long-term? Will investors flood the market with homes when they liquidate down the line, once they achieve their returns and home price appreciation begins to stabilize? Recent RealtyTrac data show that the largest of investors are holding their portfolios, at least initially (see chart below), despite some very tantalizing appreciation that could convince some players to cash out (see chart at right). As institutional buyers entered the market in early 2012 in response to the record levels of distressed SFR inventory, they changed the landscape dramatically. The deep values once available in cities they initially targeted have gradually disappeared as investor demand for rental homes combined with fundamental demand stemming from an improving economy and better credit markets. As a result, many markets have generated double-digit home price appreciation. The rise in home prices in most major markets has reduced the pool of home investors can purchase with the expectation of large price increases. Investors will expand their holdings now and into 2014, but this expansion is likely to be decidedly more restrained than the binge of the past 18 months. Large investors have restructured their acquisition programs around the preferences of public-market and securitization investors seeking a combination of yield, occupancy and collection standards which are valued by the public markets the investors who are likely the ultimate owners of these assets. Going forward, successful investors will likely shift their strategy to accomplish the following 3 things: The SFR strategy is a bet not only on the continued demand for rental housing and the strength of home price appreciation but also, on a long-term path to liquidity for investors. Large firms bought heavily before there was a clear path to liquidity; betting that something would emerge, by public offering REIT, securitization, or simply a maturing industry of SFRs where stabilized portfolios could be sold to other players at non-distressed prices. 1) Carefully manage their portfolios in current markets 2) Focus on the property management of their existing homes 3) Expend geographic footprint, acquiring homes in secondary markets Thus far, the bet appears to be paying off. Public offerings of Silver Bay, American Residential Properties, and American Homes 4 Rent along with the first-ever securitization of rental homes by Invitation Homes at a very low rate have demonstrated that public market investors buy into the potential of SFR rentals.

4 A new paradigm for property management Institutional activity in SFRs begs for the creation of a new class of investment managers and service providers that can scale to meet the needs of these institutional investors. The most successful of these players are able to combine the Main Street operating capabilities that distinguish the most successful service providers with the Wall Street analytics to analyze asset efficiency, communicate with sophisticated investors, scour big data and stay on top of emerging trends. Single family rental investing is NOT a new phenomenon approximately 14 million of the almost 90 million homes in the U.S. are owned by third parties and rented. These investors tended to be small in the past, by comparison, and bought homes in areas they knew. Deep knowledge neighborhood level market dynamics gave small investors an advantage in understanding when a home was mispriced. These smaller investors had no committed timelines to deploy capital, choosing to wait for the right time and then move quickly to snap up single properties at below-market prices. While small investors could acquire properties efficiently, management was often less efficient. In some cases, the investors would manage the properties themselves, collecting rent and repairing the home as needed. These investors were served by a wide array of property managers, brokers and service each with their own standard of performance, pricing and ethics. Those operators could be local real estate brokers, who managed properties as an auxiliary service, or dedicated property managers. Many investors believed that their investments were well managed and were pleased with performance. However, as these investors often held these investments for many years and did not account for the cost of that capital, true investment returns were difficult to monitor. As the SFR industry becomes more mature, operating standards required by the market are likely to rise. The popular press has already latched taken up the theme of Wall Street as your new landlord and several specific negative tenant experiences, which may make potential renters leery of investor landlords. Tenants can use social media to share information about the service level and tenant experience of a specific property investors and property managers. As a result, investors will increasingly press their property managers to develop high service standards similar to those of large apartment buildings, to better understand the demographics of their tenants, and to effectively communicate with the tenant base. Property managers must make investments in scalable operational processes and systems to achieve the required high service standards in tight timeframes. Managers