Why Build-to-Rent Communities Are Booming With Andy McMullen

Andy McMullen (00:00)

I think it’s so much of what this business is, just real estate in general, is how willing are you to be

Gritty. And gritty in the sense that I’m going to find a way to connect folks. I’m going to find a way to add value. And you’ve heard this, you’ve done 3,000 podcasts, so you’ve heard this all the time. But I can just tell you from my experience, and now I’m sitting at the other end of the table, it is rare that people dig in, add value in such a way that they can find the land.

Dylan Silver (01:02)

Hey folks, welcome back to the show. Today we’re joined by Andy McMullen, investor and founder of Legacy Acquisitions and Developer, including build to rent communities in Louisiana and Alabama. Andy, thanks for joining us here today.

Andy McMullen (01:16)

Yeah, thanks for having me, Dylan. It’s great to be on with you. I’m excited to dig into it.

Dylan Silver (01:20)

what types of deals and opportunities are coming across your desk these days?

Andy McMullen (01:25)

Yeah, so most of the things that are coming across our desk are in the built-to-rent space. So we’ll build, hundred units to three hundred unit single family rental communities. So we’re looking at mostly things in the South, Carolinas, Louisiana, Alabama, that out done some stuff in Texas. So the things that we really look at is can we take land in that, 30 acre range?

build eight to nine homes in that range, and then develop them, get them entitled, approved, build the infrastructure, streets, roads, utilities and sell once the units are complete and stabilized.

Dylan Silver (01:59)

Build to rent is particularly interesting, especially because I’ve heard more and more builders interested in it, but I understand it’s a tough hurdle to jump over in many cases because you do have to have deep cash reserves, this is a longer play. was build to rent always the end goal? How did you start the build to rent

Andy McMullen (02:18)

Yeah, so I started doing as low man on in development maybe two thousand and four, in Venice Beach, California. live work spaces was the kind of the thing. And then before that I did brokerage, so selling office buildings and apartment buildings and that kind of thing. So built to rent, we kind of were sniffing around maybe twenty sixteen. it started pretty quickly after.

the great crash that, you have a lot of these guys that got us into the mess buying up, scattered homes and then trying to manage them in portfolios and rent them out. At some point in that twenty fifteen, sixteen started to become a trend, hey, let’s just build these things next to each other and manage them like we would an apartment community, stabilize them quicker because we can rent them as soon as we build them.

But so I connected with my partners probably in that range of time that were in the southeast, already doing a version of it smaller. And then we thought we could maybe come in and scale it a little bit. So that’s how we got into it.

Dylan Silver (03:16)

Now, one of the challenges that investors face is finding their niche, right? build to rent specifically is I think a niche that a lot of people would like to be in, but you do have that hurdle of the cash reserves. specifically, build to rent versus build to sell. is that the main hurdle is you’ve got to have deep cash reserves in order to hold on to these properties for an extended period of time.

Andy McMullen (03:38)

Yeah, what’s interesting is I think it’s dictated more by the market. in essence, you’ve got a lot of builders that are selling that have kind of pulled off a little bit because interest rates are so high and you’re basically buying down rates. I don’t know how deep we want to get into the weeds, Dylan, but when we were first looking at these projects, we thought, wow, interest rates are high.

They certainly weren’t that high at that time, but there was already a pretty large premium above the rent to the actual mortgage you were going to be paying, right? That along with how many people wanted new stuff, right? Which is I don’t want to live in the old house down the road or an older apartment. I want new stuff with my own backyard. and then there was no longer the stigma around it because a lot of

investors your age would just assume buy something on their phone than have the gated, white picket fence that my generation looked at. So I think a lot of it is it’s deep pockets only in the sense that you’re going to be finding a lender that’s going to lend up to 75 to 80 percent of the loan to cost. And then you’re gonna have to find that capital through investors’ funds.

etc. So I’ll come up for air there. I’m sure there’s probably a lot more questions you have on that, but don’t want to bore your audience if it’s not interesting.

