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HIGHLIGHTS FROM THE PODCAST:

1:04 – Andy explains what SFR3 stands for

4:35 – Talks about buying during a recession

6:43 – Best practices when buying investment houses

8:07 – The key to Operating a company like SFR3

9:12 – Andy talks more about the online marketplace that connects sellers of single family homes and buyers across the nation

12:01 – Newbie mistakes that will happen

14:00 – Andy talks more on what he looks for in a good PM

16:55 – How institutional capital has changed buying for smaller landlords

19:12 – Institutional investing can create a new floor

21:18 – Andy talks about the markets SFR3 focus on buying

24:17 – Thoughts on build-to-rent homes

25:23 – Andy talks about Birmingham positives

27:31 – Advice for out-of-town investors

FULL TRANSCRIPT OF THE PODCAST AUDIO

Andy Boyum:
Have a game plan, and have a playbook, and then stick to it. Understanding that not 100% of your buys are going to go exactly to plan.

Spencer Sutton:
All right, everybody. Welcome back to another episode of The Birmingham Rental Investor. I am Spencer Sutton and I’ve also got my co-host, Matthew Whitaker with us. And we’re excited because we have Andy Boyum with us. He is the Vice President of Property Management from SFR3, and he’s calling in today from California.

Spencer Sutton:
So first thing I want to say, Andy is welcome. That’s number one. And then number two, man, I’m sorry that you have to deal with property managers all day long, that is a rough job.

Andy Boyum:
Well, thanks. I appreciate that Spencer. And happy to be here with you guys and thanks for the invite. Dealing with property managers, it could be worse than hanging out with you guys for 30 minutes here on a Wednesday. So what can I say?

Spencer Sutton:
Andy, talk a little bit about the name, SFR3. Where does that come from?

Andy Boyum:
SFR, obviously single-family rentals, that one is pretty self-explanatory. The three is a dumb or a stupid play on a couple of different things. The first is we invest primarily in tertiary markets. So we’re not in the primary markets like New York, LA, San Francisco, Chicago type markets. And then we’re not even really in the secondary markets like Atlanta, or Birmingham, or Dallas, or places like that. What we do do is look to acquire areas that are surrounding those secondary markets. So we call them more tertiary markets is the idea there.

Andy Boyum:
And then the second piece is if we want to see returns on our SFR portfolio squared or to the second power, we want to go to the next level and make them to the third power. That’s the joke there. Those are both of the ways the three in the SFR3 came from.

Spencer Sutton:
That’s good stuff and y’all are institutional home buyer and y’all actually buy here at Birmingham. But before we jump into Birmingham specific stuff, just for context, you’ve worked for an institutional buyer that actually went public and you’ve got quite a history of buying houses. And then you actually worked for a platform that sold houses. Can you just give people a rundown of… You’re pretty deeply rooted in the SFR space.

Andy Boyum:
I’ll give the CliffsNotes version here. So I’ve been in real estate for about 20 years, but I’ve been in the single-family rental space for about a decade or that. So about half of my real estate life has been in the single-family rental space.

Andy Boyum:
Matthew, to your point in, during the last downturn that we saw, we can call it 2010 or so, I had actually joined one of the first institutional single-family rental funds called Waypoint Homes. That was at the bottom of the last recession. And when I joined, funny enough, I’ve been working in consulting for a while and saw the buying opportunity, but really thought of it as more of a trade rather than a business.

Andy Boyum:
So my thought going in there was, “Hey, let’s buy some homes for 50 cents of a dollar, fix them up, and then down the road, we’ll sell them for 85 cents on the dollar, make some money and then I’ll move on to the next opportunity.” But somewhere along the line, I drank some Kool-Aid and here I am still 10 years later.

Andy Boyum:
So that was a way point for about four years and started acquisitions, we were buying 500 homes a month in the go-go-go days all throughout the nation. We did acquisitions for a year and a half or so then really transitioned more into the operational space. So now that we own the homes, we got to fix them up, and lease them out, and then manage them.

