Rent, Build, Repeat: Why Build-to-Rent is the Future of Housing | Jake & Gino Podcast

[00:00:10] Hello, everybody. It's Jake Sanzano, host Jake and Gino Podcast, here with my co-host, the Multifamily Mentor, the Coach of Chef, the Father of Six, the best-selling author, the G Daddy. Gino Barber. Gino, how's it going? Jake, I'm doing great, brother. How you doing? Always making it happen, big man. Today's guest has a real estate career that spans over four decades. Gino, I think that's 40 years. It's a long time. Currently serves as CEO of Quinn Residences, a real estate operating company where he continues to use his expertise to create inclusive communities that enhance

[00:00:41] resident lives. Sounds like the Chick-fil-A of Build-to-Rent? Build-to-Rent? Which is it? I don't know. So without further ado, Richard Ross, the boss. Welcome to the show. Thanks, guys. Thanks, Jake. Thanks, Gino. Glad to be here. Thanks for having me. Hey, it's our pleasure. So before we got on, we did a podcast and Gino was trying to ask all these questions. And I want to hear the real story. So five years ago, you got into Build-to-Rent. Tell us a little bit about your real estate career before that and then that transition, please.

[00:01:10] Sure. So I've been in this business 40 years, first 10 as sort of a financial guy, and then got into real estate in the early 90s when all of the big real estate companies you know today, the big public companies that own all, what, half the apartments in this country were formed. And so my background is both public and private operating, real estate operating companies from multifamily apartments, if you will, and then grocery anchor shopping centers.

[00:01:40] And I've been involved, as I said, both at the public and private level. The Build-to-Rent thing started almost five years ago when a guy I had run a company for approached me and said, hey, I've got this business plan. It's called Build-to-Rent. I need somebody I know and trust to run it for me and build it, build it up. And I said, you know, I'm 60 years old. I'm kind of thinking about retirement, but send me the plan. Let me take a look.

[00:02:10] And the plan was compelling. All the things we're going to talk about, I'm sure, in the next few minutes here supported this business plan. Shortage of supply, demand for millennials. This is all pre-COVID, right, pre-pandemic. And it was a very compelling business plan. So I said, you know, I'm in. What made it compelling?

[00:02:31] All the things that I saw in the early 90s in the multifamily business, meaning a shortage of supply of homes, an aging demographic. Right back then, it was people coming out of college and, you know, the young millennials. So you get the newbies and the oldies there all in one, right? Exactly, exactly. And so the aging millennials, people wanting to get out of a two-bedroom apartment into a three or four-bedroom home, which is what we deal with exclusively.

[00:03:00] That they don't have to take care of. Right. Don't have to take care of the maintenance-free lifestyle. And so all of that was very compelling. And it was also an opportunity, frankly, to build something literally, pun intended, from the ground up. Not a lot of people were doing this exclusively, right? Purpose-built communities for rent.

[00:03:21] A lot of people, a lot of companies, big companies today, public companies, have done what we call the scattered site business, meaning buying homes off the MLS, buying homes from realtors, buying the last 20 homes in a subdivision from a builder, and renting those out. This was a more purposeful business plan, meaning we are going to build an entire community separately amenitized, meaning its own amenities for rent, where every home is for rent. And that was the gestation of the business.

[00:03:51] Richard, what was the risk in the business plan? So the risk is obviously you're going to build these homes. You're going to build a 200-home community, and you can't rent it. Or you can't rent it for enough, right? You can't rent it exactly for enough. Obviously, I have investors. They need to make a return on their investment. And that was the risk. Although I will say, guys, the downside of that risk was if it didn't work, you just sold the homes at retail, as we call them. So that was sort of the downside.

[00:04:20] What's the worst thing that could happen? You sell the home. The worst that can happen is you don't get the- No, no. I'm sorry. That was- I always ask myself that question. What's the worst? And I answered it. So sorry for you being- No, but you're right, Jake. That was the downside. And I think that was the attraction to investors to put up money for this sort of new idea in real estate. I mean, real estate's pretty arcane, stodgy old business.

[00:04:44] And to have a new industry growing up, really in the last 10 years, but certainly didn't get legs until the last five. And so look, when we started, as I said, pre-pandemic, that was the business plan. Then the pandemic comes in, and you basically pour gasoline on the business plan. That's better. That's better. Jake, I'm going to push back on both of you because you guys are both coming at it from being experts. I see the risk as you getting into this project, and all of a sudden, you don't move quick enough.

[00:05:14] And all of a sudden, labor and material and supplies exponentially get a lot more expensive. And you're like, oh, crap. And people forget about what happened in the other recessions when building just stops, slows down, cost of capital gets a lot higher. You're not looking at a lot of these other variables that I said I had my Will Ferrell moment 10 years ago when somebody brought me this business plan. And I'm like, that's the stupidest idea I've ever heard of. And I see all these other risks when you guys are just saying, hey, we just sell the homes. Now, Richard, you've been doing this for decades. This is not for the faint of heart.

