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Show Summary
In this episode of the Real Estate Pro Show, host Erika interviews Ted Farry, a successful real estate investor with a diverse background in construction and finance. Ted shares his journey into real estate investing, the lessons he’s learned along the way, and his current focus on affordable single-family rentals. He emphasizes the importance of networking and building relationships in the industry, discusses market strategies, and highlights the significance of providing affordable housing. Ted also shares insights on capital raising and his future plans for growth in the real estate sector.
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Investor Fuel Show Transcript:
Ted (00:00)
there’s a difference between yields on paper and that you calculate using it like an Excel spreadsheet versus real world yields.And so I think that, you we call them paper yields. A lot of times,
first inclination is like, I need to go to the high yield properties. And that’s great. But I think the thing that is missed very often when people target that segment is the change in expense load that is associated with it. You you might be dealing with maybe a lower quality tenant.
Even though the house, you know, costs less
still costs $4,000 $5,000 or maybe even $7,000 for an HVAC, maybe $10,000 for a roof. And even though that yield is very high, that lower rent makes it much more difficult to cover those fixed expenses and, potentially, you know, just…
more frequent turnover and things like
Erika (02:28)
Hey everyone, welcome to the Real Estate Pro Show. I’m your host, Erika, and today I’m thrilled to be joined by Ted Farry, who’s been crushing it in the ⁓ real estate investing space. Ted, it’s awesome to have you here.Ted (02:42)
Thank you for having me. Great to be here.Erika (02:45)
So let’s dive right in Ted. For those who aren’t familiar with your world, give us the rundown. How did you get started in investing?Ted (02:55)
Yeah, as I was telling you before, it really came down to construction. One of the first things I did after finishing undergraduate was started a construction management business. You real estate, to be honest with you, at that point Ihad no clue what I wanted to do with my life. I had graduated undergraduate with a double major in math and philosophy and no job prospects. But anyways, I played football.
And I remember one of these stories that one of these other defense defensive lineman told me when I was playing football is, Hey, you know, during the summer, go get a framing job because then you’re getting paid for your workout. So I didn’t play football that much longer, but that story rung true with me. I throughout college had construction jobs and. know, looking back, I landed such a great opportunity with a great luxury developer in the town where I’m from.
I went back and started working with him. He helped me start this construction management business. I worked to get my MBA at night while I was doing that. Moved on to work with a production home builder. And from there, the housing market turned kind of quickly and had the opportunity to go work with the Instructure of Finance and CNBS Securitization. But the company I joined was countrywide, so it didn’t end up being the conservative choice out of all of it.
on some degree ended up having front row seats for financial meltdown. So great, great experience nonetheless. From there kind of ⁓ rode the market a little bit and went on to work in an analytics role with a billion dollar MPL fund, Arch Bay Capital, priced out who knows how many billions of dollars of MPL loans. And as that business transition, had again had another opportunity to get back into that physical side of real estate.
which I started in and I had this really awesome role where I traveled to every market across the country where we had major concentration of REO
and met all of the brokers that were listing our houses and it enabled me to develop this network. And that has been so powerful for me as I’ve, you know, as I then moved into single family rental and started to focus on acquisitions and buying single family properties to put in.
very large single-family rental portfolios.
Erika (06:12)
Yeah, wow, that is quite a journey tied with the ups and downs that you’ve experienced, you know, in different areas of the market. Were there any lessons along the way that influenced the approach that you have today?Ted (06:27)
They’re constantly, the lessons are constant. I think one of the things that stuck out with me the most and I think is will probably ring true with investors of any level, especially in single family rental is thatthere’s a difference between yields on paper and that you calculate using it like an Excel spreadsheet versus real world yields.
And so I think that, you we call them paper yields. A lot of times, you know, for people that come from a financial structuring background or something similar, your first inclination is like, I need to go to the high yield properties. And that’s great.
