Paul Pettinelli has 20 years of experience in investment real estate and development, including SFR portfolio growth, commercial real estate, multi-family, & hotels. His experience and achievements have been in corporate leadership, real estate capital markets, business development, financial modeling, asset management, operations, & investment strategies designed to maximize values & returns. Paul’s primary focus for the past 13 years has been in the institutional Buy-to-Rent space where he has acquired, developed, operated, consulted, or provided services for approximately 2.1 billion in SFR assets.
In this episode, we talk about everything you need to know about build-for-rent: from maintenance to finding tenants. Paul also gives his advice on how to enter that market and what are the challenges and rewards in the space.
[00:00] – [04:27] The Real Estate Opportunities Other People Do Not See
- Paul talks about his transition from the hotel industry to real estate
- The increasing rate slowed down the economy making the prices affordable for investment
- There’s more available inventory and demand for single-family
[04:28] – [10:06] How to Select a Market for Build-for-Rent Community
- There’s got to be a good amount of land
- Understand the location’s data, zoning, and permitting
- How to spot a good tenant
- Household formation and household income
- An educated tenant that understands the cost of buying a house
- Paul talks about the risks and the business plan for build-for-rent
[10:07] – [15:58] Balancing Risks and Opportunity
- The lessons Paul has learned the hard way
- The biggest expense is tenant turnover
- Don’t increase rent too much
- The average tenancy period is three years
- The disposition strategy
- Raise capital and deploy for two years
- Exit out on a special purpose in five years
- With build-for-rent, you have decreased maintenance costs
- The importance of tenant screening
[15:59] – [17:27] Closing Segment
- Reach out to Paul!
- Links Below
Tweetable Quotes:
“Mitigate rent control. You don’t want to increase rent too much. You don’t want to price out of your target market.” – Paul Pettinelli
“When you’re managing a large portfolio, you have to have the best practices in place, which is screening. There’s a lot of technologies out there now, which is good for screening, where it automates.” – Paul Pettinelli
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Connect with Paul Pettinelli on his mobile at 843-819-2691 or email at paul@nautic.homes. Find him on LinkedIn and visit their website nautic.homes.
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Want to read the full show notes of the episode? Check it out below:
[00:00:00] Paul Pettinelli There is a lot of housing right now that is owned by Mom and Pop landlords so to speak. You know, we’ve already seen a lot of those investors start to sell, they’ll continue to sell their inventory, even with what institutional investors right now in the market, which is probably 4% or 5% now, and we’re talking about the big Blackstone’s market home sprintt, just plenty of opportunity.
[00:00:35] Sam Wilson Paul Bettinelli is an experienced real estate developer and asset manager. After years as a corporate director and executive growing the business, he decided to launch his own company at the age of 39. Paul, welcome to the show.
[00:00:48] Paul Pettinelli Thank you for having me.
[00:00:49] Sam Wilson The pleasure is mine. Paul, there are three questions I ask every guest who comes on the show in 90 seconds or less. Can you tell me where did you start? Where are you now? And how did you get there?
[00:00:57] Paul Pettinelli Started off in Hotel Management right out of college and worked in hotel operations for several years, first of all, when I was 22, so when I left the hotel industry, I decided to do it full-time. So I started a company, ran it for three years, joined a company called Parallel Real Estate, which led into working as a director for a startup SFR institutional fund. And then that segued into me running Nautic. So basically, I’ve been very much in SFR, but I have also worked in multifamily and commercial. And, yep, so really, the hunger that I learned in hotels, and watching the corporate guys talk about CAPEX improvements, really launched my interest in that next level of real estate.
[00:01:45] Sam Wilson Got it? And so today you guys are focused on the single-family residence build-for-rent communities, like you’re developing entire BFR communities. Is that right?
[00:01:57] Paul Pettinelli Well, that’s a part of it. SFR and multifamily, we talk we will do consulting in both, but the investment strategy is primarily single family and built for rent. Camellia houses founded by Jimmy Moore and Jim Isaminger, I’m a partner in that company. And we’re building in the Birmingham area. And we’re also with Nautic, which is a partner in that we’re doing the infill products property flips, and then also doing buying holds.
