How can built-to-own single family rentals be incorporated into an Opportunity Zone investment portfolio?
Jeff Pintar is founder and CEO of Pintar Investment Company, a real estate development firm headquartered in San Juan Capistrano, California.
Click the play button below to listen to my conversation with Jeff.
- The investment case for single family rentals.
- The product type of built-to-rent SFR communities that Pintar Investment Company is constructing in Opportunity Zones.
- The distinctions between MFR and SFR product types within the residential asset class.
- How the Opportunity Zone incentive can compound after-tax returns.
- How the coronavirus pandemic has impacted the real estate market and rent collection.
- How COVID-19 has fast-tracked the trend of increased demand for single-family homes.
- How current market uncertainty has led to some 1031 exchange investors transition into Opportunity Zone funds.
Featured on This Episode
- Jeff Pintar on LinkedIn
- Pintar Investment Company
- Eliminating depreciation recapture from Opportunity Zone investments
Industry Spotlight: Pintar Investment Company
Founded in 2009, Pintar Investment Company is a real estate development firm focused on single family residential homes. Their investment strategy focuses not only on appreciation and cash flow but provides for redemption and liquidity as well. Their strategy is anchored to the philosophy of Protect, Preserve, and Grow.
Learn more about Pintar Investment Company
- Visit PintarInvestmentCompany.com
- Call: (949) 276-4166
About the Opportunity Zones Podcast
Hosted by OpportunityDb.com founder Jimmy Atkinson, the Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.
Jimmy: Welcome to the Opportunity Zones Podcast. I’m your host, Jimmy Atkinson. How can single-family rentals be incorporated into an opportunity zone investment portfolio? Here to discuss that and more with me today is the CEO and founder of Pintar Investment Company, Jeff Pintar. Jeff joins us today from his office in San Juan Capistrano, California. Jeff, welcome to the show.
Jeff: Thanks, Jimmy. I’m really glad to be here. Thanks for having us on.
Jimmy: Yeah. Glad to have you here with us today, Jeff. So, let’s get going here. Tell us a bit about your track record. You’re not new to the real estate investment game. You’ve been around for a little while, and maybe you can share your primary investment thesis with us as well.
Jeff: Yeah. Certainly. And it’s interesting having just turned 50, you’re right. I realize I’m no longer the newbie in real estate, although I found this investment class of single-family residential about 10 years ago, and it’s, kinda, created a renewed energy in a reformed retail developer as I used to be a retail developer my first 20 years of my career. And so this new asset class of SFR I just continue to involve in continues to make the real estate investing industry extremely interesting for us older folks.
Jimmy: And what is your investment thesis primarily? You’re investing mostly in single-family rentals or SFR as we’ll abbreviate it throughout this podcast. What’s your theory on why SFR is such a great asset class?
Jeff: So it’s interesting when I started in 2009 focusing our energy in efforts and resources in SFR, it was primarily out of the housing crisis and the financial crisis of 2008, 2009, 2010. And really, the philosophy and thesis was based off of being able to make investments in smaller pieces making smaller bets where the theory was everybody needs a roof over their head. Even in the worst of times, people are still gonna want shelter.
You know, outside of food and water, shelter’s the greatest requirement for humans. And what I’ve learned over the last decade, and as you study all of the demographics with population changes, household formation, population growth, here in the United States with 330 million people, we have a housing shortage, especially in the middle to lower income levels or entry-level housing. And it’s hard to believe because when you fly into LAX and you look out your window and you see nothing but houses, it’s hard to realize that we have a lack of new homes that have been built, especially since the GFC in 2008, 2009.
And when you run through all the numbers and I won’t bore everybody here on it, you actually have a housing shortage because there’s been a lack of new home construction in major metropolitan areas over the last 10 years because the affordability of building new homes, the cost of land, the cost permits, all of those things compared with just the growing demand of population growth, household formation you got this whole millennial 70 million people that are gonna be moving into houses in the next 5 to 7 years, there’s just not enough housing to satisfy the demand.
And our philosophy has been just try to get singles, try to get base hits a house at a time or a deal at a time, and what you realize is you can aggregate a nice portfolio of consistent cash flowing investments, one base hit at a time and wake up 5, 10, 15 years with a really stable portfolio of cash flowing assets.