[00:05:43] This is not for somebody who just started two years ago and doesn't have any type of team built out. You've got infrastructure. You've got experience. You've got cojones. You've got a lot of stuff to make this work. This is not something that's very simple to pull out and go, I'm going to buy this land at $10,000 a lot. I'm going to put all this infrastructure in. I'm going to build these homes. I'm going to have to lease this whole thing up. This is like a three to four year project. Am I wrong in saying that or am I overstating that? No, you're absolutely right, Gino.

[00:06:12] To your point, it takes from a shovel in the ground, raw land, to a stabilized community, meaning your occupancy is now at 90%. So you've leased 90% of them. It takes about three years. And as you point out, during the pandemic, we did have incredible costs. So you couldn't get garage doors. You couldn't get windows. Costs went labor went way up.

[00:06:35] So we had to have the cojones, as you say, but also the capital to withstand those huge spikes. Construction costs have now leveled off. Supply chain has worked its way out. But obviously now we're facing really high interest rates compared to when we started, when money was essentially free. So there are challenges. There are risks. And we just have to weigh those. And being a well-capitalized long-term owner.

[00:07:03] We're not in this to build a community, lease it up, and then flip it. We're in this for the next 10, 20, 30 years as an ongoing enterprise. Man, Jake, I've got some other questions. Do you mind if I keep jumping in here? Because as Rich is talking about this, why are there developers out there that do all of this work? And then after three years, they've done it. They've got this goose that's laying these eggs, and they decide to flip out. Because I know the vast majority of them do that, whereas you're holding these assets.

[00:07:33] Yeah, I think the mentality has been, and look, we can go back during COVID or even pre-COVID. You built one of these communities. You're in it at a good cost, right? You bought the land cheap. Land is not cheap anymore, but back then you could get land cheap, as you mentioned. You build this community. You lease it up. And I won't get into a ton of math, but if you can make like a 25% profit, which a lot of these guys were doing during sort of 22, 21. Because they bought the land cheap, right? Right.

[00:08:03] They bought the land cheap. They built the home at a reasonable price. They leased it up at rents that are pretty competitive, particularly during those days. And, you know, they can make a 25% profit. They'll get out. Keep the machine going, right? A lot of these developers, their machine is build, sell. They don't have a management machine, so this may not be sustainable once it – so I think that's where some of the issue comes in as well, right? Right.

[00:08:32] And managing these things is not the same as building them, right? It's a completely different business. You're trying to keep your resident happy. The number – right, if I don't get a rent check from my resident every month, there is no business. So keeping that resident experience, keeping that resident happy keeps them writing checks. That's a completely different business than just building the home at a reasonable cost and selling it. So that's been the history of this business in its early stages. Now, that's changed.

[00:09:01] You can't build and sell at that kind of profit anymore. So that has put sort of the kibosh, if you will, on a lot of money. What else has changed, though? Is it because of just the land cost? Is that what's killing it? The land cost is much higher, considerably higher, particularly in our markets, which is the southeastern U.S. Land's just scarce. Home builders, retail sales guys, guys who are building homes and selling them at retail, if you will, are paying more and more for lots.

[00:09:29] Because there's still a huge shortage of housing in this country. So that's one thing. And then managing these assets, these homes, is not easy. It's not for the faint of heart. It's a completely different business, as I said. So that has sort of put the kibosh on a lot of these buildings. I just have to – you've been in the business for so long, and you've seen builders come in, make a ton of money, then lose it. Make a ton of money, and then lose it. Sounds like Mike Tyson. At some –

[00:09:59] Well, he made a ton of money and lost, but he didn't lose the money. Well, he's up there. But at some point, don't they say to themselves, I've got cost segregation here. I've got a lot of tax benefits here. I've got an asset that I've got a good cost basis in. Let me go find a Jake and Gino or Richard to partner up to manage these assets. I don't want to manage. Let me partner up with somebody, and I can go find another one and build another one, do what I'm really good at. But give away piece of that pie. Are they starting to do that now, or was it not even a thaw in their mind?

[00:10:28] Because if I'm going to spend the next 36 months of my life building these homes and doing all that work and making 25 percent, and then praying that interest rates and the economy doesn't go sideways and hoping I can do it again, there's a lot of risk in that for me. There's a lot of work and a lot of heartache if that doesn't go well. Yeah, you're absolutely right. And to your point, when we started in this business, we didn't have enough homes, enough scale. So we engaged what we call third-party managers.

[00:10:55] We had other companies managing these home for us. I will tell you in my four decades, as you like to chide me about. It was in the show notes. Don't blame us. It's okay. It's okay. I'm used to it. I've learned that no one manages an asset better than the owner, right? Because it's my asset. I want to make sure it's taken care of. And I'm a long-term holder, so I'm going to make sure I repair that home, I keep it maintained, so that 30 years from now, it's in good shape.