[00:02:28] Sam Wilson That’s okay, that’s a lot, so you got buy and hold, you got infill, you got property flips, and then…
[00:02:34] Paul Pettinelli It’s all single-family though, single-family investments.
[00:02:37] Sam Wilson Right? Tell me I guess, you know, with all these, you know, various pieces of the puzzle, where do you fit into this?
[00:02:45] Paul Pettinelli Sure, I mean, my core competency has always been on the asset management strategic investment side, there’s a lot better operations manager than I am, I’m very good at looking at a plan the financials of it, assessing risk. Looking at the macro economy, I consider myself fairly well-read in investments in what’s going on in the world. And I’ve used that knowledge to set the course on where, where that investment portfolio will be in real estate. And I think, you know, it’s, it’s been successful, it’s been me focusing on my core competencies always made me an attribute to the companies.
[00:03:26] Sam Wilson And it sounds like you see some good things, obviously, in the future for what it is you guys are building and investing in today? What’s the opportunity that you see maybe that other people aren’t seeing?
[00:03:40] Paul Pettinelli Well, like anything, just manage around risk and you manage around the obstacles, but the good thing is that, you know, the heightening that increasing rates, slowed down the economy, which in a way there, it was good, the advantages will be that prices will be more affordable for investments that prices will come down. The interest for in single-family, interest rates are going to soften the market and there’ll be more inventory available, there will be 10 people fighting for 10 investors fighting for one home, and then there also be a demand in the thick of demand for single-family matters. We already saw that demand with the new consumer coming into the single-family rental space. This will just exacerbate it.
[00:04:27] Sam Wilson How do you guys select a market to do a build-for-rent community?
[00:04:33] Paul Pettinelli There’s got to be a good amount of land there’s been there’s a few things the land has got to be there. And but there if you can find enough information to see how much of that has already been entitled, how much you know what is the average time from entitlement to getting the right zoning permitting. Luckily, you can see that information through companies that are already building not for rent but building just regular can Unity’s and then you know, really the influx of people moving into that market. So a lot of the primary and secondary markets are a little bit tougher, because you have to really expand outside of that city center. But if there’s good growth, then that expansion outside of that, that main city, those surrounding areas will if you build the communities, there’ll be plenty of demand. But sailboats hassles. So Kansas City is a good example, using that as a Midwest market, because Midwest is a great market and built for it. Kansas City has a lot of opportunity on those outskirts as well as Birmingham. So variant has that perimeter, that is expanding out to see build those communities. The house was available in Birmingham, maybe over prides not seeing it as she’s known. But as long as the demand keeps coming in the average income of that tenant household keeps coming into that market, you know, that can be absorbed before.
[00:06:00] Sam Wilson Right, right now, that makes a lot of sense. And you’d mentioned that there’s some tenant demographics, that you guys are seeing that you said, Hey, this, this is going to be here for a while, if that tenant pool isn’t is not gonna be there for a while, but also going to grow? What are some of those? What are those some of those demographics that you guys are seeing, he say, Hey, this is what we’re looking at. And this is why we think that this, you know, will continue to be a needed product.
[00:06:23] Paul Pettinelli It’s basically household formation, household formation, and the household income. So, you know, that’s a stat that you can look at, but then you can look at the millennial generation as a sub the average age right now of the household formations. And, and households that are purchasing homes, getting mortgages or getting mortgages, those same, that same age range is the same tenant demographic that wants to rent, the house may not want to be in the apartment, because we want the lawn, that separated walls. So it’s anywhere from 35 to 40. And then again, later on in life. So we see that a lot. It’s kind of it’s kind of like that barbell, maybe hope I know, my parents are an example. They sold their house, and they now rent, because they looked at the opportunity of reinvesting that cash into a house, as opposed to putting it in the markets, you know, whatever their investment strategy is, and, you know, the return, the opportunity cost wasn’t worth it. So we find a very educated tenant that ends up once they educated, maybe not paper, but they understand the cost of owning the home. Right? And, you know, on and on was a great thing. But there’s, you have to look at it differently than it being an investment because it can be and it can’t be, just depends.