And so, that’s always been our thesis. It’s not trying to create something and take advantage of a moment in time. It’s really focusing our energy and efforts towards the underlying demand of a product type that regardless of what’s going on, and we can talk about COVID a little bit later regardless of what’s going on in the White House, or overseas, or politics, there’s gonna be demand for housing. And so, we’ve always wanted to focus our energy and efforts towards those underlying factors where the demand is outpacing the supply. And our belief is housing fits that bill better than any other real estate asset class.
Jimmy: Right. And now, let’s bring in opportunity zones into the equation. So, tell me what is your investment strategy for your opportunity zone fund. And I think what I’d really like to know is two things. One, could you characterize the breakdown of single-family versus multifamily versus mixed use? You’re doing a combination of all three of those asset classes, and then two, maybe can characterize the approximate breakdown of new construction versus improving existing buildings.
Jeff: Yeah, certainly. Well, why don’t I start with, sort of, the product type first if that’s what you wanna get at and as it relates to within opportunity zones, you know. We believe that a single-family residential or what we call, kinda, the build to rent communities, which is a new product type that’s been evolving in the SFR rental space for the last few years and is really an attractive community or product for the consumers to live in. And so, when we call it a build to rent community, think of it as a suburban single-family residential community with individual homes, garage, driveway, yard, cul de sac, maybe an amenity center for that community self-contained.
You know, historically, that community would be filled with individual owners of homes, but the product type that we’re building and we’re starting to see evolve is communities that instead of owners of individual homes, we have renters of individual homes. And we call that a build to rent community. And what’s interesting, there’s a lot of these communities that happen to fit within opportunity zones. As we know, 2017, the tax laws that came about and about 8,800 opportunity zones were created around the country. And several of these developments were land sitting within these opportunity zones.
Now, we thought they were great investments even without the opportunity zone, but because of the tax laws and the incentives because of the 2017 tax law, the opportunity zone makes it even that much more attractive for a variety of reasons. You know, mainly, you got non-depreciation recapture. So, all the income that you get along the way because it’s new construction on these homes and land entitlements, you basically get to offset against future income. And then any of the appreciation you get becomes tax-free. And this is on top of deferring and reducing your capital gains that you get as you put it into…in a qualified opportunity fund.
And so, that product type is the build to rent community as we call it, is attractive in its own right, but with the benefit of an opportunity zone and the tax benefits that come with it you’re able to get cash-on-cash returns in the low double digits and 2.5X to 3X your equity on a 10-year hold. And because it’s in the opportunity zone this becomes tax-free.
And so, if you look at project A in an opportunity zone versus project B in a non-opportunity zone the opportunity zone project is gonna get the jump ball every time. Now that product type, what’s interesting and what we’re seeing in comparison to multifamily, which we’re doing some of it, but it’s not the traditional multifamily that I think most of the people are familiar with, we’re doing it more in an urban area where there’s a mixed use component to it where you have some residential over some ground floor commercial and we think that’s a more attractive product type than your suburban multifamily. I think the suburban multifamily is gonna be under a lot of pressure. And as an example, what we’ve seen during COVID is really strong lease up demand in our individual single-family homes, and about 40% of our tenants come from multifamily.
And it could be just the spacing requirements, people don’t wanna be holed up at home as are under lockdown in an apartment complex. If you are gonna have to be holed up at home, you’d rather have a house with a yard, maybe in a cul de sac. And the product type is of the single-family home and the build to rent community is much different than the consumer in a multifamily. The tenant base in a build to rent single-family home community tends to be more family wanting to set down roots be a part of the school district, be a fabric of that community whereas a multifamily tenant tends to be a lot more transient.
And so we think the multifamily product, as it has been historically, is gonna be under a bit of pressure as the single-family rental homes, individual homes continues to mature and evolve, and especially in these build to rent communities that we’re creating and some others are creating as well. And so, it’s an interesting analogy though because people think of residential investing and lump it all together where there are some nuances that I think we’re gonna have some major impacts and allow the SFR product type to outperform your more traditional, suburban rental multifamily over the years to come.
Jimmy: Yeah. There absolutely are some nuances within the residential asset classes, those different product types, single-family versus multifamily, quite a few differences there. So, I threw a lot your way in that last question. So, I’m gonna reask you again now because I think I gave you too much to answer. So, what’s the approximate breakdown that you’re seeing in your OZ fund of single-family versus multifamily versus mixed use?