[00:11:23] And so eventually, we internalized our management. And so I think if you're a developer or an owner, and even if it's one community, look, there are smaller owners that own 50 homes in a community, and this business is viable there as well. Beautiful. You have to supervise, right? Whoever's running that operation for you. But it is an opportunity even for the sort of smaller investor.

[00:11:52] Richard, I'm down in the southeast. We're in the southeast as well. Can you give me some metrics as to what you're trying to build? The maximum is a three-bedroom, two-and-a-half bath? Are they townhomes? Do they have garages? Do they have amenities such as pools? Is it high-speed internet? Is it electric chargers? What are you looking for? What does the actual resident base want right now? So all of the above. We deal only in three- and four-bedroom homes.

[00:12:18] We're probably – we're at 5,200 homes across 35 communities today. Half of those are townhomes, and half of them are what we call detached. Typically, every home has a garage and a fence backyard. That's what residents want. Talk about the fence. A lot of pet owners, they just want it? We have more residents with pets than children. Our average resident age is somewhere between 33 and 34 years old. Are these chain-link or vinyl just so we can create the image? These are actually powder-coated steel.

[00:12:50] Again, maintenance. Maintenance-free, right? Wood fences you've got to stain, and it's harder to maintain. This is just a little anecdote. We also put the gates on the side of the home. For the little lawn mowers? Right. Because we – that's the other thing residents want. They want a maintenance-free lifestyle. They don't want to mow the lawn. They don't want to have to unstop the toilet. They just go on their little app, call us, and we're there to fix the toilet. The other thing I will say is flexibility.

[00:13:21] Meaning, if I want to live in Jacksonville for three years because I have a good job there, but then I might need to move to Denver or I might need to go to Dallas for a job, for a life change, marriage, divorce, child, whatever. I can – at the end of my lease, I can move. If I own that home, it's a little bit more problematic. Sorry, I'm geeking out on the fence. We've got to stay there for a minute. Okay. Because we're in management and stuff like that. So did it – talk about the evolution of the fence.

[00:13:48] Was it you gave one out and you saw a premium or it just became something that people love so much? Like talk about – because maybe you started out with all these fences, but I have a feeling that it evolved. No, we piloted a community, I'll say. Right. And our – we started with smaller communities. Our first – Give me an idea of how many – The first 10 deals were probably 100 or less homes. Now our sweet spot's 200 just because of economies of scale, right?

[00:14:17] But with the fencing, we piloted it at a community and, yes, we learned that people will pay more rent. Whether it's $25, $50 on average, it's probably $100 a month more. So they can let the dog out in the back or the – And it's just built into the rent. It's not like a fee added on, right? Yeah. It's built into the base rent, if you will. Yeah. The other thing people really want is technology. So every home we build now has a smart home package.

[00:14:45] And that means, you know, your typical, right, thermostat. We put a ring camera on the front and back doors now. Electronic locks, no keys needed. We put leak detectors in every home. We put a leak detector next to the washing machine, under the kitchen sink, and next to the water heater. So that the water heater gives out, as you know, as that stuff happens, we get an email and the resident gets an email as soon as it happens.

[00:15:13] So they're not coming home from work and their house is flooded. We put motion sensors in the houses when they're vacant. You guys are from Florida. You probably read over the last couple years this whole trespasser. They call them squatters. We call them trespassers because they're breaking the law, where people get into your rental home and sort of hijack it. And so we put – when a home is vacant, we have a little disc in the home that tells us if there's movement in there. And that way we know that somebody's illegally – And it zaps them too. It's a laser. It's the laser combo.

[00:15:43] Well, that's coming soon. So those are the things, right? Technology, fence backyard, garage is critical. I love garages. I tell people when we drive through our communities, when I drive through on a Saturday and, you know, people are home, the garage doors open, they don't park cars in these garages. They're gyms. They're man caves. Yeah. They're storage units. They're man caves or she sheds or something, playgrounds.

[00:16:12] They're not – Well, there's a 57 Chevy in there and they work on it. I've seen that too. A hundred percent. When that happens, they're not moving after a year. Yeah. The garage is key to this strategy, I believe. Very key. And we have some homes without garages and they just don't get the rent that something does with a garage. The other thing I'll tell you we're exploring is two- and three-year leases with our residents so that you can sign up and know you have this rent for the next three years.

[00:16:43] Yeah. And, you know, that reduction in turn costs is important, right? You know this business, Jake. Like, you're speaking my line. As long as it's not 2020 going into 2021 and, you know, all of a sudden you're underwater or something because of the inflation. But I like it, right? So what's critical to this business in keeping both turn costs and bad debt down is proper vetting of your resident, right? And we do a pretty-

[00:17:07] No, I'm just meaning if you have like an inflation run like we saw and all of a sudden, you know, you were running for, we'll just say a thousand. And now that becomes a break even and you need to get 1200 or whatever for the unit. You know, that's the only risk there, right? Correct. Yeah. Richard, can you talk a little bit about the demographics? Because I was looking at median incomes of people who rent these homes. I mean, there are six-figure median incomes on average for a lot of these communities. Can you talk about the ages you're looking at and also the median incomes? Yeah.

