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What market is twice as big as the hotel industry and has not yet been disrupted by technology? The small residential industry. If you’ve never heard of it, there’s a reason.
People often refer to multifamily as an industry representing all buildings/complexes with anywhere from two units to over 1,000 units. Less familiar to some, but also very large, is the single-family rental industry. However, separating the rental housing sector into these two categories misses the mark. Allow me to introduce two alternative categories: small residential and large residential. I define small residential to include all single-family rental (SFR) homes and multifamily buildings with up to 49 units, and large residential to include all buildings/complexes with 50 units or more.
Small Residential Offers Tremendous Investment Opportunities
For over a decade I have been involved in the real estate industry, as co-founder of one of the largest SFR REITs in the United States (where we bought and managed over 17,000 single-family rental homes) and more recently as co-founder of a tech-enabled service for property management. From this experience, I have learned that small residential represents a vastly greater opportunity for investors than large residential.
According to the U.S. Census, the U.S. has 15 million SFR units, 21 million units in buildings of two to 49 units in size, and only 5.1 million units in buildings 50 units and larger. This means a staggering 87% of all long-term rental units in the U.S. are small residential, dwarfing the 13% share for large residential. In the U.S., small residential is a $467 billion per year industry, more than twice as big as the hotel industry.
I also learned firsthand that small residential properties are far more complex to take care of, due to the fact that they are scattered over an area instead of being concentrated together, and that technology and big data are essential for managing the complexity.
Buildings with more than 50 units are typically serviced by full-time, on-site employees; owned by large, institutional investors; and surrounded by an ecosystem of professionally managed service providers including brokers, lenders, insurers and property managers. On the other hand, properties with one to 49 units are serviced by people driving around to the buildings, owned by individual investors and surrounded by ecosystems of much smaller service providers.
So, why doesn’t the small residential industry garner more attention from the media, the public and even the real estate industry? For starters, because it is not considered an industry. Instead, large and small multifamily buildings are lumped together, and single-family rentals are considered a separate industry altogether. Secondly, since the ownership of small residential buildings is highly fragmented, it generates less media coverage than the large multifamily industry, which includes multibillion-dollar, publicly traded companies.
Technology And Small Residential
The highly fragmented nature of small residential has led to what I see as an underinvestment in technology. The industry hasn’t evolved much over the past 20 years. The service providers to small residential are more traditionally small mom-and-pop businesses, hesitant to invest the large sums of capital necessary to transform their operations with technology.
However, that is starting to change. Real estate technology (or proptech) has been one of the hottest segments in venture capital. The trend is continuing, with $9.6 billion of funding in 2018 alone. The small residential industry is garnering its fair share of the spoils. A number of my colleagues are looking to bring technology and scale to the small residential industry with such advancements as smart locks, AI-driven rent setting, marketplaces for buying and selling rental properties, vendor networks and software for repairs and maintenance and much more.
I believe our class of property management firms and other proptech companies will bring more efficiency to the small residential industry in 2019 by adopting new technology. Specifically, this technology should always help property owners maximize their net operating income (NOI) and eliminate any headaches associated with owning rental assets.
For companies serving the small residential industry, the key is to develop technology that improves the rental living experience for residents. In turn, this makes owning rentals more efficient. Innovative technology can be the differentiator that decreases leasing times, reduces vacancy, optimizes rent pricing and reduces repairs and maintenance expenses. I encourage property managers to utilize the technology available to improve their tenants’ and tenant applicants’ overall customer experience, while maximizing NOI for property owners by:
• Making digital resident applications available online.
• Enabling self-showings at units.
• Turning units into smart homes with smart locks, thermostats, lighting and water detection.
• Empowering instant communication with residents and prospective residents via mobile apps, chatbots and SMS messaging.
• Engaging the modern maintenance technician workforce.
It’s no wonder that so much capital and innovation are coming to bear on the small residential industry. It is one of the largest industries remaining that has not been disrupted by technology, but its disruption is due.