Jeff: So, we’re probably gonna be 70% what I would call build to rent single-family. And that’s that suburban individual home development somewhere between 50 to 150 individual single-family homes with their own yard and cul de sac street. The remaining of the split, sort of 50-50 between what I would call mixed use urban development with townhomes above commercial or apartments above commercial, and then the remaining would be your more urban infill multifamily, but it’s gonna be smaller multifamily. It’s gonna be 50 units or less. You know, we’re not gonna be developers of 200 apartment units in your traditional style apartment complex.
Jimmy: Right. Got it. Got it. And as far as new construction versus acquiring existing buildings, how does that break down?
Jeff: So, part of the opportunity zone in order to maximize your benefits it’s you’ve got to add a certain level of capital improvements. And so all of our product’s gonna be new construction. And in the way, what’s interesting is what we’re doing with the tax code is you’re actually able to partner with somebody that’s already under construction, and as long as we close on that asset in our name prior to a certificate of occupancy, we could still take advantage of all the opportunity zone benefits and remain in compliance.
So all of our investors get the benefit of the opportunity zone tax laws. And so one of the big concerns, I think a lot of investors have with investing in an opportunity zone is knowing that it has to be new construction takes the benefit of it and you think, “Okay, shoot. That’s a three year, kind of, turn around, I might not get any cash flow.” In actuality, our first project that we’ve just closed on in our new fund we just closed last week is a double duplex we got four units of four bedrooms each where we were able to buy it from a developer who was on a construction and we bought it prior to him getting a certificate of occupancy, and we’ve already got it leased now.
And so that’s an investment where it’s brand new construction, our investors are getting the benefits of all the opportunity zones, and it’s now a cash-flowing asset.
Jimmy: Good. So, a little bit of a mix there, and of the mix that you’re compliant with, the substantial improvement requirements, but also so that it’s it’s cash flowing as well through the entirety of the fund. Is that right?
Jeff: That’s correct. And so the 10-year time horizon of opportunity zone investing, if you just say, “Okay. I invest today, when am I gonna get cash flow?” And the new tax law is allowing us to able to acquire assets that are under construction, and they don’t yet have the certificate of occupancy is we can shorten that time frame for investors so they can get return on their investment dollars faster than just going out and buying a greenfield piece of property, doing the entitlements, doing the horizontal improvements, the vertical improvements which could be three to four-year process, which eats up a chunk of your tenure or hold period.
And so, a combination of finding these existing assets that are cash flowing right away allows opportunity zone investors to increase their cash flow yield faster than they would if they were just doing complete ground-up deals.
Jimmy: Right. Right. And then yeah, purchasing those new construction buildings right before they get their certificate of occupancy, there’s no substantial improvement that needs to be done there. They’re considered new buildings not yet put it into service. So, that’s very helpful as well for you I’m sure.
Jeff: Yes. That’s right.
Jimmy: What deals have you closed so far? Are there are any assets you’ve acquired, any specifics you can share with us?
Jeff: Yeah. So, our first deal, I was just mentioning that we closed on last week was this double-duplex up in Los Angeles, near USC. It’s very attractive from a student housing standpoint especially as there’s spacing requirements and it’s four units of four bedrooms each with four bathrooms. So students are able to get their own unit and their own bathroom and have a shared kitchen in a brand new product, a brand new community with parking and all of that. So, that’s our first deal.
We’ve done another build to rent community in Florida out in Lake Lucerne where we have 56 single-family homes that we built and have leased up actually during COVID and we’re in the process of getting some agency debt on that. Right now, we’ll probably return about 70% of the equity to the investors and that project is on target to have about a 12.5%, 13% cash-on-cash yield to the investors after the refi. And we have some other land that we’re in control of, similar types of deals.
So, we’ve identified about 15 markets around the country that we are really hunting in, so to speak. We pick these markets for a variety of reasons, but basically the underlying factor was a lack of recent residential development, but these communities have seen outpaced job growth, income growth. So, really, that lack of housing. And our belief, back to our thesis is the values of the residential real estate may bump along over a short period of time, but over the long run, the future value will be greater than the present value.