[00:17:37] So our average rent somewhere around $2,100 a month. And our average rent to income ratio is 5X. So that means these people are making five times their rent. Multi-family, you know, typically a third is good, right? If your rent's a third of your cost. So we're way ahead of that curve. These people- What about the cost to build though? So if you're 2,100, what's the average all-in? Well, I can't give you a total secret sauce here, Jake,

[00:18:05] but I will tell you our average home has gone up over the last three or four years, for sure, is probably in the neighborhood of $275,000 to $325,000. And that gives enough of a spread where you guys are feeling good at the $275,000 with a $2,100 rent. Correct. Yeah. And it used to be $275,000. It's more in the low threes now. Having said that, we build these homes for long term. These are starter homes, right? Three and four bedroom, granite countertops or solid surface countertops,

[00:18:35] could be quartz, stainless appliances, the tech package, all of that. But we build them to be durable. There's no carpet in our homes. We do not do carpet. We do solid surface flooring, even on the stairs. Well, is that LVP or are you talking like tile? It's LVP. In Florida, it might be tile, right? Okay. Okay. But it's typically LVP and then they can put their throw rugs down or whatever. Is there a quality risk there as well? Because that's the other thing when we were talking earlier, I'm saying, how big can you go in the home before there's a risk there and you're not going to be able to get a large

[00:19:05] enough population that can afford that? And then is there a quality risk as well, which is essentially costs, right? Where you start to get to a point where it's like, this is getting uncomfortable from a spread perspective. Yes. I mean, when you talk about the size of the home. So it's all cost related, right? So like what the average size of your home is 2,000 square feet, 1,800? What are we talking? 1,800. 1,800.

[00:19:31] But like if you went to all of a sudden, just per se, sorry, if you went to 2,100 and then there's more tile, there's more granite, are we talking brick exteriors? Like all of this starts to throw dollar signs off and then you might get a little uncomfortable because the price of the home is now 350, but your rent is being capped at 21 or 22 or something. That's where I'm trying to get my head wrapped around. And I will tell you, you know, anything over 2,000 is we have 2,300 square foot homes. They're too big.

[00:20:01] They're too big. Say that again. Say that again. 2,300 is too big. It's too big from both from a cost perspective. And a demand. And you're right. And demand. Like people now want a little bit more compact, more usable space, more open space. In other words, that third bedroom. And the affordability. Right. I mean we're today, I'm going to look at some stats here.

[00:20:23] Today we're somewhere between 30 to 40% less to rent a home from us than to own the same exact home. And that's a great competitive advantage. Right. Huge. And you got to keep that in mind when you're talking size and cost of fixtures and things. Right. Yeah. Right. And that's what's been driving this business for the last, you know, four or five years. Historically, renting's been about 15%. I'm talking like the last 50 years.

[00:20:49] So there's a market today where renting is considerably cheaper. And I'm talking all the costs of rent. So that's the maintenance. That's the property taxes. That's the insurance. All the things that you face. Yeah. It's a big deal. What was it like for the maintenance guys going into this tech package world? Because you got guys that are, okay, we can change, you know, the water heater. Light bulbs, AC filters. And all of a sudden you're giving them these ring things with logins. They must have wanted to kill you.

[00:21:19] So, yeah, but it's just training, right? We spend a lot of time and money training these guys. Hey, don't just brush over this, all right? You know, you take a 16-year-old guy that's been doing maintenance his whole life with water heaters. And you tell me, you need a login now. You're going to start troubleshooting the tech. It's just training. Like, come on. It's not that easy. We know this. Well, it is. They all have iPads. They're used to using an iPad. We got 80 guys on staff here. And I'm going to tell you right now, it's not going to be that way for all of them when we get to this point. We'll get there. We'll do training.

[00:21:49] But I'm just saying, like, you know. It is all about education and learning how to use the technology. The technology is provided by a third party. So it's a package, right? Comes in literally. The builder gets a box from this vendor and they teach them how to install it throughout the house and then maintain it. Yeah. Right. Hey, I can almost hook up a ring camera. So I know it's reasonable. And there's a path forward. Well, you got some headphones on. Well, so you know what the greatest thing about these headphones is? So I have problems with them.

[00:22:18] Like all this stuff all the time. Like something's not working. And so now what I do is I test every connection before I get it. And I hear the humming. And I know, okay, I'm good. Okay. And I did that today. So, you know. So you're no different than my maintenance guy, right? No, your maintenance guy would have picked up on that a lot sooner. Okay. Maybe so. But it's a good point. Let me ask you a couple of questions about the communities themselves. Have you ever bought a community where you have like 200 lots and you've sold some lots to limit your downside risk and get some capital back?