must be able to rehab, rent, maintain, and respond to issues in a scalable manner. Managers must also be able to tailor their approach to meet their investor client s specific strategy. Property managers must have a strong, local presence to ensure positive rental outcomes, good tenant relationships, and low vacancy rates. Local property managers can manage tenant relationships and rent collection in such a way that tenant issues and delinquencies are resolved quickly. Customer service specialists can foster positive, collaborative relationships with tenants. Costs vary across geographies and investor strategies, where some investors prefer to purchase properties requiring only minimal rehab and others cast a broader net to include properties with meaningful amounts of renovation required. Pintar has been able to achieve impressive benchmarks for costs by consolidating administrative functions and optimizing the placement of maintenance resources. Approximate Costs, Rehab through Rental Rehab $20,000 for distressed sales Leasing 1 month s rent Management 7 to 8 percent of collected rents Maintenance 3 calls per home per year with total cost less than $500

5 The promise and pitfalls of real life operations Each of the steps in the purchase, rehab, lease, and management process has its own risks which can impact the investment outcome for that property. These risks begin before a property is even in the hands of the investor. Gaps in due diligence prior to purchase can cause title, lien, necessary repairs, or neighborhood hazards to be under-reported or overlooked entirely. These gaps can result in unexpected costs that may dramatically reduce an investor s returns. Possession can be less straightforward that it appears, especially in the case of a distressed property that is still occupied by the former homeowner. These occupants can create problems for an operator by stretching out the eviction process and driving longer timelines all while they sit in possession of the investor s asset. Effective SFR operators can help investors manage these risks from the very beginning of the process. Renovation can be equally impactful to an investor s returns. If a property is under-renovated, it will either rent for a sub-market price or have costly maintenance issues. Under-renovation problems often result in further damage to the home (such as a poorly patched roof causing internal damage). Alternatively, over-renovating a property results in costs incurred with no corresponding increase in rent revenue. Expensive upgrades may be added which aren t adequately valued by the underlying renter base in an over-renovation. For example, tenants in some areas may own a refrigerator, which they will move with them. Furnishing those homes with a refrigerator may actually cause a prospective tenant to pass on a rental. Effective SFR institutional operators and property managers will have extensive experience with their areas of operations and can advise clients on how to optimize renovation strategies. With experience and analysis, seasoned operators will find opportunities to improve performance of their portfolios. Operators will look back at their experience and find ways to hone in on mispriced properties. Operators with large footprints will identify variations in expenses and investment returns across the country. Operators working on behalf of investors will be able to advise their clients on how to make smarter decisions. For example, analysis of the SFR properties managed by Pintar shows significant difference in the expense ratios in 74 cities throughout the Southwest and Georgia. If one was to just look at the Mean numbers in the summary statistics below, it would mask the vastly different expenses and returns available across the different markets as demonstrated in the table in Appendix A. Summary Statistics for 74 Cities in CA, NV, and GA Expense Ratio Rent Gross Yield Mean 40.0% $1, % Std Dev 6.6% $ % Max 58.3% $7, % Min 11.2% $1, % One discovery from parsing the data at a market level is that higher-priced homes can have lower expense ratios. For example, in premium neighborhoods, such as Beverly Hills, the expense ratio (Costs / Annual Rent) is barely above 11 percent lowest among the 74 cities. This is caused by certain costs which are relatively consistent from a nominal basis including maintenance, certain turn and leasing costs and landscaping. When allocated over a larger rent revenue base these costs become less significant. By contrast, some of the entry level neighborhoods in Atlanta and Nevada had expense ratios of more than 50 percent. Differences in expense ratio are explained partially by differences in tax rates and the homes themselves. Tax rates can vary by county or even at the community level. In the case of California s Mello-Roos, assessments are levied to fund infrastructure projects for newer communities. Mello-Roos are especially common in the Inland Empire communities of Southern California. Condition of homes at purchase also has an impact on expense ratios. Areas where more of the homes are well renovated prior to purchase tend to have lower expense ratios. Areas with HOAs or elaborate homes features such as swimming pools tend to have higher expense ratios.