And since these are long-term investments 10 years, we believe these markets are gonna outperform others in that time frame, both from an appreciation value standpoint and a consistency and predictability of cash flow because of the school districts, the lifestyle of these communities, the job growth of these communities and things like that.
Jimmy: Good. And earlier… I want to talk with you about some financial projections right now. Earlier, you mentioned your deals are typically seeing a 2.5X to 3X return on equity, you mentioned low double digit cash-on-cash return numbers. What about target IRR and cash flow? Can you dive into those briefly for us?
Jeff: Yeah. So, the IRR it’s gonna be upper teens over the 10 year period. And we’re able to achieve that through…you know, in year three, we’re anticipating significant return of a lot of the equity through debt refinancing somewhere between 30% and 45% of the equity. And we’re looking to raise $100 million of equity. So we’re probably gonna do somewhere around $350 million to $400 million in total projects.
And so, we aim to return probably let’s call it 35%, 40% of that equity after year 3 upon stabilization of those portfolios. And then that’s gonna get you to an IRR in the upper teens over a 10-year hold, and then that cash-on-cash is gonna be a blended high single digits 8% to 9% cash-on-cash of that remaining equity in the fund. And because it’s an opportunity zone fund these are numbers that are probably pretty consistent in a non-opportunity zone fund projection standpoint, but because of the tax laws I think what people sometimes don’t recognize is these are after-tax projections, right, because the cashflow is tax-free through the depreciation and there’s no depreciation recapture in the opportunity zone. And then obviously, the appreciation that one gets through the ownership and holding of the assets over that 10-year period is also tax-free. And so, in comparison to a non-opportunity zone investment, it’s light years ahead. It’s depending on your tax rate, it’s significantly better.
Jimmy: Yeah. Absolutely. The tax benefits can definitely reduce the numbers considerably depending on your tax rate and which state you’re paying income taxes too. That could help as well further compounding the returns there. Let’s talk about COVID now. You know, we are in early July here. We’re about four months into when this current COVID-19 pandemic really hit the United States hard and we started shutting down and the economic and financial markets started turning upside down. How has COVID impacted your strategy and what are you seeing in the real estate market as a result of COVID?
Jeff: It sure is a topic, isn’t it? So, when we went out to raise this opportunity zone fund, we’ve started, kinda, at the end of 2019 and…which seems forever ago. The market was as rosy as it had ever been everything was firing on all cylinders, and if anything, our concern was at that time was assets were a bit pricey. And where are we gonna be able to find anything attractive to make investments in because we’d seen a decade of appreciation and increase in values. And then March hits and COVID hits and we had a real fear of, “Oh, man. Nobody’s gonna pay rent. Everybody’s out of job, out of work. You know, what’s gonna happen? And now’s not the time to be investing.”
And so, we sat on our hands a little bit and we also managed a large portfolio of our own assets single-family residential, and so we’ve got a lot of data that we can see what’s happening in the market. And we were pleasantly surprised that our collections have remained consistent with pre-COVID. And so our faith in humanity was renewed, so to speak, that despite a lot of rhetoric of not needing to pay your mortgage, or not needing to pay your rent, and things like that, everybody’s paying rent for the most part. And that reinforced our underlying belief that this is an asset class that is a great place to have your money invested, especially if you’re looking to, kinda, protect, preserve, and grow your investment dollars and have that consistency of income.
And so, what we’ve seen with COVID oddly enough from an investment standpoint is the pricing of new acquisitions has improved because, you know we have cash and there are a lot of people out there with stress. And so, there’s less buyers than there have been and there’s some stressful…you know, there’s some distress happening with some of the sellers. So, we’ve been able to pick up deals and renegotiate deals that we had in contract with some better pricing. So, our return has actually improved. Our underwriting returns have improved from our initial assessment of what we were gonna have when we were starting this back in 2019 because the market pricing has changed.
And what we’ve seen as well is a greater influx and demand for our product type of single-family homes for rent. I think as people are working from home, and I don’t think that’s gonna change, I think we’re gonna see more and more people figure out how to work from home. And we were already trending in that direction, but it’s probably been advanced a decade through COVID, the work from home or the…you know, this flex workspace. You know, I think COVID has advanced that trend at least a decade. And you’re gonna see a lot more people with these flexible working locations and hours more so in the future.