[00:07:47] Sam Wilson Right? Right. Yeah. And there’s a lot of different ways that you could slice and dice that, that comment and have a whole conversation about whether or not owning a home is an investment, which we won’t get into here today. But do tell me this, like what’s the total total business plan for you guys? So you’re gonna do a build for rent community? You bring in tenants, how long do you hold it? What are the risks? What are the upsides? I mean? What’s the whole business plan look like for you?
[00:08:16] Paul Pettinelli Sure, well, as we scale the focus on the Lake Street fund, because that is basically what’s absorbing everything, even the build for it. So we have a, you know, about a seven-year window, maybe 10 years to raise, deploy, and stabilize and then exit. Well, there is a lot of housing right now, that is owned by Mom and Pop landlords so to speak. You know, we’ve already seen a lot of those investors start to sell, they’ll continue to sell their inventory, even with what institutional investors right now owe in the market, which is probably four or 5%. Now, and we’re talking about the big Blackstone’s American homes grant, just plenty of opportunity to purchase that inventory. And Bill as well, because there’s a housing shortage. So the housing shortage, along with the opportunity to be able to take those renters in that want that home is betting and the risk is jumping into the space honestly, and not understanding the investment strategy. That’s the risk. That’s the housing new stuff. So now if you look back years, you have enough data to know how housing will go. You know, twould say it’s the safest IRR at that level that you’ll get because even multifamily is a great investment over wrong but you can’t diversify your risk so you can be in many markets. And that’s a great investment strategy because you can be in an area of town you can have 100 units over several zip codes, and have your assets protected. Even if it’s 50 basis points of a drop in value. Now the first 10 years, we had to figure out how to operate that, now that there’s best practices on how to operate single-family and scale. We’re able to capitalize on that.
[00:10:06] Sam Wilson What do you feel like some of those best practices are some lessons, maybe you guys have learned the hard way?
[00:10:12] Paul Pettinelli It’s really keeping a good product, maintaining it. I work for a company that when I was overseeing asset management and the management section of it, a lot of the fault landlords were the primary business. So they had just come out of 2008, 2009. And they were very cost-conscious, essentially, every single maintenance item, they have decide on, you know, we have our budgets, we know the mouth operate the whole, but the biggest cost in operating a home is a cost of losing a tenant. So if we maintain a home Well, every turnover we’re putting are making sure their useful life on the carpet, the paint, everything is crisp, and new, because that’s the only thing that sets us aside from not every mom and pop landlord, we just walk great small operators out there. Let’s say mom and pop shop, anyone under 100 homes. So yeah, just making sure that every full American home is right is a great example and invitation home, they have really good products that they roll over. And they don’t short, the quality of those houses, they move into a house freshly painted new carpet, maybe not hardwood the lbpd floor to feel like you’re moving into something fresh, a lot of times it’s nicer than homey. So that is the key point is tenant moves in that experience is what’s it’s going to be that first impression. If you can keep those retention rates up, you’re gonna have retention rates up, occupancy cost down, the costs, you’ll spend a lot more maintenance even more than you budgeted? You’ll end up better off a long.
[00:11:53] Sam Wilson I like what you said there that the biggest expense is tenant turnover, occupancy, you know. You lose it, you lose a tenant for a month or two. And that’s an enormous expense.
[00:12:03] Paul Pettinelli But mitigate rent control, too. We don’t want to increase rents too much. You want to price out your target market. And so if your costs are high, because you’re not offering a portfolio, and you make and let’s say every operator made up for it by driving rents, well, that’s not a good thing. Becauyou don’t want to drive the rent pass a certain threshold affordability, if you manage when read, natural rent increases are needed. But if you operate the retention piece, you can keep their rents reasonably lower, or direct raise reasonably lower, and you don’t have to price at your market.
[00:12:46] Sam Wilson What’s the average tenancy period?