But I think the thing that is missed very often when people target that segment is the change in expense load that is associated with it. You you might be dealing with maybe a lower quality tenant.
Even though the house, you know, costs less because of probably the neighborhood that it’s in, it’s still a house. The fixed asset investment isn’t that different. You know, it still costs $4,000 $5,000 or maybe even $7,000 for an HVAC, maybe $10,000 for a roof. And even though that yield is very high, that lower rent makes it much more difficult to cover those fixed expenses and, potentially, you know, just…
more frequent turnover and things like
Erika (07:55)
Yeah, Ted, I want to talk a bit about what you are focused on today. You know, what areas of single family are you in and are there any unique opportunities that you see in there?Ted (08:08)
Yes, I’m, thank you for asking. ⁓ I’m working to grow an affordable single-family rental fund right now. It’s a $50 million regulation D506C private placement limited to accredited investors. And the opportunity that we’re targeting is just outside of the traditional institutionalbox, buying slightly older homes at a discount, rehabbing them to an institutional standard.
and making them available for lease to Housing Choice voucher tenants. So one of the reasons why I think right now is such a great time to be doing that is, you know, it’s really twofold. One is that we’re, and you know, first and foremost is that we’re filling a gap in supply of affordable housing to a segment, know, a segment of potential tenant that needs it. And two, more from an investment standpoint, I think that we’re on the front side
of the third major capital deployment cycle into single family.
Erika (09:14)
Yeah, yeah, that’s that’s really exciting. And I know, Ted, that you personally have done a lot of volume in the investing world, which I’m sure we have a lot of listeners that, you know, they want to get there to what kind of advice do you have for investors who are just starting often? You know, they they want to increase their volume toTed (09:37)
Right? I mean, I say it all the time. I think when you are working in single family, it’s depending upon the area you’re in. If you’re in Southern California, it doesn’t really work like this, but a lot of other places in the country, no single deal is going to make or break you. It’s really much more about the process and way that youon a large volume of transactions that is going to have the biggest effect on the outcome of your investment.
Erika (10:42)
Yeah, absolutely. And when it comes to the deals that you’re doing too, are there any connections or networking that have made a difference for you? And again, like you said, it may not be one deal, but for you have there been, you know, maybe it’s not one connection, but it’s, you know, making those multiple connections.Ted (11:04)
Right. There’s several different areas of those. Right. So, I mean, I think as we’ve, we’ve seen this institutional SFR industry grow, that’s been an amazing network to be a part of. can, I go, there’s two different conferences that I go to every year. The IMN SFRs, you know, there’s one in Miamiin May every year, another one in Scottsdale in December. It’s a great accumulation of people in the industry and a great way to learn and just build relationships over the longterm.
I’ve definitely benefited from that and love to contribute to that network. Real estate agents, know, looking back and knowing how, you know, I see how ignorant I was when, you know, growing up or being new to the industry, I always thought, and I think this is really before we saw a lot of things happen in foreclosure. So everything was good. You know, this is probably like early to mid 2000s. And I…
for whatever reason just had it stuck
my head, if you’re an REO agent, that’s the lowest tier agent. But it’s the exact opposite. The REO agents have so many more, like stronger demands in terms of what they have to do. They’re not like just listing houses. It’s probably the smallest responsibility that they have. They have to go out and first establish relationships with asset managers so that they can get the listings.
that is a huge business unto its own. Once they get the listings, oftentimes they’re executing property preservation and lockouts and vacancy checks and all of these things all the way through to make sure that that listing, that property is, the investment and the condition of the home is as sound as possible until that point. If they’re able to stick with it all the way through, then they get the opportunity to list the house. And so.
