Build-to-Rent Explained: Why Investors Are Leaving Fix & Flip Behind

Jim Sheils (00:00)
You know, the joke is, you know, while you’re waiting for that to all be approved and subdivided, know, land eats three meals a day. So you better be ready. It’s not like a rehab where you can acquire it, rehab it in 90 days and then have it either rented or sold, you know?

Dylan Silver (01:48)
Hey folks, welcome back to the show. Today’s guest, Jim Sheils is a partner at the Southern Impression Homes, a vertically integrated real estate development firm based in Florida. He focuses on building and delivering build to rent BTR communities while also providing fee building services for other developers and co-investing in the projects they construct. With a full team of over 120 employees, he operates at scale across multiple Florida markets, combining construction, investment, and long-term ownership strategies. Jim.

Thanks for taking the time today.

Jim Sheils (02:18)
Good to be here. Thanks Dylan.

Dylan Silver (02:20)
Now you’ve operated both fix and flip and build to rent. What made you shift toward BTR and what did you see that others weren’t seeing at the time?

Jim Sheils (02:31)
Yeah, honestly, sometimes you fall backwards into stuff out of necessity. And I’ve started investing in real estate in 1999. So holy cow, 27th year in, which is crazy. And I did a lot of fix and flips, fixing hold for rentals and starting California came here to Florida. And after the 08 meltdown, there was just an unbelievable opportunity to buy foreclosures. And so I went into buying bulk foreclosures, renovating them, selling them to investors, keeping some for myself.

And the way Build to Rent came along, Dylan, was the deals were just going away by by 2015. You know, those deals of 2009 and 10. I mean, they were getting pretty sparse and there was a lot more competition going in. my now building partner, who had also property management company with his family and was managing a pretty large portfolio of mine, said, hey, we have a small building company. How would you like to build some rental properties instead of rehab old ones?

And at first I thought, well, that’s a terrible idea. You know, we’re rehabbers. We don’t know anything about new construction and, sure enough. we threw in some development fees together and started in a area of Jacksonville, 28 houses, um, that, uh, in an area we had already built. And it, it went okay. But the signs and signals were there like, wow, this could really have some legs to it. You were working with better subcontractors, less surprises.

⁓ Better fundamentals to the properties. Once tenants got in there, there were usually better tenants that stayed longer. The maintenance and repair was much less. The turn costs on a rental. And so we kind of just fell into it, Dylan, where it was out of necessity because we were rehabbers that found old fixer uppers and foreclosures and the competition and the deals were just going away. So we kind of had to pivot. And we started doing build to rent before the term ever even was said.

Dylan Silver (04:00)
Yeah.

Jim Sheils (04:28)
Build to Rent didn’t exist. We were just building new construction rentals.

Dylan Silver (04:32)
and then running them out. the pivot that I’m having to see a lot of people make right now is realizing that their fix and flips are effectively competing with new construction in many areas of the Sun Belt. And so whether they like it or not, they’re having to look at, hey, our buyers might be looking at ground up new construction and they find themselves thinking, well, do I get into new construction? Do I get into?

Jim Sheils (04:47)
Yep.

Dylan Silver (05:00)
BTR. So this is a more common sentiment, you know, maybe now than perhaps ever before. When you were getting into this space, was there anyone else who was thinking the same thing? Or were you, you know, a cavalier in that regard?

Jim Sheils (05:05)
Yeah.

Very few. we were definitely, you know, I don’t like to say the pioneer. I’m sure there are other people doing it, but we were really the first people that started to do it to scale for small investors. You know, there were larger builders building for larger institutions, but our model was like you said, you know, when we were first, you know, chatting before we started, this was ⁓ for investors, by investors. That’s actually our slogan. You know, it was a, know, ⁓

construction company built for investors, by investors to build investment property. Less than 5 % of what we would do would be retail sales. And so we were kind of unique in being a builder that really focused on building investment property. That was very,

Dylan Silver (06:43)
When working for and with other developers, what separates a good partnership from a bad one?