Andy Boyum:
Saw that piece as well for a couple of years, and then towards the end of my time there, built out the disposition platform. So from buying them, to fixing them up, to operating them, to then selling them, got a good amount of experience. And then Matthew, that group did go public in 2014, I want to say. We spent out with Starwood and became Starwood Waypoint Homes, and now the largest institutional group owns those assets, Invitation Homes owns those.

Matthew Whitaker:
You have a lot of experience buying and selling houses. Talk to me a little bit about buying during a recession. We’re in the middle of COVID world, everybody agrees there’s going to be a recession now, the recovery who knows what that’s going to be. But talk about buying during a recession, some best practices that you found when you were working at Waypoint that you think you’re going to deploy while at SFR3.

Andy Boyum:
It’s a really good question. During any recession, you are going to see buying opportunities, you’re going to see a home that might normally costs $150,000 sell for $125,000 or whatever the numbers are.

Andy Boyum:
Now, that could look like a great deal. Important thing is you want to make sure that you’re not only getting a good deal or discount to fair market value on the buy, you got to make sure that you are going to be able to operate it to an appropriate operating return, which is where folks such as yourselves and other property managers come in. You’ve got to make sure that yes, you might be able to buy it for a discount on fair market value, but does your ability then to rent it out at a level that’s going to give you an appropriate return? The way I’d like to think about this, does the rent shake hands with the price?

Andy Boyum:
You got to make sure that that piece is in place too. And that’s something we learned at Waypoint Homes very quickly. We were very aggressively buying anything that moves, so to speak, but we learned our lesson very quickly and it licked our chops a little bit. We made some bad buys that on paper, we’re getting 50 grand discount to fair market value, but these homes weren’t in good rental neighborhoods, we didn’t have the right partners to help us manage them, things like that.

Spencer Sutton:
Mathew and I never have bought bad rental houses? Have we, Matthew?

Matthew Whitaker:
Yeah, what I was about to say is-

Spencer Sutton:
When he was jumping into Waypoint, he was speeding by in a Lamborghini while we were strung out on the side of the road.

Matthew Whitaker:
That’s right.

Spencer Sutton:
That’s the picture.

Andy Boyum:
Nobody talks about the 95% of the good ones, they talk about the 5% that goes sideways somehow, right?

Matthew Whitaker:
Absolutely. Talk about some disciplines, best practices when you’re buying houses. You often hear people about sticking to the numbers. What are some things that you mentally institute to try to keep yourself disciplined?

Andy Boyum:
I think sticking to the numbers is one, and going along with that is making sure you understand and know what your buy box is. Understanding what kind of risk you’re willing to take on, how much money you’re willing to spend both in terms of the actual home, but then also how much money you might be willing to put in to renovate it and fix it up. And then also, based on your risk threshold, your risk tolerance, how much risk reward are you willing to take on?

Andy Boyum:
Are you looking for a 10% cap rate or a 10% return on your money, but going into that eyes wide open, knowing that the folks that are running that home might be a little bit more likely to move or cause damage to the home rather than willing to accept a 5% return on your money, but understanding that the upside there might be more limited. I think that that is fundamental to anybody looking to invest in real estate in any market, but particularly in a downturn.

Matthew Whitaker:
You are focused now, and we’re going to get into your job in a minute, on operations, but what did you learn about operating a company like this from your Waypoint Home days?

Andy Boyum:
One of the things when I first jumped in that I didn’t really understand was you have to be able to operate these homes. The way that you’re able to operate 300 single-family homes as opposed to a 300 unit apartment complex is through technology. And utilizing that technology, whether that is you as the principal, as the person who’s acquiring it and managing it yourselves, or making sure that your operating partners or property managers have good technology and good systems in place is absolutely key.

Andy Boyum:
You’re not going to be able to operate a portfolio or even two, or three, or four single-family homes without a good either your own technology system, where you are tracking the data and the numbers closely, or partnering with a property manager and making sure that you guys, or that group has the right systems in place.

Matthew Whitaker:
And your next stop, you went to a platform where you got to deal with a lot of individual investors. Talk a little bit about some best practices you saw from some of the best investors that bought from that platform.

Andy Boyum:
After Waypoint went public and spun out, I took a little bit of time off, but then got back together with some of my old colleagues from Waypoint Homes at a platform, a marketplace called Roofstock. Roofstock is an online marketplace that connects sellers of single-family homes and buyers across the nation.