I think that’s been really one of the greatest networks in being involved in single family rental that I have is kind of, I view it as an asset. It’s just having had the opportunity to know and build relationships with so many different REO agents, they’re really, they’re great agents, but on top of it, they’re great business people. then I know I’m told me to keep it short on the stories here, but one final group that I think is really
Erika (13:27)
Go for it.Ted (13:31)
interesting, especially for people that are new to buying houses and want to get started working with institutions or larger volume buyers. It’s, it’s the groups of, of wholesalers and, ⁓ you know, bird dogs, right? There’s it’s, it’s an entirely different business to go direct to consumer or direct to seller to create leads, to buy houses than it is to, you know, price those houses than it even is to procure the capital, to be able to execute those acquisitions.And so no matter what acquisition platform that you talk to, there’s always a need for more leads. And so I think that that’s just a great place to start. It doesn’t really take a lot of capital. You can get a lot of it done with just elbow grease and determination, I guess, as you step into it and you want to create volume in that business like anything else, you need to invest in marketing and things like that. But I’d say, you know, it doesn’t cost anything to go knock on a door. And there’s…
as long as you, mean people can reach out to me, but there’s a lot of different acquisition platforms that would love to have that lead and provide pricing for you.
Erika (14:41)
Absolutely. Relationships are everything in this industry. If someonejust starting off and you said they don’t have a lot of capital and they should knock on a door,
what would you say in that scenario?
Ted (15:44)
⁓ yeah, I mean, go, go do it. Like the chances are that you’re probably going to have to knock on, you know, a hundred of them before you get your first opportunity and, ⁓ you know, make sure you stretch before us. Cause you know, you might get chased off a few properties, but, ⁓ you know, I think that’s kind of part of the business. I think as long as you’re respectful and honest about your intentions, then I don’t, I don’t see how people can fault you, whether that’s the seller.or it’s the person that may be interested in buying the home from you, they would do it through an assignment, get in the complications there. But I would think creating the leads is probably the most difficult part of that. And so starting there and trying to get an angle there is probably one of the best things you can do. And then I think there’s a lot of resources to figure out how to monetize that on the backside.
Erika (16:39)
Yeah. Yeah. And then Ted, for your markets, you’re mainly in California, yes?Ted (16:46)
I live in California, but we buy basically no real estate in California. The yields don’t really work here for the most part. ⁓ With Homestead Affordable Fund One, my fund, our portfolio will be, 80 % of the portfolio is targeted in Dallas, Atlanta, and Houston, with smaller concentrations tagged for San Antonio and Phoenix. And then,Probably more going into like a fund too. We do
part of our strategy to purchase in the Inland Empire, California. But yeah, it’s tough these days. I think in the downturn, there was a lot of opportunity in California, it takes a lot more capital to be in business in real estate in California.
Erika (17:40)
Well, for that fund that you’re working on and those locations, what kind of opportunities do you see with those properties? What is the strategy with those locations?Ted (17:54)
I think first and foremost with the markets that we’ve selected,wanted to take as much market risk off the table. I think those are three of the largest MSAs in the country. And so the risk associated purely with the market is taken off the table. I think there’s a lot of opportunity for people that are interested in going into secondary or tertiary markets, but that’s not what we’re trying to do here.
⁓ I think once you get to the asset level, ⁓ you know, really, you know, kind of real estate execution is basically about, you know, market selection strategy and execution. So our strategy is you might call it a value add single family rental play. So, ⁓ where a lot of people are focused on build to rent these days where they’re buying new construction homes and putting them into rental portfolios. That’s very yield driven.
⁓ for the most part, aside from having a large discount, at purchase or prob there’s probably the cap rates and interest rates probably still need to move just a little bit for that, that strategy to really work. But, ⁓ scattered site, you know, portfolio construction in value add because we’re adding value from our initial rehab activity. That’s what makes the strategy work.