[00:22:47] Or you don't do that? Not as a matter of practice. But I will tell you during the early pandemic days when costs were going up like hourly, you know, lumber was ridiculous and you couldn't get a garage door. And yet builders, home builders were selling homes like crazy. This is, I mean, they're selling homes very, very at a healthy pace today. But remember when interest rates were 3%, those guys couldn't build enough homes.

[00:23:16] So yes, there are one or two deals where I'm just going to make this up. We had 150 homes and the builder was, we contracted, you're going to build this home for $250,000. And now he's realizing, oh my gosh, I'm going to lose money because of the increase in cost. So we said, you know, we're a good partner. We want, we do a lot of deals. We work with a lot of builders. And we said, fine, we'll give you 50 lots back. You can sell them at, build your home on there, sell them at retail.

[00:23:44] And you know, that'll help you get some of your costs back. Did you cut those out for a new survey for financing purposes? Yes. Yes. Let me, I had another question about the whole, the whole development. As far as going down there, how do we take care of this supply challenge that we have? I mean, how are you finding more land to build on right now? Because that seems like there's a risk. Everyone's talking about, we got to get rents lower. The only way you get rents lower is by building more, by increasing supply.

[00:24:14] Are you having problems finding land at reasonable cost to build right now? Yes. I mean, that is the single largest impediment to my business and even to the, to the big home builders is finding available land to build that you can get at a cost that, that sort of makes sense. What do you like from a per unit perspective on land costs? I mean, I'd like to be in a lot for, you know, it depends on the market.

[00:24:40] Obviously Florida is different than rural, you know, than Charlotte, than Raleigh, but on average, let's say anywhere between 60 and $80,000 of what we call a finished lot. So a lot that's ready. A lot that's ready. What about raw land? We don't really deal in raw land. You get the infrastructure and then you go. Right. We only deal in entitled land. It's got to be entitled zone for what we want to do.

[00:25:04] Now we have a very unique credit facility that allows us to buy the land, work with the developer, right? To, to once he's got it entitled to do the horizontal, right? The site work as we call it. So we can partner with builders and developers in, in helping them at the beginning of the cycle. So they don't have to risk their capital. Right. Word to mother. You're, we're talking about materials.

[00:25:30] Have you since, you know, uh, we'll, we'll call it COVID look to more readily, readily avail. And maybe you always have, but I'm thinking readily available products that are typically on the shelf. Um, you know, so it's standard size windows, like 36 inch windows, et cetera. So that if things go sideways again, there's less risk in, and the products that there are more readily available. You're, you're going to have access to those. Yes. Without question. Or have you always done it?

[00:26:00] Or was it a transition? I guess. No, that, that was a learning that we, you know, we've learned a lot of lessons, right? In any new business, you, you learn what works and you learn what doesn't that. And I will tell you, as I mentioned, we build a durable home. We've mentioned the LVP. Hardened asset, Gino. We, we use really good paint. I won't mention the provider, but it's, it's a really good quality paint. And we do two coats of paint on every wall. And the entire community is the same color inside.

[00:26:28] So that when we do have to turn a unit, one, you can, what are we talking? Chantilly lace? Chantilly lace? No. Off eggshell white or some sort of, sort of. Oh, dude. It's definitely, it's definitely not that. It's way more foo-foo of a name than that. Come on, dude. Right. We're talking to a builder, Gino. This is extra refreshing. But unlike a starter builder, you know, builder starter home where they just throw some cheap paint up there because they sell the home and they don't have to worry about it. Yeah.

[00:26:56] We consider, right, having to, what we call, instead of painting corner to corner, when you turn a home, you can touch up because you've got two coats of really good paint and the paint's consistent throughout the community. So those are the kinds of things we've done. As you said, standard windows, standard appliance package, all of that goes. Probably concrete out back, like you have a concrete pad or something for the deck. Yeah. Typically a concrete, but no slider doors anymore. Yeah. No sliding doors. A maintenance nightmare, a security nightmare.

[00:27:25] We typically try for, you know, a fixed glass pane and then a sort of a French, half a French door kind of thing. Good pickup there. That's smart. Yeah. No, we, you know, essentially we're moving in the direction that you're at. We started with garden style apartments and we've not exclusively gone to, but I would say the bulk of our, the newer stuff that we buy are townhomes. We bought two, we bought a bill for rent community actually earlier this year from a developer.

[00:27:54] And, you know, we, we like the, the two and three bedroom townhomes, you know, typically if they have a garage, it's, it's a huge bonus washer jar hookups. But I think that the big takeaway for me today, Gino, is the fencing. It could be, it could be, it could be a good one for us, man. Longevity baby. For itself. And you mentioned, you know, EV chargers and we, we put solar on one community was very successful and we're now rolling it out on four others. And there's some tax advantages to that. You guys probably are.