Jim Sheils (06:53)
⁓ You know, you want to make sure your builder is well-funded. ⁓ That’s a lesson that we learned very early on when we expanded from Jacksonville into Ocala, which is still one of our most popular markets. We were not self-building. We would hire builders to work under us. And, that was a painful one where we had a builder who didn’t do what he was supposed to, was not well-financed, and went bankrupt.

And it feels great to get a nice big fat judgment, but it’s like squeezing blood from a rock. And so that actually forced us still into become a set to self build everything that we do. And that changed our business. So, so it was kind of forced upon us in tough times, but you have to make sure your builder is financially stable. ⁓ You know, that’s a really important thing. If you’re an investor teaming up with a builder, you know, or what are their financials? What’s their balance sheet?

Dylan Silver (07:28)
Yeah.

Jim Sheils (07:51)
because I’ve seen too many people hit some real pain marks ⁓ with builders that are not financially solvent, if that makes sense.

Dylan Silver (08:00)
In a built to rent scenario, how many homes are typically being built? it vary? Are these full subdivisions that are all being rented out?

Jim Sheils (08:08)
Well,

you know, and that’s that that is the common misconception, Dylan, that, it’s just a neighborhood of single family homes or townhouses. You build the whole neighborhood and the whole thing’s rentals. And yes, we do build those for some of the larger institutions and family offices. But as an investor, the way that we really started, we work with individual investors and large institutions. Yeah, they’ll build whole neighborhoods. But

What we really specialized in for the first several years and I still like is what we call scattered lots. So scattered lots are just existing neighborhood you go into and there’s those blank lots. We would just buy them up and build a single family home or a duplex. And they did really well. And as an investor, know, my first mentors always said, Jim, try to go to a neighborhood that you can walk at, you know, nine o’clock on a Friday night. It doesn’t have to be fancy, but you don’t want to go.

someplace too dangerous, and you want a good mixture of homeowners and renters. You know, not all renters, not all homeowners. So that’s why I always love for our individual investors and ourselves, these scattered lots, because we could go into pre-existing stabilized neighborhoods that have that pride of ownership, but also rentals in them. So we do quite a few, we’ve done thousands of scattered lots and those work really well. So yes, build to rent is sometimes, but normally that’s only for larger.

Financial groups, they’ll build a whole neighborhood of single families, a whole neighborhood of townhouses, cottages. But again, for the everyday investor like you and I, we build scattered lots. We build new construction in already existing neighborhoods that have strong fundamentals and a good mixture of homeowners and renters.

Dylan Silver (09:37)
Yeah.

I would like to get a little granular on the acquisitions process for those lots. So I’m imagining that those lots can really be very valuable because you have developers like yourself and others who need property, an infill lot, right? A scattered lot to put a new home on. And so when folks are looking for these ⁓ vacant land opportunities,

Are these in many cases fire damaged, water damaged? Are these an opportunity where maybe a developer, you know, didn’t finish the block or something along the lines of that? What’s the scope of acquisitions look

Jim Sheils (11:03)
Yeah, and you would think, look, now in the last few years, yes, it got popular. Like we got into a lot of land in 2020 right when the pandemic started because we thought we’re either going be really right or really wrong. you know, we rolled the dice on that and we went in our favor and land was crazy cheap in a lot of the markets we were building, you buying in, you know, but a lot of times lots have gone from an average of 12,000 to 50,000. So they’ve gone up quite a bit.

But they weren’t always in high demand, Dylan, because like the national home builders, they have zero interest in infill lots. And a lot of investors, including like ourselves, building ground up construction is very different than rehabbing houses. And there is a bit of a steep learning curve ⁓ to be had. And so we learned that in the first two years. But once you get through it, there’s less people doing it.

Dylan Silver (11:54)
Yeah.