Erika (19:23)
So when you say initial initial rehab, is there kind of like a template for that? You know, it’s probably still individualized, but is is there, you know, some sort of formula that works?Ted (19:34)
Yeah, I mean, one of the things that came out of the, you know, kind of the rise of the public SFR REITs is a very standardized way that a home should look. So, you know, I think that you have, and it’s, I’m not really talking about cosmetic. I’m talking about more like the mechanics. So once a roof gets to be over 12 or 15 years old, it needs to get replaced, especially at acquisitions. Same thing with an HVAC. When it comes to the cosmetics,people talk about hardening the asset. And so that’s things like maybe instead of using flat paint, you’re using, you know, egg shell or even, I don’t think people are really using, you know, semi-gloss on walls, but you know, egg shell is probably the furthest you go. and the intent there is that when you get to a turn that you’re limiting the cost of needing to repaint. Same thing with like hard surface floors over carpets, hard surface.
countertops. ⁓ So there’s a pretty well standardized model that people ⁓ basically adhere to. we’re taking that same model, we’re just going slightly outside of it in terms of ⁓ age.
Erika (20:51)
doing anything to kind of put your own twist on it or you know make your property stand out?Ted (20:59)
That’s, yeah, we’re gonna do lime green front doors. ⁓ No, I think, I think the, thing, you know, our biggest anglethat we’re trying to fill supply, you know, where it doesn’t exist.
Erika (21:14)
⁓ And what made you so interested in affordable housing in particular?Ted (21:21)
⁓ It’s I mean it goes back to what I think one of the biggest benefits of single family institutional single-family rental is You know from from the get-go is that we’re we’re collectively as an industry providing the opportunity for people to live in homes that you know don’t necessarily have the opportunity to purchase it and so I think what we’re doing is just taking it one step further in expanding that you know access to single-family homes to people that you knowthat maybe have an even tougher time of 14.
Erika (21:55)
Yeah, yeah, absolutely. And Ted, what do you see next on the horizon when it comes to investing? What are you looking to do?Ted (22:04)
⁓ Yeah, I mean, I’ve said it, I probably have a big enough task ahead of me here with this fun. I think that is probably first on the horizon, as I think bigger, I’d love to be involved in a fun two and fun three of Homestead ofErika (22:25)
That’s awesome. And when it comes to these funds, do you see any hurdles and you know, how, what do you anticipate, you know, that you need to do to get there?Ted (22:37)
It’s really all about capital raise. With my background, ⁓ I’m an operator of real estate. And so the thing that is ⁓ slightly different for me here is working to raise capital. I think there’s some very interesting opportunities in the market for that. About 10 years ago, there were some changes in regulations with how you are able to or allowed to market private placements. And sofrom some degree, I think that’s dislocating broker, you know, traditional broker dealer activity. you know, broker dealers are expensive. They definitely served a place in the market. And I think a typical path for somebody in a fund one would be to go and engage a broker dealer, but it also costs five to 7 % to do that. And so that it just makes it, it, has the effect to shrink the available investment opportunities that work. And so what
you know, the big hurdle and task that we’re working to ⁓ overcome there is trying to go direct to investors or, you know, either through, you know, direct marketing or through RAAs, Registered Investment Advisors, so that we can bring that investment opportunity without having to saddle the returns with such a huge cost associated with a broker dealer.
Erika (24:04)
Yeah, yeah, absolutely. Well, Ted, before we let you go, if someone wants to reach out, learn more about what you’re doing at Homestead Affordable or they’re interested in learning more about the capital funding, what’s the best way for them to get in touch?Ted (24:21)
You can find me on LinkedIn. know, I’m linkedin.com. Ted farry. Very simple. Our website is also homestead, affordable.com. think those are probably the two, two best ways to find me.Erika (24:34)
Awesome. Ted, thank you so much for sharing your story, your insights and your strategies. I know our listeners are going to get so much out of this.Ted (24:42)
No, thank you for having me. Great to talk with you as well.Erika (24:46)
And for our listeners here, if you got value from this episode, make sure that you’re subscribed to the Real Estate Pro Show. We’ve got more conversations coming up with operators like Ted, who are building fantastic real estate empires. We’ll see you on the next episode.