And with that the space in which people are working is their home office and that and our product type of a single-family home, is a lot more conducive than in an apartment, especially if you’re one of the 70 million millennials that are likely to be going through some life changes with starting families and wanting to put down roots, but maybe you don’t wanna buy a house to make that financial commitment.
So, the demand for our product type has increased substantially. And I think I might’ve mentioned earlier our lease-up through COVID, we’ve seen 40% of the tenants come out of this suburban multifamily. And I think that we’re gonna continue to see that trend even post-COVID because of the comfort and the luxuries of being in a detached single-family home versus a shared wall a suburban apartment.
Jimmy: Right. You know, that’s an interesting perspective you have. I’ve been trying to pull out silver linings from a lot of the COVID-19 discussions I’ve had with my guests on this show over the past few months and for you definitely, a big increase in demand for your SFR product type and that’s incredible that you suspect it’s advanced a decade, that trend, and it may very well end up being a long-term effect of COVID, all, kind of, happening at a relatively short, compacted time period. Is there anything else interesting that’s resulted from COVID for you and anything else in respect to your typical investor base?
Jeff: Yeah. So I don’t know if it’s COVID related, but I think it’s probably not COVID related, but I think it’s just opportunity zone related. And here we are in July, the tax returns deadline got extended and so, that’s coming up. And one of the things we’ve seen from investors is if you’ve got this hard date that’s now coming up with your tax deadline, and one of the things we’ve seen that’s pretty interesting is we’ve got a few people that have reached out that have these 1031 exchanges that were in place, ready to get locked and loaded, and maybe they were gonna go into a shopping center. And now that shopping center doesn’t make sense anymore.
And I guess that is COVID related because retailers aren’t opening up stores and nobody really wants to catch that falling knife. And we’ve had a few investors sort of, implode their 1031 exchange and reinvest those exchange monies into our opportunity zone because their 1031 deal sort of, blew up or they weren’t able to find a project that was as attractive for them as they were otherwise.
And so I think that is an interesting, not phenomenon, but as asset classes are changing and the values are changing and how how do you underwrite an office building or a shopping center today, and if you are gonna be putting a 1031 exchange money into one and you’re afraid of catching that falling knife we’re seeing more of those investors come our way that had already had previous commitments to 1031s that they are now pulling out of those.
And the type of investors that we’re seeing is all high net worth accredited investors and the stock market’s been on a crazy run. And the one thing that’s pretty in common with those that are high income, high earners, or have had some gains is how do you make your after-tax dollars work the best for you? And we’ve got a lot of wealth managers that have clients sitting on taxable gains in equities or other asset classes that are now selling out of those positions and investing them into an opportunity zone like ours because they can lock in those gains, lower the rates that they have to pay on them, and defer the payment of those, as opposed to just keeping it in there and riding that roller coaster like they traditionally have been. And so, yeah, wealth managers, RIAs tax advisors are all a great resource of potential clients and investors of ours.
Jimmy: Yeah. That’s great. I mean that huge stock market sell-off in late February, early March when this whole thing was hitting, opportunity zones, kinda, coming to the rescue here for a lot of investors with capital gains, looking for deferral. Now that the deadline has been extended by the IRS to the end of this year for them, I think certainly, a lot of opportunities there for high net worth individual investors and their wealth advisors and RIAs to consider.
Well, Jeff, thanks for joining me today on this episode. It’s been great chatting with you, getting your perspective, and having you share some of your expertise with our listeners. Where can our listeners go to learn more about you and Pintar Investment Company?
Jeff: Yeah. Thanks, Jimmy. Yeah, the easiest spot is you can…you know, please visit our website, www.pintarinvestmentcompany.com. You can always call us as well here. Our number is 949-276-4166, and you can ask for me, Jeff Pintar, or Tom Casper, who’s head of our investor relations. And we’d love to talk about what we’re doing, and see if there’s opportunities to work together.
Jimmy: Perfect. Thanks, Jeff. And for our listeners out there today, I will have show notes for this episode on the Opportunity Zones Database website. You can find those show notes at opportunitydb.com/podcast, and there, you’ll find links to all of the resources that Jeff and I discussed on today’s show, and I’ll be sure to include a link to Pintar Investment Company and their phone number as well.
Jeff, again, thanks for joining me today. I appreciate it.
Jeff: Thank you, Jimmy. Have a great day.
Jimmy: You too. Thank you.