Build-to-Rent Strategies With Austin Good and Loe Hornbuckle

If you are an active investor looking beyond multifamily projects or single-family flips, consider the flourishing build-to-rent market. On this Best Ever Show podcast, Austin Good and Loe Hornbuckle of Good Horn Capital delve into build-to-rent opportunities.

About Austin Good and Loe Hornbuckle

Austin and Loe founded Good Horn Capital to develop build-to-rent communities. Austin is a long-time real estate developer with deep experience raising capital for high-stakes business projects. Along with his brother, he ran a successful residential real estate business and began investing in build-to-rent commercial properties. Loe founded Sage Oak Assisted Living and Memory Care and is CEO. He previously spent over a decade working in an auto dealership, honing his financial skills before venturing into real estate investing in 2007. After acquiring single-family properties and managing a large multifamily complex, he found his passion in assisted living and memory care. This niche in commercial investing demanded construction expertise to build out facilities. After a business introduction, Austin and Loe combined Austin's construction and development experience with Loe's sales background to form a winning team. Good Horn Capital leverages passive investing to raise equity for build-to-rent development.

Benefits of Build to Rent

The build-to-rent model involves obtaining land and building single-family homes, duplexes, or townhomes for the rental market. These commercial properties are managed like multifamily developments. Unlike apartment complexes, however, these units appeal to renters looking for a standalone home experience. Austin describes the demographic shift behind the build-to-rent model's popularity. People still want the American dream of one's own home, but they are more willing to rent it. Sometimes they find homeownership beyond reach, and often they choose to rent as part of an overall financial or lifestyle plan.

Risk Mitigation

The build-to-rent model offers a significant strategic advantage for active investing or passive investing. A challenge in commercial investing is to exit gracefully in tough times. Complex developments such as retail shopping centers have constraints that hinder swift divestiture. As an active investor in build to rent, notes Austin, you have several options for a clean exit:

• Sell off individual homes in the residential market.
• Sell single homes to investors.
• Refinance and hold, which is Austin's preferred option.

Loe emphasizes that the strategy's modularity lowers risk. Houses are platted individually, which means they can be sold singly. The development owner can sell or finance the entire community, part of it, or single units. This flexibility widens the pool of investors and allows principals to respond nimbly to changing conditions. Build-to-rent projects typically offer tax advantages as well. In addition to lower taxes, they often provide capital gains and cost segregation benefits compared to build-to-sell.

Choose Your Location

According to Austin and Loe, a suitable location includes a buildable land tract and robust single-family rental demand in the community. Factors to look for include strong population growth and top school districts. Austin and Loe have had good luck targeting college towns with a solid economic base for ordinary workers. However, you can succeed with build-to-rent active investing in varied communities.

The Challenge of Land

If you are starting from scratch, finding suitable land may be your biggest challenge. Austin stresses the need to avoid entitlement risk, and the best way to do that is to prevent rezoning. Sometimes people purchase land with rezoning in mind because they believe it's their only option. However, it pays to hold out for properties or land already zoned for their current state and future development. Even if your land is zoned for development, you still have to navigate community hurdles. In Austin's view, the market is toughening even in the face of housing shortages. Cities often view rental developments as drags on property values and quality of life. Their approach is to encourage homeownership by supporting single-family home developments for purchase. This civic attitude means you often have to negotiate with the city to approve your project. As larger players enter the build-to-rent market for active investing, more community leaders may eventually see the model as an affordable way for residents to enjoy a private home. When it comes to locating land, Austin notes it's a tight and overpriced market. The public prices are almost always much higher than what a local insider can negotiate. Austin has found wholesale deals to be mediocre as well. Though finding the right land tract is challenging, your best bet is to leverage local networks. In Austin's experience, success means building relationships with landowners, developers, and other key players. People also want to trust that you can close deals. Austin was fortunate to find a well-connected local mentor who helped him obtain preferred pricing.

A Tricky Profit

The toughening market means controlling margins to keep projects profitable. A continuing housing boom is fueling build-to-sell developments that make for stiff competition, notes Austin. To succeed in build-to-rent, you need high rents and minimal community expenses without revenue. A drawback to the multifamily model, Loe explains, is the "amenities arms race" complexes face. Apartment communities compete for quality tenants by offering extras such as well-provisioned gyms and resort pool areas. These amenities are expensive and usually bring in little revenue. Fortunately, the build-to-rent market attracts a different type of tenant. Prospective renters compare these communities with single-family homes rather than apartment complexes. They want a house's perks, such as a private yard, no shared walls, and several bedrooms. In return, they are willing to forgo many shared amenities. When planning their projects, Austin and Loe can skip some extras that saddle multifamily developments. Austin predicts that eventually, the burgeoning build-to-rent market will spur competition for tenants. The trend is toward more amenities as larger players with multifamily portfolios enter the niche. For now, Austin and Loe are capitalizing on the current demand.

Rent Smart

A critical piece of any thriving rental community is quickly attracting and retaining quality tenants. The build-to-rent model again offers advantages, notes Austin. Unlike most multifamily property owners, they can rent each house upon completion. This approach brings in faster revenue and also appeals to prospective tenants. Austin gives the example of their 89-unit, $20 million phased townhouse project. He and Loe will build 30 units in the first phase and stagger availability so that several residences bring in revenue at any given time. In most cases, a conventional apartment project means waiting until near completion to begin renting. Whereas new retail shopping centers may lease space months in advance, most residential tenants are reluctant to commit early. Austin and Loe do most marketing online and include channels such as student housing listings. They highlight that people are getting a single-family home with a yard suitable for a dog. As more people hunker at home and own dogs, this living style becomes a coveted amenity.

Leverage the Basics

The perennial desire for one's own home fuels the build-to-rent and the build-to-own markets. However, a smart build-to-rent strategy can offer a lower risk profile and other advantages. If building the American dream is your passion, consider honing this skill.