6 Applying Wall Street wizardry to B2R In addition to insights into expense ratios, analysis of Pintar properties shows advantages of properties in premium areas vs. those in core areas which may not be immediately apparent. Comparing yields: premium homes versus core homes On the surface, the net rental yields in premium areas tend to be lower than yields in core areas. But, the gap between the two yields is narrowed by a more difficult collection experience in core areas. The total time required for the acquisition-to-rehab-to-rent process is slightly longer in core areas, also reducing the gap in yields. The difference in timelines can be caused by slightly longer timetables required for the existing occupant to vacate the home. The above chart shows that the average price per square foot of premium homes, defined as those with a purchase price of $300,000 or more is increasing at a faster pace than the average price per square foot of a core home. This gives investors a better prospect of a long-term return at the end of their holding period, even though in the short term the yields may be smaller on the premium homes. Credit quality also tends to be better and collection issues less frequent in premium areas. Rates of delinquency and evictions are lower in markets with higher incomes and home prices compared to regional averages. Analysis of properties managed by Pintar also shows some evidence of slightly higher appreciation for premium areas compared to core areas, even though rent yields appear less attractive in premium areas on paper. Both price per square foot and rent per square foot increased faster in the premium areas in the year ending July This may be due the slightly better affordability metrics demonstrated in the premium areas as well as some recent evidence of better credit availability for those areas. Meanwhile, rents on premium homes are also showing some increase even while rents on core homes are flat lining. This demonstrates more upside potential on premium home rental yields.

7 Appendix A: Expense Ratio, Rent, and Gross Rent Yield for 74 Cities in CA, GA, and NV City State Expense Ratio Rent Gross Yield Beverly Hills CA 11.2% $7, % Alpharetta GA 18.3% $1, % Gainesville GA 26.7% $1, % Loganville GA 30.4% $1, % Marietta GA 32.9% $1, % Cumming GA 33.1% $1, % Duluth GA 33.3% $1, % Snellville GA 34.2% $1, % Douglasville GA 34.8% $1, % San Pedro CA 35.0% $2, % Wildomar CA 35.0% $1, % Ball Ground GA 35.0% $1, % Los Angeles CA 35.6% $1, % Santa Ana CA 35.9% $2, % North Hollywood CA 36.5% $2, % Oxnard CA 36.6% $2, % Canton GA 37.1% $1, % Fontana CA 37.3% $1, % Norcross GA 37.5% $1, % Anaheim CA 37.6% $2, % Suwanee GA 37.8% $1, % Menifee CA 38.0% $1, % Escondido CA 38.1% $2, % Long Beach CA 38.8% $2, % San Diego CA 38.9% $2, % Temecula CA 38.9% $2, % Rialto CA 39.0% $1, % San Bernardino CA 39.6% $1, % Buford GA 39.7% $1, % Perris CA 39.7% $1, % Sun City CA 39.8% $1, % Winchester CA 39.8% $1, % Moreno Valley CA 40.0% $1, % Oceanside CA 40.0% $2, % Spring Valley NV 40.0% $1, % Powder Springs GA 40.1% $1, % Spring Valley CA 40.1% $2, % Lake Elsinore CA 40.1% $1, % Corona CA 40.1% $2, % City State Expense Ratio Rent Gross Yield Fullerton CA 40.3% $2, % Murrieta CA 40.4% $1, % Riverside CA 40.6% $1, % Sugar Hill GA 40.6% $1, % Noth Las Vegas NV 40.7% $1, % Colton CA 40.7% $1, % Vista CA 41.3% $2, % Lawrenceville GA 41.4% $1, % El Cajon CA 41.6% $2, % Chula Vista CA 41.6% $2, % Woodstock GA 42.1% $1, % Henderson NV 42.1% $1, % Austell GA 42.3% $1, % Inglewood CA 42.3% $2, % Hemet CA 42.3% $1, % Lilburn GA 42.5% $1, % Auburn GA 42.9% $1, % Kennesaw GA 43.1% $1, % Van Nuys CA 43.5% $2, % Tucker GA 43.6% $1, % Dacula GA 44.1% $1, % San Jacinto CA 44.2% $1, % Acworth GA 45.3% $1, % Grayson GA 45.4% $1, % Beaumont CA 46.1% $1, % Romoland CA 46.3% $1, % Hiram GA 46.3% $1, % Mableton GA 46.8% $1, % Braselton GA 48.1% $1, % Atlanta GA 48.6% $2, % Las Vegas NV 49.4% $1, % Lithonia GA 50.7% $1, % Stone Mountain GA 51.0% $1, % Enterprise NV 51.4% $1, % Decatur GA 58.3% $1, % Source: Pintar Investment Company For more details on Pintar, go to