[00:28:22] Well, and other things with the, with the, the EV too, right? There's something going on there, maybe local, different local communities. Yeah. Well, we, well, we learned with it. So we started putting, you know, these little EV pumps, I call them, you know, in the, I think you just need the connection though. Right. Yeah. But what we do now is we, every home is wired for an EV charger in the garage. It's behind the sheetrock. Yeah. And then if a resident has an electric vehicle, which, you know, yeah, there's been some backlash and maybe they're not going to sell as many electric cars, uh, in the next

[00:28:49] five years as they fought, but we still have a number of residents who will pay the $350 for us to cut the hole in the, in the garage, put the charger in there. Um, and then, you know, we charge them five bucks a month or something like that. But again, it's, it's other income that helps our yield and gives the resident, you know, a charger in the garage. Yeah. Richard, what is the balance? What does it look like as far as expenses go? I mean, this is all separately meter for utilities, separately meter for water.

[00:29:17] Uh, what, what expenses does a bill to rent community have? Well, the two biggest are what we call uncontrollables, right? Property taxes. Would be Jake too. I can't control Jake. So that's another expense as well. Okay. Wow, man. And insurance, right? Those are the two big, what we call uncontrollables. Insurance has been crazy. You guys know in Florida. Um, but any, anything coastal is, is prohibitive, which means your margin, right? Your profit margin, if you will, is, is constrained.

[00:29:46] That and property taxes. The rest is pretty easily predictable. I would say the other big part is payroll, right? The people that are, the guys who change in the AC filters are learning how to install the tech package, um, are, are leasing folks, right? He's had to steal people from Google now to take care of these ring cameras and things, you know, that's what he's saying. Yeah, but they Google people, they go to sleep for half the day and they have their little safe spaces. Because when they plug in, they're half, they're like cyborgs, right? Right. They want, yeah.

[00:30:14] And they, they, you know, want stock and all of that. So, um, regardless, it is, it is a conscious effort to keep our costs under control. And we've talked about land. That's the biggest impediment to building more homes. I mean, depending on who you talk to, the census bureau says we're short 6 million homes in this country. Others are more conservative. You know, I put the number somewhere between three and 4 million. That's a lot of homes shortage. So that's demand drive.

[00:30:42] That's the supply is severely constrained. And then when you can't find land and look, land is not necessarily scarce. Obviously the further out you go from. Yeah, but it's just less desirable. I think the correct statement is desirable land is scarce. It is. And it's also hard to get through the entitlement process, right? The zoning and entitlement. You got, you got a lot of NIMBY warfare going out there. You got NIMBY warfare.

[00:31:09] You also have municipalities who, you know, there's always has been this stigma about a renter and, you know, a second class citizen. We've disproven that with statistics and with actual data. However, when you're talking to a mayor and a city council. They're very discriminatory. They say one thing and they do another. You know, they got to stop the discrimination. Renters rights, baby. And unlike us who are back in the office, we're talking, we're working.

[00:31:36] You know, they dismissed a lot of their staff during the pandemic and they haven't brought them back. So what used to take a week to get a, I'm just going to make this up. You have a tree plan, right? You got to plant certain number of trees to make the community, to get it. Their architectural guidelines. To get that plan stamped. Okay. Richard's planted the trees used to take a week. You go in, the guy's in the office, you know, maybe you have to wait, buy him a cup of coffee and he stamps the plan.

[00:32:02] That could take a month now because the guy's working from home or he's, you know, not in the office or whatever. So that's, that's a big impediment to, to adding to supply. Jim, Richard, before we go to the short answers, I want to jump right back into the expenses as well. In these communities, are you, are you cutting the grass? Are you taking care of the pool? Are there other, other expenses on here? Yes. We, we are responsible for everything. So we hire a landscaper, right?

[00:32:28] We cut the grass, we maintain the pool and it depends on the amenity package that's governed by the sort of size of the community. The larger the community, the more amenity rich it is. We can talk about that. So yes, we're, we're, we're maintaining the grass and typically that's a third party landscaper. We like to use local folks because we think they do a better job. We're maintaining the pool. We're maintaining the clubhouse. We're changing the HVAC filter in every home quarterly.

[00:32:59] That's a maintenance thing. Contagnant with pest control? We do pest control. The reason I mentioned the AIC filter is it gets us in the home. So we get one of our guys in the home to kind of see what's happening in that home. They're playing Mission Impossible music when they're doing it. Well, not that we're trying to spy on them, but we want to see, you know, does this person have eight dogs in there, you know, tearing up the flooring or, or, you know, are they,

[00:33:25] do they have more people in living in the home than, than is on the lease? That kind of thing. It's just a, it's just a quality control, quality check. Exactly. Exactly. All right, guys, let's take quick timeouts here from our sponsor. This episode of the Jake and Gino podcast is brought to you by Wheelbarrow Profits, the premier multifamily education community. Wheelbarrow Profits proof is in their results. Their members have closed over 86,000 units. That's over $5 billion in student deal volume.