Dylan Silver (04:54)

We can get into the weeds and we will. one of the things that I think the general public is curious about, I’m sure people involved in brokerage experience it but still have a level of curiosity. This whole idea of builders being able to buy down rates and have lower rates than pre-owned homes and why that’s happening, how long that’s been happening for and how pervasive it is.

Can you break down some of that for us? When people talk about buying down rates and we think about the corporate builders and anyone doing build to sell having lower rates than the pre owned home space, can you break that down for us?

Andy McMullen (05:29)

Yeah, so basically what’s happening in short is the builders are including that in their cost to build. That, hey, look, in order for me to bring in the residents that I want in this community, I am gonna have to give them a mortgage that’s much lower than seven, eight percent, whatever it is today. It’s gone off from six and a half to seven and a half. When I know a lot of folks were in that five, four, many people locked in, as you know, in twos and threes. I think it’s fifty five percent.

locked into twos and threes. So it’s almost like another concession that you’re, if you’re building to sell, that there’s a new project in Dallas right down the street. You’re gonna have to, embed some concessions in order to get the most promotion and the most leasing. that’s just another way of bringing in residents. For us on the built-to-rent side, there’s still the concessions. There’s still somebody that could be building next to you. But once you get them in that space,

Typically they’re staying longer than an apartment. what we call in the business stickiness of the residents. And that just means because their friends are there, because they’re seeing the people in the backyards, because they’re walking down with their dog trail, etc. But I think as a result of the interest rates, just to wrap it up, Dylan is built to sell guys have started to pull rein in a little bit because that cost.

is becoming a little bit more than they can justify to build with insurance costs went up, fuel costs so high, lumber, etc.

Dylan Silver (06:52)

Build to rent, is this a pivot that the build to sell guys and gals are comfortable making? Or is this such a different business model that, the folks who are doing build to sell and the folks who are doing build to rent are operating in two totally different spheres?

Andy McMullen (07:09)

great question. a lot of the built-to-sell guys have figured out we need to have part of our business built to rent for the reasons that we described earlier. now there is some changes, right? If you’re a building to sell, you’ve got to have your sales team and there’s kind of its own business model around exiting, right?

but in the built-to-rent space, they’re still the same kind of you got to have your leasing team, you gotta have your marketing team, you’re still putting them out of dollars. So built to rent is still a very small portion of rentals, right? It’s maybe three, four, or five percent. You hear online about Blackstone buying up everything and renting it out, and that’s just not necessarily the case. but American Homes for Rent, Lenar.

some of the other guys, DR Horton, all have kind of a division now too of built to rent in addition to built to sell.

Dylan Silver (07:57)

Pivoting here a little bit, if we look at the fixes or the suggested fixes, we could say that people have floated for affordable housing. I know LITEC low-income house tax credit apartments is something that I’ve heard about on this show. I see, if I’m wearing my Texas realtor hat, I’ve seen tiny home communities go up, even from some of the corporate builders, under 150 grand out the door.

I’ve seen the influx of more townhome communities or you’ll have a subdivision and maybe a percentage of it will be townhomes. and now we’re talking build to rent. Are all of these spaces vying for somewhat of the same eyes and capital, so to speak? And I’m not just talking literal capital. I may be talking like human time and the bandwidth that people spend looking for homes, right?

‘Cause the person who’s looking at the town home might also be looking at the tiny home, might also be looking at the build to rent. Do you feel any of that?

Andy McMullen (09:30)

No doubt. I think that our typical resident is gonna want to have their own yard, typically a family, typically walkie trails. Some projects we build have more amenities, right? So they would be the same kind of amenities that you might see at a class A apartment building where they want to have the clubhouse and the pool. but yeah, no doubt on one of the projects we just have a three bedroom, two bed to two bath home, all the same single layout.