Matthew Whitaker:
And we’re a preferred property manager. That’s how Andy walked into our office one day and we were able to meet. You were on the front lines of individual investors who are probably similar to the people that are listening to this. Talk about some best practices that you saw when you were dealing with the people on that platform.

Andy Boyum:
Correct. So Matthew and even Spencer, we met and worked together. In my Roofstock days, we worked with property managers across the nation. We had a couple of partners in each of the markets we were active in. So I was out there crisscrossing the nation and meeting the best in class operators making sure that we were partnering with those best in class operators in each market, so that when we are making introductions, making those referrals to the Roofstock investors, we wanted to make sure that they were going to have a good experience, a good handoff, and be in good hands post-close.

Andy Boyum:
So to your question, Matthew, some of the things that are more power users, or more successful investors that Roofstock really did was have a game plan, and have a playbook, and then stick to it. Understanding that not 100% of your buys are going to go exactly to plan. We were joking around before, you’re going to remember the 5% that go poorly rather than the 95% that are bopping along.

Andy Boyum:
But sticking to your guns and sticking to your playbook. If you are looking for a 20, 30 year investment, don’t worry about the three months of vacancy that might happen here and there, but stick to your guns and have a playbook. But what I like to joke around is have a playbook but write in pencil.

Spencer Sutton:
It’s good.

Andy Boyum:
You’re going to have to make zigs and zags here and there. But as long as you are focused on whatever your longterm term goal is, whether that’s retirement, whether that’s “In five years, I want to make some money and then flip that into something else,” just as long as you keep your eyes there, you’ll be all right.

Matthew Whitaker:
Talk about any mistakes that you saw people making that were newbie mistakes that you think people can avoid, who haven’t bought their first house yet.

Andy Boyum:
How long is this podcast again?

Matthew Whitaker:
We’ve been at the top 10.

Andy Boyum:
Jokes aside, the biggest one is around repairs, and maintenance, and renovation in particular. When you first buy a home, you’re making a big investment in a home. And a lot of times you’re going to want to not add to that capital outlay, that money out of pocket by renovating the roof, or putting in a new air conditioner or whatever it is. You might be able to get away with that for a year or two, but down the road, it’s going to cost you that same amount of money, if not more, than what you could have spent up front to just fix it and then just set it and forget it. You’re going to have lots of tenants, you’re going to have more headaches to deal with down the road.

Andy Boyum:
So I would say number one, just understand that there will be construction expenses and repair maintenance expenses. It’s not a matter of if there will be, it’s a matter of when they will hit. So just making sure that you’re budgeting for that and understanding that.

Andy Boyum:
Along those same lines, I would just say, knowing that there is some variability in these homes. Yes, you might sign a lease, and yes, it might be a great tenant for two, three, four years, whatever it is, but at some point, they’re a renter and they’re going to move out. So you got to be sure that you understand that you will have some vacancy costs and make sure you’re budgeting appropriately so that you can cover your mortgage when there is a vacancy. Even though you might not be getting rent income, your bank or your lender still expects to get paid. Making sure that that is budgeted in there as well.

Spencer Sutton:
Andy, you’ve been around the country, you’ve met with a lot of property managers, done probably a lot of due diligence on property managers. What are you looking for when you do this due diligence? What are the signs of a good, reputable property manager? Because people that are listening to this podcast, they may be buying in other markets. So what are some of the things that you’re looking for?

Andy Boyum:
It’s a really good question Spencer. There are a handful of things. I put them in three buckets. The first is just fundamental. These are compliance or legal-related issues. Making sure that they have the appropriate license to do business in whatever state they’re in, that varies by state, by the way, some you need a broker’s license, some you might not need any license at all, but understanding that.

Andy Boyum:
I would say number two is operationally, how are they set up? One of the things that I always wanted to double check on is, “Hey, show me a demo of what property management software you use.” And if they pull up an Excel spreadsheet, that’s probably not somebody who’s going to be a professional partner that you want to work with.