[00:12:50] Paul Pettinelli It’s approaching three years. Yeah, I’m gonna say it’s about a 70% retention rate. So I’m looking at a five-year window. So let’s say your average hold time on that asset is five years, you if you’re operating it reasonably well should keep a tenant two and a half or two years.
[00:13:09] Sam Wilson Yeah, that makes a lot of sense. And I think that’s longer than probably than what the average would be, say, in an apartment, you know, and also, again, it goes back to the fact that people want to live in a home these aren’t people that want to live there in an apartment, the end of that five year period. Are you guys selling off those properties? Are you, what’s the disposition strategy?
[00:13:29] Paul Pettinelli That’s I mean, essentially, you know, you spend the first two years raising and deploying the capital, right, leverage it up. And yeah, five years is generally the point at which you, you want to exit out of that, that special purpose vehicle, meaning the best strategy is to sell that portfolio at a lower cap rate to another institutional investor. But we can extend you know, if you’re offering memorandums are written, well, you can have that extension because maybe five years, maybe you want to extend it out a couple of years. There’s 10 years fund out there, there’s evergreen funds, but five years tends to be the sweet spot.
[00:14:07] Sam Wilson That’s the sweet spot for you guys. That’s really, really cool. And I guess the other thing you probably get on brand new build for rent is decreased maintenance costs overall.
[00:14:18] Paul Pettinelli That’s definitely a plus. You know, I would say rental home is about 58 to 60%. And the y margin didn’t get up as high for the first two year 70%. Maybe higher. They got warranties. So yes, absolutely.
[00:14:35] Sam Wilson That really, really cool. And I guess maybe the last thing I guess as it pertains to maintenance when you have entire families moving into a home, you know how Are you preventing those from just getting, you know, just torn to pieces? I mean, it gets somewhat, you’d have an apartment complex, but I would think a home might even take more wear and tear than an apartment. I don’t know. Is that…
[00:14:54] Paul Pettinelli
Yeah. Well, when you’re, you know, when you’re managing a large portfolio, yeah, you have to have the best practices in place, which is screening. I mean, you have a lot of times, I mean, there’s a lot of technologies out there now, which is good for screening where it automates it, you know, it was companies will grant me, for example, has an application as the lockbox company that has the screening on the back end. If you keep that screening to a level and you’re and you’re, you’re pretty stern on abiding by that you’ll have a bit tan, not just credit of that about, you know, landlord referrals, or if you can’t catch everything, but for the most part, if they’ve been a good tenant, or they’ve been a, you know, they’re they don’t have a huge blemish on your record. It’s usually a good sign. I mean, if you’re just getting heads in beds, and you’re recruiting everyone, that’s when your turnover becomes an issue. And I’m not saying that, I’m not saying that they’re going to get the homeless. I’m not saying that. I’m just saying as a rule of thumb, you know, people who have looked after their trade line and their credit will look after your own.
[00:15:59] Sam Wilson Right, no, that’s a fair baseline analysis there. So that’s really really cool. I love what you guys are doing certainly the build-for-rent industry is exploding I don’t see it going anywhere, anytime soon. You’ve shed a lot of light on you know, everything from maintenance down to finding tenants to you know, just the way you guys are finding opportunity here in the country, how you’re, how you’re picking your markets and things like that. So certainly have enjoyed having you come on the show today, Paul, appreciate all your insight here. If our listeners are in touch with you and learn more about you what is the best way to do that?
[00:16:34] Paul Pettinelli You can contact me on my cell 843-819-2691 or my email address paul@nautic.homes, without a .com. Or just reach out to me on LinkedIn.
[00:16:48] Sam Wilson Awesome. We’ll make sure we put all of that contact there. But tell me nautic.homes, that’s N A U T I C . H O M E S, just for those of you who are listening.
[00:16:56] Paul Pettinelli Correct.
[00:16:57] Sam Wilson nautic.homes, Paul, thank you again for coming on the show today. I do appreciate it.
[00:17:01] Paul Pettinelli Thank you.