And just different elevations, just different exteriors. But the people that come there are probably also looking at in some cases, maybe not the tiny homes, because a lot of our residents are families, but they’re looking certainly at another apartment project. they would ultimately at some point maybe like to buy, or maybe they were downsizing. I don’t know that it’s the same residents are in that built to sell as they are

maybe the class A versus the Class C apartment buildings. But there is certainly a version as we’ve seen interest rates go up, rents, with that doubt that delta so much different. At some point, the person who is buying a home is likely renting a home. Right. now affordable is interesting because like I remember when we were coming in California, we were buying these projects in Fresno, like middle parts

of California and we couldn’t get anybody to help us with affordable credits, et cetera. Now I think there’s a real sea change in that regard, even where I am in California, which seemed impossible years ago.

Dylan Silver (10:52)

Hm. Yeah, I’ve heard this, from multiple folks involved in the space, and I’ve also seen it firsthand, is that there seems to be more savvy builders who are leaning into that lie tech space and then you also have increased awareness that there are these subsidized programs and they’re nice. They’re not, when sometimes people give suction eight a bad rap, but

Litech has a different tone, and I’ve seen some of these, and they’re indistinguishable if I’m looking at just the Greater Austin Metro, where I’ve seen one in particular from other brand new beautiful complexes. you’re looking at a pool and granite countertops, long high hallways with fans, right? So this type of thing is not what typically people would associate with that low income space, but yet here we are, which brings a question.

When folks are looking at rentals and they’re looking at making a move, oftentimes what is driving this is the circumstances that they’re in. And this could be, hey, we need to downsize, hey, we’re having difficulty making these bills, hey, we’ve gotta move. We’ve got a date that said, and we have to move. do you feel that the demand at certain times is rising or falling based on what’s happening?

Let’s say in the home market, as interest rates rise, you’re seeing more and more people having to look at build to rent versus folks who may be, first time buyers who are looking for a home.

Andy McMullen (12:17)

Yeah, Absolutely. our part of our thesis was, hey, let’s buy in communities that are secondary and tertiary. you go to Austin, you know this just as well as anybody, Dylan. You go to Austin, you go to Dallas, and people say they’re in those markets, but you know that there’s corners of those markets that are really struggling, right? There’s ascending and descending markets in every community. So we said, hey, let’s just pick a steady communities with growth.

that are balanced. It used to be Lafayette, Louisiana was a lot of oil, now it oil and gas. Now it’s healthcare, it’s tech. there’s, a billion hundred billion dollar SpaceX space station that’s going, 45 minutes down the way. So it’s basically those kinds of jobs that and growth that you’re seeing, dictate how built a rent has grown.

it’s still the case that there’s younger families that would be buyers that are gonna be coming in to a built to rent cake. And some of them honestly, some of the data showing Dylan, based on the people that we’ve got, they could buy, but they’d rather have their money elsewhere. They’d rather not pay those kinds of rates. they’d rather be in a community where everybody else is out and about and use their money for, whatever else you young guys are doing with it these days. But

I think it’s, dictated by a lot of factors, but that’s the main one I see.

Dylan Silver (13:29)

That’s a great point. And I think part of it is that I feel like there’s two maybe opposing forces. There’s a force of homeownership is becoming more of a hurdle. And then there’s, well, this is what it’s going to cost in order for me to make that happen. I’d rather not have to deal with that. And I could get the home, but I’m gonna be comfortable renting, right? Now, when you’re doing this at the scale that you’re doing it.

On the back end, there’s the property management side of things, right? These people are renters after all. What does property management look like when it’s a home and not an apartment?

Andy McMullen (14:01)

Yeah, it’s a good question. I think It’s very similar. You’ve got to have the same kinds of economies of scale. what we think of it as is like pulled apart apartments, right? So you’ve got detached homes, but you’re still managing it in the same way. The lawn care, collections, making sure that you’re doing things for the community to keep them there. We do community events,

We do different things to make sure that our residents feel as part of the community. But the real difference that I’ve seen over time is the operating expenses are lower, at least in the short term because it’s newer product and if residents are staying longer, the turns which are usually what gets you at for anybody who your listeners that have been in the apartment game, the turns kind of really suck into your bottom line, right? So

that’s been probably a net benefit. But again, you’re probably, considering costs down the road that are going to be a little bit more. so that’s one of the trade-offs at this point.