Andy Boyum:
So making sure that they have the right systems in place, and then also, you want to understand what their policies are. Property managers really sit in between, they are the client of the owner, but they’re really the owner’s representative when they’re interacting with the tenant of course. So that property manager layer needs to be responsive to both.

Andy Boyum:
So they need to be responsive to the tenants needs. I’m sure you guys have heard the old adage, big smile, sharp teeth. That’s how property managers should deal with tenants. And you want to give good customer service, but if it’s the seventh or eighth of the month and the rent is not paid, then that’s where the sharp teeth come in.

Andy Boyum:
But then also, understanding some of the soft skills from property managers too. How are they going to interact with the owner? What is the normal communication that I as the owner should expect? Personally, the way that I like to interact with my property managers is as long as the numbers are looking good, and the metrics are looking good, we don’t really need to have a check-in. I don’t really need to hear from you, but if something is going wrong, I want the property manager to be proactive and say, “Hey, Andy, we’re having some trouble collecting rent,” or whatever it is, “and here’s what we’re doing,” that sort of thing.

Andy Boyum:
There’s some quantitative stuff, some fundamental stuff. In that bucket, I would also put what’s their overall occupancy rate, what is their average rent collected versus rent charged, things like that. But then there’s the more qualitative stuff where it’s more, what’s your customer service experience like? And things like that.

Matthew Whitaker:
I want to jump into your next stop at the institutional buying. And one of the things I want to zoom out before we zoom in on what y’all are doing and SFR3, I want to know how you think that institutional capital in our space has changed the buying environment, especially as it relates to the smaller landlord, a smaller owner.

Andy Boyum:
It’s a really good question. The institutional space, or the private equity money, or things like that, keep in mind, out of the whole 16 -17 million single-family rental homes in the United States, that group only represents between two and 3% of that entire housing stock.

Andy Boyum:
So keep that in mind. When we’re talking about the institutional folks, yes they’re out there, yes they have deep pockets, yes they have probably more sophisticated technology than a lot of people. But that said, in the grand scheme of things, they are still a very small fish in a big pond. So I would just caveat that number one.

Andy Boyum:
Number two, and I’m probably a little biased here, but I think it’s a positive for the industry as a whole, just given that they are bringing in that level and that amount of capital, two neighborhoods and two major metros. And this is what we’re doing at SFR3, we’re purchasing homes that are either distressed or need a lot of work, a lot of value-add renovation work. And we have the deep pockets and the ability to go in and take on a $30,000 construction job, whereas, a mom and pop or a retail investor, they might not want to spend $30,000 to fix up a home that might only be worth 75, things like that.

Andy Boyum:
I would say institutional overall, probably bias, but overall a good thing for the industry, but keep in mind that the industry is much, much bigger than just the handful of institutional investors out there.

Matthew Whitaker:
One institutional investor I’ve met with said that, and I thought this was really interesting, that he felt like institutional capital had created a new floor that where something like 2008, 2009 could not happen because there’s so much capital out there that’s willing to buy these homes before they get the 2008, 2009 real estate prices. It created a new floor so that it supports the ecosystem, the real estate, the housing system. Any thoughts on his thoughts?

Andy Boyum:
I would agree with him at least in our lifetimes, knock on wood, given current circumstances and uncertainty, but I don’t see another home price drop, in some markets, what was the 30, 40%, home prices fell. There is that backstop, somebody is going to catch the falling knife. And yes, I think you’ll still see real estate prices fluctuate. That’s just the way that the market is, but I don’t think you’ll see things to that level.

Andy Boyum:
One of the things that was proven out in the last cycle, the last downturn was that while you did see the home prices in some markets falling, 30 – 40%, nationally, rents actually never went negative. In some markets they did, of course, but nationally, it never went negative, it either just popped along that zero to 1% or was just flat.

Andy Boyum:
Now, once people realized that and the institutional money came into the space, it really made single-family rental, it was the birth of this new asset class, at least the institutionalization of the asset class. Because if you have rents that are staying flat and prices are plummeting, there will be a point, call it a 10 – 20% drop in prices or less, where it makes a lot of sense for an institutional investor to go in there and really start buying aggressively.