[00:33:55] Are you serious about taking your real estate game to the next level? Do you have the confidence to take action? Schedule a call with the Wheelbarrow Profits team today and supercharge your real estate knowledge. Build lasting relationships through unparalleled networking opportunities. Obtain lasting knowledge on how to buy multifamily real estate with intensive training. Gain hands-on experience through their live events with like-minded individuals and industry professionals, all while experiencing the personal touch and family atmosphere that set them apart.

[00:34:24] Visit wheelbarrowprofits.com for more information. All right, we are back. So let's talk about the evolution of debt in the build-to-rent space because you were speaking to folks early on and they said, you smell Richard. We don't want anything to do with you, crazy man. And now you're probably cozying up and getting cuddly with Fannie Mae now. Is that right? Well, yes. Our Fannie, the agencies that we call them, right? Fannie and Freddie are now financing build-to-rent deals.

[00:34:54] They're also looking to put together a more comprehensive, larger facility. They've done a number of sort of one-off. What do you mean by that? Well, you build a, typically what an agency would do, you guys know this probably from your multifamily background. You'll build a $50 million community and go to Fannie and they'll give you a 35, 65% loan to your value. And that's what we call a one-off individual loan.

[00:35:21] They're now talking about building a facility where you can put 20 communities on this Fannie agency debt facility. Cross-collateralized? Typically they want them cross-collateralized. Well, yes. But if you're a long-term owner and you get, you know, that's just a math exercise, Jake. Is the reduction in rent and the increase in loan proceeds offset the perils?

[00:35:47] No, I'm sure it's a great fee experiment, but I just like to keep everything siloed at times too. The evolution of our debt structure has been, as I said, at first they were like, you're going to do what? These are banks. We did find a regional bank in Texas. That's where it started. Yeah. This is in August of 20. So middle of the pandemic. Dude, it's so weird. Like, I feel like this has been going on longer, but it is new, like five years. It's crazy. Yeah.

[00:36:14] I mean, it really got its legs five years ago. Yeah. And so we found a regional bank that was willing to finance one individual communities for us. And then we graduated to one of the big New York banks that did a, what would they call a warehouse? A community bank in New York or whatever? No, not that. And then now we have, now we have a, you know, they did a lot of stuff.

[00:36:40] So we have a credit facility that's a billion dollars and it's, it's funded by seven different banks, big banks, banks you would know. And it allows us to buy land. That's one bucket to finance construction. That's a second bucket to finance completed homes. Right. That's a third bucket. And then a stabilized community. So there's four different buckets and leverage points to your point. But that, that's only been in the last two years, meaning that this business has started

[00:37:09] to, to become attractive to large lenders and the agencies have, have been, and now even the life insurance companies are, are getting into the financing these communities. So obviously you're in this space now. Do you feel like you are in like the premier spot in, in real estate right now? Um, you feel like, man, I'm, I'm, I'm not diversifying from this. I'm just going to continue to go in. Or do you think there's any risks in where you're at right now?

[00:37:37] Well, you never want to put, I'm talking personally now. You never obviously want to put all your eggs in one basket. I will say this is an industry. I mean, I came up in the multifamily industry in the early nineties, as I said earlier, that has, we're in like, we're not even in the first inning. So we're in batting practice, this thing in over the next 30 years, build to rent is somewhere around 2% of the multifamily, uh, stock in this country.

[00:38:07] You know, multifamily is somewhere around. You think it has legs. I think it has legs and long legs, right? What part of the, what, like what percentage of the market share do you see this thing going to? Um, I don't, I, so there's roughly a third of the, of the housing in this country. Is rental. And as I said, the bill to rent is a tiny, is 3%. 3%. I don't know why it couldn't be 15 half of the rental stock just because of the aging of the population.

[00:38:36] I mean, yes, we have aging millennials in our, in our homes, you know, 38, but we have a lot of 50 people over 50 empty nesters as residents in our communities for all the reasons we mentioned maintenance, free lifestyle, flexibility. They want to be near the grandkids. They don't want to live with the grandkids, but they want to be near them. So there's a lot of drivers to the long longevity of this business. I saw a BTR the other day and all white, the vinyl did not look super attractive. Wasn't the best design.

[00:39:06] And I was just thinking to myself, and this goes back to what we were talking about with the cost before, but a little bit of brick on the front, a little bit more care into the design. And you step back and go, holy shit, we got a beautiful community here. And I'm thinking to myself, am I missing something? And I'm talking to the guy right now. So what would you have done in that scenario? Cause I'm looking at it and going, yes, costs matter. I'm very cost conscious in our business, but you could have made it just a little bit more, you know, aesthetic and you sit back and there's pride of ownership. People are going to want to live there more.