Dylan Silver (14:53)

as I’m listening, one of the things that immediately comes to mind for me is okay, so you’ve got folks and multiple different demographics. They could be, maybe someone who would be considering buying a home and now they’re renting. It could be folks downsizing. It could also be someone who needed to find a place quickly. What about the folks who have seen change in these communities and they’ve been living there for a while and now they’re seeing a build-to-rent community?

come into their community, how does this impact their home pricing, right? Because a rental community might affect comps differently than a build to sell. How does that affect the existing real estate market?

Andy McMullen (15:28)

I remember we were building a project in it’s Moolan. It’s like excuse me, Broussard, we call it the Mulan. And it was gonna be sitting right next to one of the councilmen who would be approving our project, right? And he said, I just want to make sure that if I sign off on you’re not bringing in section eight, et cetera, like you had described, right? so I think that there’s a perception everywhere for since the beginning, I’ve been in the business of this kind of

yeah, LA, we needed to build a lot of housing or San Diego where I’m based, we need to build a lot of housing, but yeah, just not there. Not so close to me. It’s true. I would say because these communities are new and they’re gated and they’re visually appealing, right? When you drive by a built-in community, you see the green, you see the walking trails, there’s people out and about. It’s a little bit different than condensed apartment building. So I think for the most part,

we’ve certainly had some battles in approval hearings and neighborhood councils and everybody who’s ever been in development has dealt with that. But for the most part, pretty welcoming. I think people would be surprised because there is a openness to them for people that own homes in the area, I think that’s quite appealing.

Dylan Silver (16:34)

When we look at new developments, the land portion of this is of course huge and you have to buy right. for folks who are involved in the transactional side, whether that’s brokerage or sellers themselves, what’s the best way for investors but also sellers to become involved with a builder or a developer?

Listed on the open market? Should they go to someone first like yourself who’s done this and say, Hey, what would you offer me on this? what’s your experience for the best way both to acquire and to sell these vacant land?

Andy McMullen (17:05)

Yeah, gosh, I started with very little when I got in the brokerage. And you’ve been in brokerage, I know I can look at you and say you’ve been eating nice, some weekends, and there’s been other weekends you’re like, I don’t know if I’m gonna make it to Monday, right? I think it’s so much of what this business is, just real estate in general, is how willing are you to be

Gritty. And gritty in the sense that I’m going to find a way to connect folks. I’m going to find a way to add value. And you’ve heard this, you’ve done 3,000 podcasts, so you’ve heard this all the time. But I can just tell you from my experience, and now I’m sitting at the other end of the table, it is rare that people dig in, add value in such a way that they can find the land. They can find the person who owns the land. we’ve got

an AI operating system. It’s not so much about the information. We can do the comps. we can manage the construction costs. We can manage the property underwriting. All of that is automatic. they can’t get is actual experience and relationships. I went through four cycles. during the dot-com boom it was the same thing.

after 911 was the same thing after the GFC it was so I just feel like people want to get involved. It’s very easy to contact an operator like us or a broker and say, hey, look, what is it that you’re selling a lot of now that you need help finding guys? So anyways, that’s just kind of an open commercial anybody who’s curious about this business, I’d be happy to talk to them. And we’ve got a team full of folks that would as well.

Dylan Silver (18:33)

Now, if we can get into the weeds here in underwriting, without giving away all the gold, right? when you’re looking at underwriting build to rent versus build to sell, what are the key differences there or is it relatively similar process?

Andy McMullen (19:22)

Yeah, without getting too deep into weeds, I think what most lenders care about and what we care about is what is the on the cost. So if we just say, hey, we’re gonna throw in all of our costs, that we gotta pay Dylan on the brokerage side, we gotta pay our team, we gotta pay the hard cost, which is like the hard construction costs, and we got engineering, all that. We throw that one to one bucket and we can predict.