Matthew Whitaker:
And now you’re working at SFR3, talk a little bit about the markets that y’all are focused buying.

Andy Boyum:
Just joined SFR3 actually a few weeks ago from Roofstock, and we’re an institutional investor. We actually have funds, we’ve raised some capital ourselves and then also raised some debt, who our strategy is, like we’ve been talking about, buy, renovate, lease and hold, and manage.

Andy Boyum:
We are focused primarily in the Southeast markets. Our biggest markets are in South Carolina, Columbia, Greenville. Then we go into Georgia. Back to our thesis around the more tertiary markets, we don’t buy in the Atlanta metro, but we’ll buy around it. Augusta, Columbus, Macon, areas like that. We’re in the Alabama markets, Birmingham, Huntsville, Montgomery. And then a portion of the portfolio is in the Midwest as well. Cincinnati, Louisville, and then more recently, St. Louis, Kansas City and Indianapolis.

Andy Boyum:
So we’re about 1800 doors or so across those markets, and we’re anticipating a pretty strong buying opportunity upcoming, but even before that opportunity rose given the COVID outbreak and situations we’re dealing with around that, we were buying between 100 and 150 homes a month or so across all of the markets. So we’re a very aggressive and active investor.

Spencer Sutton:
Do you have a target size you want to get to, how many doors you’re looking to buy?

Andy Boyum:
We like to set stretch goals. Our goal would be 10,000 homes by the end of this year. Now, we would have to drastically ramp up the buying pace of course, but more realistically, probably 10,000, ideally by the end of 21. So we have very aggressive goals and we’re assembling a really strong team, and we’re confident we can get there, but that’s the idea.

Andy Boyum:
We’re very much focused on the workforce housing segment. So these are going to be, compare it to a median home price in Atlanta or a major metro, we’re going to be below the median, both on the price point and the rent point.

Andy Boyum:
So we fundamentally believe that there is a shortage of housing, not just sitting here in California, but all throughout the nation, especially at that more affordable workforce type housing levels. We really believe that if we can provide newly renovated homes in some of these areas at an affordable price point, we’re very confident in the demand for homes that fit that box.

Matthew Whitaker:
Are you doing only homes that need renovation or are you also doing any build-to-rent?

Andy Boyum:
We are not doing build-to-rent, at least not currently. The model still is more the value-add, opportunities is what we’re looking for. We’re very confident in our ability to go into these more suburban tertiary markets with our construction team, and go in and invest a significant amount of money into these homes, which allows us to then play or operate in a pool or a sandbox where those larger institutional groups just aren’t active, or the retail investors, because they probably might not be willing or want to take on a large construction job, whereas we see that as an opportunity.

Andy Boyum:
So to answer your question, Matthew, not currently, and that’s not to say that the model might change down the road, but our current model is more of that value-add in those more suburban and tertiary markets.

Matthew Whitaker:
Talk a little bit about Birmingham now. This shows specific to Birmingham, you guys are already buying and operating here in Birmingham. What is it about Birmingham that you like? You’ve obviously been here a number of times. So from the outsider’s perspective looking in, from somebody from California, looking at Birmingham, tell us the positives.

Andy Boyum:
There’s a ton of opportunity in Birmingham as a whole, also the other metros, Huntsville, Montgomery as well, but it’s one of those markets, when we talk about the areas where the larger institutions have not gone into, at least not with any scale, that is certainly one of the things that attracts us there, is just the opportunity for us to buy and buy attractively in areas that fits our box.

Andy Boyum:
The price in rent points make sense to us as well. Our mission really is that more workforce housing, not necessarily core Birmingham, but the areas around it are really attractive to us for that reason as well. And frankly, it’s just blown a little bit under the radar, at least nationally, not so much more recently, but for a while there it really did.

Andy Boyum:
I first visited when I came out to visit you. And it’s funny, I was at the hotel bar having a beer with one of my colleagues and we were talking to the bartender and they’re like, “Where are you from?” And we’re like, “California.” And he jokes. He’s like, “Hey, where’d you make a wrong turn?” And I’m like, “I meant to turn right in Oklahoma.”