Jim Sheils (12:01)
So they are in demand, they’ve gone up in price. ⁓ And these infill lots, like you said, they’re great because you can get those approved a lot quicker. The biggest mistake I see too is people saying, I got this 10 acre, great piece of raw land. Well, that’s great. But again, hopefully you got your clock set because that could be two years before you’re even able to break ground. And that’s a lot of holding. And we learned that too, because we’ve done raw land and-

Dylan Silver (12:26)
Yeah.

Jim Sheils (12:30)
You know, the joke is, you know, while you’re waiting for that to all be approved and subdivided, know, land eats three meals a day. So you better be ready. It’s not like a rehab where you can acquire it, rehab it in 90 days and then have it either rented or sold, you know?

And so, yeah, the infill lots are great, but they’re not for everyone. So certain times they’ll be really hot, certain times they won’t, but the good news is you’re not competing against like the national home builders for these.

Dylan Silver (12:59)
Now, when folks are getting into the new construction space, you mentioned some of the hurdles, bottlenecks, that they’ll have growing pains. What’s the biggest mistake that you see newer developers making?

Jim Sheils (13:13)
Wow, yeah, the biggest mistake is either hiring a bad GC or builder to oversee your project like we did, like I’ve seen others do, you know, that will promise you the sun and the moon, the cheapest price, and then they’re broke and insolvent and not able to finish your project. That’s happened a lot, so you gotta really look at track record and financial stability. ⁓ Also, you know, sometimes, again,

instead of starting with just building a couple of infill lots, they’ll again say, I found this incredible piece of land, 30 acres, it’s gonna be incredible. And it dies in the process because it’s such a long ruling process. They bite off more than they can chew, instead of crawl, walk, run, they kind of jump into the deep end. And that’s a very different process than just.

If you’ve been doing old homes, grabbing one, renovating it and being done in maybe 60, 90 days, 120 days, this is a very different timeframe and that can be really painful if you’re not prepared for

Dylan Silver (14:23)
Yeah, one of the things that I’ve seen from flippers is, sometimes flippers are cowboys in a lot of ways and say, well, I’m just not going to pull permits. And if I get caught, I get caught. You’re definitely not doing that with a new construction. ⁓

Jim Sheils (14:35)
No, construction. Yeah, that is a big

no-no. If you’re not doing everything by the book in new construction, it’s not a matter of if you get in trouble, it’s when. And so, yeah, you might be able to cut some corners on some things on an old rehab. Yeah, I wouldn’t recommend that for many reasons on the new construction. You’re going to caught pretty red-handed.

Dylan Silver (15:45)
Now you mentioned the timelines, like two years, right? What are the big steps in that two year process? What are the ⁓ markers? Okay, this ⁓ project is moving along here.

Jim Sheils (15:58)
Yeah, well, again, let’s look at, you know, a big piece of raw land could be two years to get it approved and subdivided. But again, an infill lot, you might be able to get that done in a few months. And so, you know, that’s why I encourage people if you’re starting small and going from like we did, fixing up old homes to building a maybe a simple single family or duplex. mean, that’s still what I like. We do do some quads as well. But, something residential, you know, the infill lots can be a lot quicker.

⁓ So, you know, because if you’re going into a piece of raw land, you know, there’s several things you have to go through to make sure. And have you bought a piece of land where the environmentals are clear? Like there’s such a checklist, Dylan, that I really encourage. It’s not impossible to start with a bigger piece like that, but just know your timeframe is going to be longer and you better have a great team lined up for you to do the horizontal construction.

Dylan Silver (16:50)
Now, when folks are thinking about assembling their team and they’re thinking about maybe vertically integrating some of this and, I might be doing more new construction. should bring someone in, partner with someone who themselves is a builder. When does that make sense versus hiring that out and hiring a contractor to do this on a one-off basis?