What that actual cash flow would be, what that cash stream would be at the end of our stabilization. So we throw it all into a bucket. Now we got three, four, three years of construction, and then another year or so of marketing, and then another year of leaseup. So let’s say we’re in that five-year at that point in time, what is our income stream against what we put into the project?

a bank wants to see somewhere above seven. It fell down to six at one point, depending on the kinds of projects. if you can be in that range, now you’re above where cap rates are, you can still utilize that delta between that yield on cost and the cap rate that gives you kind of that what we call in the business development lift. So

That’s what we really look at big picture wise. And then how much contingency can you build in? costs of land are high now in some cases. So where we are in the south, it gives us a little bit of an advantage. We can buy a lower basis. We’ve got a little bit more room. That’s a long kind of winded answer. Sorry for that.

Dylan Silver (20:49)

at the five year mark, five years is particularly important, not just in build to rent, but also in larger commercial deals or commercial deals of any size where you’re looking at especially adjustable rate debt and debt with coming due in five years. a lot of syndicators in particular, we’ve had many on this show, are

Realizing okay, this note is coming due. We’ve either got to make the bank hole, renegotiate with the bank, and so forth. Build to rent being single family is a different asset, but I imagine has a similar method when it comes to financing. At the five-year mark, is it an exit? Do you sell the homes off individually? how does that look with the bank? Walk me through what happens at that five-year mark.

Andy McMullen (21:31)

Yeah,

that’s a good question. So typically what would happen in a perfect scenario is that would be around when you would sell, right? You created as much value as you possibly could in that year four and five, and the IRR or the average annual return is about as high as you’re going to get. in built to rent, if it’s individually platted, in which case some of our projects are, some of them aren’t, we could eventually take off 10 and say, Hey, I’m gonna take 10 out and I’ll sell them to Dylan.

And then we’ll keep the 90, becomes a little bit of a challenge for managing. Dylan’s gotta understand he’s at mercy of what we decide to do. but that’s an option. The other thing that I think is interesting now about just the market is that debts come back, right? For a long time, debt was sitting on the sidelines. I think for the most part, debts signed come back. So for example.

We’ve got a life co-company, a life insurance company that, they’ll, if interest rates now are at six and a half or seven, they’ll end at five and a half and they’ll go up to eighty, eight percent LTC own to cost, but they want forty percent of your deal. So if you’ve got some kind of programmatic partnership like that, then you can do more projects and you only have to raise 12% as opposed to some cases now 30 or 40% equity.

that’s not a bad idea. If you’re halfway through the project, then it probably is not the right move because now we can use that, and I’ll go into a little bit deeper later, but we can use that collateral to build as we go if we wanted to.

Dylan Silver (22:54)

I can imagine and hearing you talk about the financing side of this, is there a degree of complexity that is more challenging financing a build to rent and having those relationships with banks is really the strength behind a good build to rent operator versus build to sell communities?

Andy McMullen (23:14)

Yeah, I made it complex, but it isn’t complex, right? But there is a degree in which the relationship of the lenders that you’ve worked with in the past can carry you through, right? There’s no doubt about that. A newer operator with not as much gray hair as I is gonna have a much harder time convincing a life co company to come in, right? I had the same challenges earlier on.

In my case, I was able to get a senior partner, right? That either had some of those banking relationships or balance sheet or whatever that was. So there’s always ways around it. But I wouldn’t say that the financing is more complicated. I think that there’s just more products now that before were not willing to lend on built to rent. It was still kind of a little bit of a new idea. And now FHA, Fannie,

They’re all looking at it like, hey, this is really pulled apart apartments. Let’s take different looks at it. And as a result, I was talking to guys just this last week that said, hey, we will look at built to rent new stuff with a much keener eye and willing to probably drop our rates a little bit because we know it’s new stuff and we got to get capital deployed, right? So I don’t think that differs from the way that a built to sell.

Because he still has the same kind of timelines. He’s got to sell them all out at a certain point, or we’ve got to rent them out at some point, or we’re not stabilized. Right.