8 Appendix B: Median Sale Price All Sale (Including Distressed) and Gross Rent Yields State CountyName Median Value All Sales 3BR Rent 40 Percentile Annual Rent Gross Yield PA Philadelphia County $70,267 $1,414 16,968 24% FL Duval County $93,450 $1,233 14,796 16% TN Shelby County $81,633 $1,066 12,792 16% OH Cuyahoga County $79,878 $1,005 12,060 15% FL Pasco County $105,317 $1,269 15,228 14% OH Montgomery County $79,500 $953 11,436 14% MI Macomb County $96,279 $1,124 13,488 14% GA Dekalb County $103,648 $1,187 14,244 14% MI Wayne County $100,000 $1,124 13,488 13% FL Brevard County $107,317 $1,193 14,316 13% OH Summit County $88,050 $965 11,580 13% FL Volusia County $110,332 $1,199 14,388 13% OH Hamilton County $95,212 $1,018 12,216 13% WI Milwaukee County $98,309 $1,036 12,432 13% NV Clark County $150,000 $1,530 18,360 12% FL Hillsborough County $124,933 $1,269 15,228 12% FL Polk County $110,517 $1,094 13,128 12% FL Orange County $132,500 $1,311 15,732 12% FL Miami-Dade County $166,000 $1,600 19,200 12% GA Gwinnett County $123,800 $1,187 14,244 12% FL Broward County $191,500 $1,797 21,564 11% OH Franklin County $113,633 $1,039 12,468 11% MI Kent County $112,983 $1,033 12,396 11% IL Lake County $136,667 $1,248 14,976 11% FL Lee County $133,200 $1,212 14,544 11% NY Monroe County $119,602 $1,051 12,612 11% GA Cobb County $137,083 $1,187 14,244 10% MD Baltimore City County $184,900 $1,599 19,188 10% FL Palm Beach County $188,667 $1,623 19,476 10% PA Allegheny County $118,617 $991 11,892 10% PA York County $129,350 $1,080 12,960 10% DE New Castle County $170,323 $1,414 16,968 10% IL Cook County $150,833 $1,248 14,976 10% NC Guilford County $116,667 $964 11,568 10% NE Douglas County $129,500 $1,059 12,708 10% CA Kern County $150,000 $1,195 14,340 10% CA San Bernardino County $199,167 $1,582 18,984 10% OK Oklahoma County $125,250 $989 11,868 9% WA Pierce County $192,725 $1,472 17,664 9% NC Mecklenburg County $143,576 $1,096 13,152 9% VA Virginia Beach City County $204,667 $1,562 18,744 9% CA Tulare County $145,000 $1,104 13,248 9% AZ Maricopa County $185,505 $1,410 16,920 9% TN Davidson County $149,308 $1,131 13,572 9% PA Lancaster County $153,133 $1,157 13,884 9% MI Oakland County $149,000 $1,124 13,488 9% CA Stanislaus County $178,167 $1,341 16,092 9% NC Wake County $150,667 $1,108 13,296 9% CA Sacramento County $215,248 $1,580 18,960 9% SC Greenville County $133,000 $975 11,700 9% Source: RealtyTrac, HUD Fair Market Rents For more information about RealtyTrac data products and services go to

9 About RealtyTrac RealtyTrac is the leader in housing market information including distressed and non-distressed sales and neighborhood data. Neighborhood data includes demographics, unemployment, schools, building permits, crime, environmental hazards, sex offenders, drug labs, etc. RealtyTrac has developed a full set of offerings to address the needs of SFR investors, including market comparison reports, investor activity reports, and property level reporting. RealtyTrac provides bulk data license, custom reports, historical reports, and trends back to 2005 For more details, please call About Pintar Investment Company and Port Street Realty Corporation Pintar Investment Company is a vertically integrated, residential real estate investment company and Port Street Realty is its wholly owned property management company providing SFR investors the following services: o Sourcing / Acquisitions / Diligence o Renovation / Maintenance o Leasing / Property Management o Dispositions National operating platform Over $2B in acquisitions for our partners in past 36 months Institutional and Individual partnerships o Over 5,000 homes under management o Platform is built for scalability. Approximately 250 employees Acquisitions group evaluates 2,500 3,000 properties / week Extensive investment in technology tailored to drive timetables and improve investor outcomes For more detail, please call