[00:39:36] I'm, I'm, I have to believe, or am I missing something? No, you're absolutely right. And we are intentional in the design of our communities, meaning it's not a row of the same facade, right? We, we bump them in and out, right? We, we do a little brick, a little stone. We typically don't like vinyl siding. We like hardy, you know, hardy board. Um, not to give anybody a plug. Um, and then, but that's, that's great feedback. Don't hold back because I think that, you know, we put tree, a tree in every yard.

[00:40:05] That's kind of one of my things, you know, um, the aesthetics do matter. What tree do you prefer? Uh, well, it depends obviously, right. Are you doing like evergreen or are you doing something that's, uh, these are usually a hardwoods, right? Um, cause they're, they're easier, easier to maintain and more hardy. If you will. Um, the, the, the amenity needs to be open when the community is, is starting leasing and the amenity needs to be at the front, not at the back. A lot of home builders, right.

[00:40:33] When you go into a Pulte or a Lenar or, you know, one of their sub- Yeah, drive into it to find a clubhouse. Yeah. And it's typically the last thing they do. Cause it's kind of an afterthought. We're very intentional in that. Well, and also I think they're doing it to offset costs, right? They want some revenue coming in before they're putting into it probably. Right. Yeah. So exactly right. So, um, so, so today you're, you're, you're, you have this, this group of banks that you're

[00:41:00] financing the build with, and then you're, you're sending out to pasture to, to Fannie probably that's, that's what's going on. That's the, that's the business plan. Yes. And then, you know, we'll, we'll own this thing for as long as we, uh, as long as we can. Yeah. And so I was kind of going through this earlier from a raw land perspective. What do you, what do you think, um, on average in the Southeast things are trading at right now? You think it's like mid twenties? You think that's sort of the mark or what do you think? You know, what do you think things are? That's probably low.

[00:41:30] So you think higher? Yeah. I mean, it's just, and in Florida, I mean, it's, it's crazy. You guys know, you know, and we are focused. When we look at a community, evaluate a community, it's jobs, jobs, jobs, employment, employment, where, how far are we from the employee next to the Amazon plant? Yeah. A hundred percent. Second is proximity to retail. Can they go grocery shopping? Can they get their nails done? Can they go to the doctor? Right.

[00:42:00] It used to be schools. When's the nail salon coming into the, the build to rent mixed use version of your communities? Well, we actually. Starbucks, little mochicino. Don't laugh. We, we probably have four or five communities where we're part of a mixed use and then we sit very well. You can walk to the grocery store, right? Yeah. Yeah. That's a huge draw. And I say that schools used to be sort of the second criteria and then retail was third. We've kind of reversed that because a lot of our residents, you know, at 34.

[00:42:30] It's a beautiful thing, man. Hey, can we walk to the pub? Right. Can we walk? Exactly. Yeah. So I like that. We've learned that that's a huge amenity, if you will, to be able to walk to Publix using the Florida analogy. Well, and here's the thing. You want to go to Publix because they're going to bag your groceries and treat you nice. Okay. Used to be a Kroger guy. Kroger, you're losing me. I'm just telling you, you're losing me. Okay. Publix is pulling me in because it's about service. And that's why they're expanding, you know, all over the South. I mean, they're up in.

[00:43:00] Just like Richard's communities here. Hey, I will tell you guys just straight out. When we look at a neighborhood to build a community, we see where the grocery is. Publix is and where the target is. And where the Chick-fil-A is at. Come on. Give me some of that. Yes. Yes. Gino, get yourself together and bring us home here. Okay. This is a great, it's been a great story because Richard started back out in the nineties. He saw all the powerhouse multifamily communities.

[00:43:27] They started growing in the nineties and over four decades, as Jake likes to allude to, he's gone from the multifamily guy to the cojones and having the capital and starting back in 2019 on a vision saying, I'm going to do this built to rent. This sounds like a pretty cool thing. And when he goes into the bank, the bankers are like, Richard, what the hell is wrong with you? This is the stupidest thing I've ever had in my life. We don't do that. This is the way this is going to work. And five years later, he's like, well, I proved them wrong because I've got 5,200 units and

[00:43:56] I'm continuing to buy these things and build these things. So you put a little cojones, you mix it up with a little capital and you look back and you're like five years later, it got 5,200 units. So congratulations on the business plan and for actually taking the risk. Because like I said, I saw this eight or nine years ago and I thought this was crazy as well. I couldn't get my mind wrapped around it. And I think to speak and to like, I guess, mention the last thing is there's a lot left in this built to rent. It's not just a fad that just started. It's got a lot of legs.

[00:44:26] And if you're getting into the space, you need to have a little experience and surround yourselves with guys like Richard. Well, thanks guys. And I'll just say, yes, there's a lot of opportunity here. It's not for the faint of heart. So Gino, next time you come across something in real estate or whatever, and you say, what? Should I do that? You know, do it. Just do it, Gino. Well said.

[00:44:54] Gang, as always, we believe in buying deals for the long term. Think in decades. I'm Jake. He is the G daddy. We make it happen. We'll see you next time. Thanks, Richard. Thanks, guys.