Dylan Silver (24:31)

We didn’t talk about this in the green room, so this may be a little bit of a curve here, but if we look at some creative financing strategies that I’ve heard folks who are in the on ramp to home ownership on the other side of this equation are looking at. sub to seller finance, one of the things that sometimes gets shying but I think not enough is lease options. So lease with the option to buy. Is this a strategy that happens at all with tenants in the

BTR space.

Andy McMullen (24:58)

It does. and I would be more than happy if that was the case. I wish it would happen more often. I can’t tell you exactly why it doesn’t happen more often. I think that in general, if you get to a point where you’re like, Hey, I’d like to buy a home, you’re looking at everything, not just the home that you’re currently in. so it doesn’t happen as often as I would like to see it, but

a big win for us and this is gonna sound, maybe sap it, but if we had a resident that just said, Hey, look, I’ve found a poem and I’m gonna move out, it would be fantastic. we would let him out of the lease and no problems because I think that’s what some people want.

Dylan Silver (25:33)

one of the things that gets overlooked, and we don’t talk about this much, because we’re in many cases talking about real estate strategy here on this show, and we’re talking about, especially investors who are scaling portfolios and doing things creatively. the other side of this is community building, right? And not just giving people an opportunity to own a home, but giving people an opportunity to live in community amongst their neighbors, right?

And sometimes and I think often this gets overlooked because as investors were looking at the numbers, from the outside perspective looking in, a build to rent community of homes is a phenomenal way to create a win win between folks who need a place to rent, investors who need an asset to capitalize on.

And then a surrounding community who wants to have a place where people want to move to. And is that a fair analysis of all the moving pieces there?

Andy McMullen (26:24)

sounds so sanctimonious, but it is the reason that we do what we do in the sense that we could be building homes and telling, our investors that, hey, look, we’re not gonna have community outreach, we’re not gonna have events, that’s cutting into your bottom line.

But it would be a mistake from their perspective as well. Because if I’m an investor, I want to have a community that’s vibrant, that people refer folks to, that people show up, that people stay longer, we have the contest for, Christmas lights and Halloween lights, and they buy in, they show up to the events. So they welcome new neighbors. That was one of the big things that we did when we were in every project, we’ve got some kind of community resource.

called a chaplain, called a community resource. It’s not just about the Bible studies for us. It’s about building a community event that they can go to. And what we found is it’s usually not the person on the outside, some kind of organization like apartment life that’s running it. It usually comes from the interior. So how can you empower some of those you know them, they’re in your neighborhood. They’re the kind of gatherers or the connectors

that they love to have their neighbors over and we just try to support them with either whether it’s money or, pizza, whatever that is. But that’s the part in the investment part where I think people do overlook it, Dylan, because they think that it’s got to come out of somebody’s profit, right? And it’s usually not the case because it usually grows to pie. People are staying, instead of one year turnover, maybe they’re staying three or four or five on average. that’s the data we’re seeing.

Dylan Silver (27:55)

I think there’s a lot of people, young and old, who would like to see a more neighborly communities across the country and folks where people know their neighbors, and where they feel that sense of community. And sometimes I think for a lot of people it feels like we’re going away from that and maybe it would be nice to see more of that. So hearing what you’re doing is incredible. we are coming up on time here though.

Andy, any new projects or activities that you’re working on, and then also anything that you’d like to mention directly to our audience.

Andy McMullen (28:24)

Yeah, there’s nothing really to specific to plug. we’ve got multiple projects that we’re working on. So people that are interested in investing with this, that’s certainly an option. But if there’s people that just are out there just kinda, hey, how do I dig in and help and learn more about this business? We’ve got quite a bit of resources, Dylan, on our website, legacyacquisitions dot com. Just take a look at that if you feel like you wanna and join our investor group. If not, we’ve got, a couple built to rent books there that

we put together and other resources. So I just know how hard this business is, Dylan, right? There’s a lot. You need somebody in front of you helping you. So now that I’m that old guy, I feel like it’s my duty to, reach back a little bit.

Dylan Silver (29:02)

Andy, thank you so much for your time today. Thanks for joining us.

Andy McMullen (29:05)

Thanks, Dylan. Appreciate you, man.