Jim Sheils (17:14)
Yeah, it’s a good question. mean, I think it’s personal preference. Like what is the position this investor is in? If they’re an investor who’s running a full time business or practice and they’re trying to get into real estate investing on the side, I’d be very cautious for them to try to handle everything themselves and try to be their own self builder. ⁓ You could do it, but what I’ve seen is like we’ve had people come to us who have tried to build on their own and then got

screwed over and something happened and they’re too busy. And now that we’re a volume business, you know, we were partially acquired a few years ago by Sumitomo Forestry, their 351 year old company out of Japan with all of our sister companies in the US, we’re the fifth largest builder in the US. So we get really great prices on subcontracting and materials. So a lot of the times when you find the right BTR ⁓ building partner,

It could be us, it could be someone else. lot of the times they might be able to give you, even with them making a profit margin, a way better price if you tried to do it on your own. So I tell people, very cost, if you really want to learn it, then great, learn it. Make sure you get a great first head GC that you’re going to be overseeing very closely. And I would start with only a few properties.

Dylan Silver (18:35)
What’s the difference between being a builder in these deals versus being just the investor?

Jim Sheils (18:44)
Well, the builder, you know, we’re handling things directly. The investor is usually overseeing the builder. So does that make sense? Yeah. it’s your, your, your having, if you’re in the investor, you’re having less involvement, but you have to keep people accountable. ⁓ and, that’s super important as the builder, we’re investor builders. We’re, one in the same. ⁓ and again, Dylan, all of this came out of necessity. couldn’t find old houses to fix up anymore. So we became it.

Dylan Silver (18:53)
Yeah, yeah.

Jim Sheils (19:12)
We were the investor overseeing a builder. We got, I mean, we lost millions that could have been really, really bad about, you know, eight years ago. We had to eat it all and became a self builder out of that pain. And so now that’s been able to build our business, get our costs down, get better subs because we’re so involved.

Dylan Silver (19:32)
In in built to rent in general in Florida, are you seeing a strong demand for this in any one particular market or city in Florida?

Jim Sheils (19:41)
⁓ In different areas, you’re seeing different things. It all comes down to affordability and workforce housing. ⁓ Areas that have gotten too expensive, it’s hard for you to get the demand might be there, but for investors, it doesn’t make sense to build because the returns are not there. So there’s areas where there’s still great, like central Florida where we are, the median value is about 270. So that’s still really affordable.

Dylan Silver (19:47)
Yeah.

Jim Sheils (20:07)
you know, for us to build our single family homes and our duplex models. And it provides a good workforce housing for an area that’s growing. ⁓ You can build, you can still build ⁓ all over Florida. But the question is, will it cash flow? Will it put money in your pocket or take money out of your pocket every day? So that’s something investors really have to look at. You don’t want to just build a property, build it. You want to have a financial strategy.

Dylan Silver (20:33)
We are coming up on time here, Jim, any new projects that you’re working on and then as well, what’s the best way for folks to reach out to your team?

Jim Sheils (20:41)
Yeah, I mean, our model of building for investors of single family duplex and quads continues. We have just started ⁓ to break into the co-living space. We’ve been working with a group called PadSplit who does co-living, which was a very interesting model that I didn’t know, I didn’t understand even as an investor of 27 years, but we’ve been kind of putting this together for the last few years. And just like us, the co-living people and PadSplit people were…

buying old houses and trying to renovate them from four-bedroom, two-baths to six-bedroom, six-baths or seven-bedroom, seven-baths. And that’s pretty hard on an old home for lots of reasons. So we’ve actually designed plans to build new construction co-living houses. So we’re building some seven-bedroom, seven-bath homes and a few key markets for people who want co-living properties and even starting to do some duplexes that are about twice that size.

So that’s a pretty new and exciting thing that we’re building for and financing the properties for our investors. So I’d say that’s a pretty hot topic right

Dylan Silver (21:39)
Jim, thank you so much for joining us today. Thanks for coming on the show.