Andy Boyum:
But jokes aside, it’s just one of those places that historically, I don’t think the national investors have spent too much time uncovering what Birmingham has to offer. More recently, I think you’ve seen a lot more attention and publicity, again, more nationwide publicity. So the cat’s out of the bag a little bit, I think, but there’s still a lot of opportunity to be had.

Matthew Whitaker:
From somebody who’s investing from out-of-town, what advice would you have for them who want to invest in Birmingham or any out-of-town market?

Andy Boyum:
The first thing would be, pick up the phone and talk to people such as you and Spencer. Honestly, that’s one of the things that we did back when I was buying at Waypoint, that certainly as you guys know is one of the things we encouraged at Roofstock as well. And one of the things that we’re doing at SFR3 is we have very strong, and robust, and detailed data systems in the way that we look at our acquisition, opportunities, and potentially buying properties.

Andy Boyum:
That said, the way I like to think about it is on a pendulum. One side of the real estate pendulum is the old way of doing things, signing on dotted lines, pen and paper, shaking hands, kissing babies, that sort of thing. But then, you can swing it from that to more fully automated tech, all the AI, all the buzz words you want to talk about, where on that continuum do you fall? Where do think you can swing it a lot towards the tech side? But that said, you still don’t have the knowledge that people who are local to that market are going to have.

Andy Boyum:
Our data and algorithms might say that one, two, three main street is a good property, but you guys might know that there’s a gas station across the street, or there is big power lines in the backyard, or something like that, that we’re never going to be able to see. So that is certainly the biggest thing that I’ve learned working in these remote investing areas, is you still need to pick up the phone and talk to some of the market experts.

Spencer Sutton:
I think that’s a great point. I had a conversation with an investor three or four months ago, he called, he was asking about this particular house in a part of town that we would recommend that people buy in. And he asked me some specific questions about it. I didn’t have the answer, so I called a really good friend of mine who knows every street in this area. And he was like, “Hey, yeah, I’ve looked at that house before.” He said, “The problem is right outside the door of that house there’s 20 apartments and there’s people loitering all around.” So we were like, I gave him that information that helped him, he would’ve never known that had he not called. So that’s a great point, pick up the phone and call.

Andy Boyum:
It’s great.

Matthew Whitaker:
Well, one of the things about property managers is we don’t want to manage that stuff either.

Matthew Whitaker:
We’re not trying to create a transaction, we really don’t want to get into a situation where we’re having to manage homes that are problems. Our interests are very much aligned with our owners.

Andy Boyum:
Yeah, exactly. And I was just going to say, like for Birmingham example, there could be really, really good pockets that you guys would know being on the ground that, this area is up and coming or it’s seeing a lot of new investment. We think it’s a great opportunity to buy, and you can probably, maybe get a rent that’s a little bit higher than what’s currently being seen in the markets, or on the flip side that you can say, that zip code or that broader community is a great community. But Spencer, to your point, that specific house or that specific street will be hard to rent for X, Y, and Z reasons.

Spencer Sutton:
And the problem would have been, they’ve come with an expectation to get X in rent, and then we would have had that market on the house, showings would have languished, we would have gone back with the price reduction. It wouldn’t have been a great relationship, Matthew’s point. We want to have a great relationship with these owners and delivering bad news about a bad buy is not fun for us.

Andy Boyum:
There are no bad buys though, right guys? Come on.

Matthew Whitaker:
I’ve done a few.

Spencer Sutton:
I’ve done several.

Matthew Whitaker:
Well, Andy, thanks so much for your time. I think this is a great spot to wrap it up. And super excited to see what SFR3 is going to do here in Birmingham and in some other Southern and Midwestern markets. And I just really appreciate your time and really appreciate you giving back to the real estate community.

Andy Boyum:
Appreciate you guys having me on. And next time I’m on your way, I’m going to look you guys up and we’ll reconnect in person once all this COVID dust settles.

Spencer Sutton:
When we get to get back on planes.

Andy Boyum:
That’s right.

Spencer Sutton:
All right. Well, thanks everybody for joining us on this episode of The Birmingham Rental Investor. If you haven’t subscribed, go ahead and do that now, anywhere you listen to podcasts. We’ll see you next time.