James McClelland knows plenty about the single-family home market. Thirty-six years ago, the CEO of Tinley Park, Ill.–based Mack Cos. started as a real estate agent, eventually building up a 40-broker-strong company that he sold to ReMax to help launch a planned unit development construction firm. After a chance pitch by one of his bankers on an REO sale, McClelland turned from building homes to buying, value-add rehabbing, and renting distressed single-family real estate. With a Midwest portfolio of more than 500 single-family homes, McClelland says the shadow market is just as strong as ever, forcing Mack customers onto a four-month waiting list. McClelland stopped by Multifamily Executive this week to share his thoughts on shadow market rentals and single-family property management, which might not be as different from traditional apartment operations as you might think.
MFE: So Mack Cos. wasn’t just quickly born from the housing recession. You’ve been around with the value-add play in the single-family shadow rental market for a while now, haven’t you?
McClelland: We sure have. Fourteen years ago, I was building planned unit development houses priced at around $300,000 when one of my banks called me up and told me they inherited a single-family home and did I want to buy it. I bought it, redeveloped it, and sold it. I didn’t really make money on that, but it only took me three months to do the redevelopment, compared with the nine months it was taking me to do new construction, and something told me a three-to-one turn wasn’t a bad thing to look into. From that point forward, we’ve become one of the largest redevelopers in the Midwest, and we do about 200-plus properties per year. Everything we buy is bank-owned.
MFE: What does the value-add process look like on the single-family side?
McClelland: I redevelop all of the properties with my own staff of more than 100 employees, including my own plumbers, my own electricians, carpenters, and my own property management company. So we redevelop the asset, hand it over to the property management company, tenant the property, and typically hold the properties for a long-term appreciation, between 10 and 15 years.
MFE: How did the recession affect your inventory levels?
McClelland: Well, what it has really done has been to give us a chance to get better inventory, as opposed to just more inventory. Even during the heyday of real estate five years ago, when everything was selling, there were still bank-owned properties, but the pickings were slimmer. Nowadays, you get much better properties for about the same price that you paid before. You get later-model buildings and homes. The key to that is infrastructure: copper plumbing versus galvanized, for example. Better infrastructure reduces the costs to redevelop the property but, more importantly, results in fewer problems to the resident. And fewer problems is the name of the game when it comes to keeping good, stable tenancy.
MFE: What do your renters look like?
McClelland: That’s an upgrade again. What we’re getting now versus what we got before are residents with better income: people in solid situations who for one reason or another were forced out of their property. We have more people to choose from than ever before. As a result, through quantity comes quality. Of course, rents go up, too, but that’s really not as important to me as having good renters.
MFE: Is your sense that demand will continue over the next several years?
McClelland: The basic dynamics driving the situation are supply and demand. There is still a huge cost gap on the single-family side between what is currently available and what it would cost for new construction. We don’t expect to see any real advancement in new construction for at least five years, or at least not until existing inventory rises in price and closes that gap. So if new construction isn’t happening in any meaningful way, it means more people are in the market to rent the existing inventory. When there are more people coming in than there are units to fill, prices go up and we get to get a better-quality resident.
MFE: How different is single-family property management from multifamily property management?
McClelland: We have about 100 apartment rentals in addition to our single-family portfolio, and there is a difference, but the management platform is closer than you’d think. I also go to property management conferences and benchmark against apartment managers as a form of comparison. We do all of our own screening, including a credit check; an interview with their current landlord; a site survey of their existing home, because how they maintain their unit is indicative of how they will likely maintain our unit. We talk to their employer regarding their prospect for long-term employment; we do a skip trace; and we do a criminal background check. We aggregate all of that data and give them a red light or a green light to get on the four-month waiting list for one of our properties.
MFE: What about after move-in?
McClelland: We have a two-hour indoctrination when we move in a new resident. We introduce them to the home, give them a housewarming gift, and provide tips on basic care and upkeep. We want them to feel comfortable because we expect them to stay for a long time. Our average tenant stays at the property for 4.8 years. We also physically go to every unit on a monthly basis to collect rent and conduct a site survey to verify condition and upkeep of the property. We try to become personal friends with them and maintain communication. Over 14 years, we've only had two evictions.
MFE: A four-month waiting list? That sounds like a pretty healthy business. What’s your prognosis on the next year or two and your hopes for the general economy?
McClelland: My hope is that my waiting list doesn’t get any longer [laughs]; you know, people can only wait for so long. The government has reached out to the private sector to help resolve the inventory situation through rental programs, so my hope is that people who get into this business are successful but help to clear this excess inventory, because things won’t change economically until that inventory decreases.