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Overhauling the World’s Oldest Investment Class

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In late 2012, I was invited to a holiday party at a friend of a friend’s house. It was one of those gatherings where everyone loosely knew each other, or at least had all gone to the same school.

Residential neighborhood subdivision skyline Aerial shot
Residential neighborhood subdivision skyline Aerial shot

Source: TDKvisuals / Shutterstock.com

The hosts were extremely welcoming and made everyone feel right at home. At the time, I really didn’t know much about them. But from the size of their house, I knew they were involved in something serious.

We sat down for dinner at a long dining room table that probably had 20 chairs. At one end of the table was a rowdy group of teenagers, while the other end was reserved for the older adults. I was seated in the middle, in earshot of both ends.

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There wasn’t much eavesdropping to be had at the teenager end, but at the other end, a conversation started to develop that piqued my interest.

Looking back now, I probably should’ve been taking better mental notes, but I guess I just was totally oblivious to the whole opportunity…

They were talking about homes that they were buying. Not one or two homes. Not a couple dozen… but tens of thousands of single-family homes…

You see, they had just founded a company, called American Homes 4 Rent (NYSE:AMH), and received a $600 million investment from the Alaskan Permanent Fund. That investment was on top of the original money that the company started with from Wayne Hughes — the host of the party.

Hughes, the billionaire founder of Public Storage (NYSE:PSA), was one of the first people to recognize the massive opportunity in U.S. real estate (and most importantly, act on the opportunity).

AH4R went public in 2013 on the NYSE and currently sports a market cap of well over $13 billion. Although that opportunity that Hughes capitalized on with AH4R sounds obvious now, it wasn’t so simple back when the company was founded…

Tech Solution to Property Management

“How in the world are we going to actually manage all of these homes?!”

Not a direct quote, but the gist of the conversation I was hearing that night.

Other than AH4R, there was only one other major player in the market that was pursuing the same strategy: Blackstone (NYSE:BX).

Both companies recognized the unbelievable opportunity that existed in U.S. residential real estate, and they had the money to start buying at a feverish pace…

But the management of these massive portfolios was still uncharted territory.

The logistics of managing tens of thousands of single-family homes across the U.S. is enough to spin the heads of even the best professionals.

Think about it… AH4R was trying to scale up a business that had tens of thousands of assets that aren’t… scalable!

Not one single home in its portfolio was the same. Location wasn’t the only difference. Each home had its own unique quirks. Different floor plans, different maintenance requirements, different local taxes, different tenant types and on and on…

This all required an enormous amount of management. And it made it extremely difficult to scale up efficiently while still ensuring that every single home in the company’s portfolio was taken care of and rented out for a profit.

That’s where tech has stepped in… Proptech, to be specific.

What is Proptech?

Proptech is nothing new, and it is exactly what it sounds like… property technology. The actual definition is, “the use of technology to help individuals and organizations including home buyers, renters, investors, and real estate agents improve the way they research, sell, buy and manage real estate.”

For AH4R, proptech was an extremely important part of its growth. Forget about the management part of the business for a second and think about the actual paperwork that surrounds a real estate transaction.

For those of you who have been through the process of buying or selling a home… you know what I’m talking about.

There is an enormous amount of paperwork that goes into it. Now multiply all of that by 50,000!

As of Sept. 30, 2021, AH4R owned 56,077 single-family homes across 22 states… and there are companies that own even more…

Invitation Homes (NYSE:INVH) owns over 80,000 homes.

That’s a lot of roofs to take care of!

And there’s more…

Big Opportunity in Proptech Right Now

Although AH4R, Blackstone and Invitation Homes have been in this game for a while, there are still more players entering the market every day. Furthermore, existing stakeholders are starting to venture out into other residential real estate projects as Wall Street continues to gobble up U.S. residential real estate…

Just this week it was announced that Blackstone acquired Preferred Apartment Communities for $5.8 billion. This all-cash purchase was for 12,000 units stretched across Georgia, Florida, North Carolina and Tennessee.

From the Wall Street Journal:

“Investors poured a record $335.3 billion into apartments across the country in 2021. Nearly a quarter of it went to just four metro areas in the Sunbelt: Dallas, Atlanta, Phoenix and Houston. In some other Sunbelt cities, total multifamily investment more than doubled over the year prior, according to a report by real-estate firm CBRE Group Inc.

“Buyers are clinching an unusually large number of deals for properties that weren’t listed for sale, investors said. Appetite to capitalize on fast-rising rents far exceeds the number of assets available to buy.”

The need for real estate efficiency has never been greater…

Proptech to the rescue.

Fifth Wall, the largest venture capital firm focused on technologies for the global real estate industry, just announced a new 140-million-euro fund. This fund brings Fifth Wall’s total capital under management to over $3 billion.

The investor list is stacked with all of the who’s who in global real estate corporations. These investors are just as interested in the access to the fund’s future portfolio companies as they are about the actual fund investment return.

As more and more major companies acquire large portfolios of real estate, the need for tech-enabled efficiency only increases.

This is both exciting for investors and entrepreneurs who can look for ways to capitalize from this trend.

The real estate industry is long overdue for a big shakeup. When it happens, we’ll be ready to stake our claim.

On the date of publication, Cody Shirk did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

By focusing on megatrends that will shape the future, Cody Shirk uncovers generational wealth in the private investing space. To make sure you never miss Venture Capital Digest, click here to subscribe.

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