235: Build-To-Rent Mastery with Jim Sheils

Big Mike Fund Podcast
Big Mike Fund Podcast
235: Build-To-Rent Mastery with Jim Sheils

Welcome to our latest episode. Today, we’re thrilled to have Jim Sheils, a seasoned real estate investor with over 22 years of experience and a portfolio that includes over 2,000 acquisitions and rehabs. Jim is a full partner at SI Homes and a #1 Wall Street Journal best-selling author of the popular book “The Family Board Meeting”.

In this engaging discussion, Jim shares his journey from Bakersfield, CA, to Florida, his expertise in the “Build to Rent” model, and insights into the current real estate market and strategic capital raising. Jim delves into the advantages of builder forward commitments, how his team navigates the Florida market, and the rise of house hacking. He also discusses preparing for potential market recessions, the challenges and benefits of new construction insurance in Florida, and the overall supply and demand equilibrium in the build-to-rent sector.

Tune in now to gain exclusive access to Jim Sheils’ expertise and discover how to navigate the build-to-rent market effectively. Don’t miss out on this insightful episode!


00:25 – Guest intro: Jim Sheils

01:06 – Current real estate market conditions

01:48 – Focus on Build-to-Rent model in Florida and Texas

03:08 – Impact of builder forward commitments on mortgage rates

04:54 – Subsidizing mortgages for better affordability

06:14 – Investor-focused properties and the rise of house hacking

08:42 – Supply and demand equilibrium in the Florida market

11:59 – Preparing for potential market recessions

13:32 – Challenges and advantages of new construction insurance in Florida

18:45 – Forward outlook and market trends

If you found this episode substantial and want to dig deeper into real estate, or maybe you want to discover better investment opportunities, be sure to check out www.tempofunding.com.


Website: https://southernimpressionhomes.com/
LinkedIn: https://www.linkedin.com/in/jimsheils/

Full Transcript:

Intro: Welcome to the BigMikeFund Podcast, where you’ll learn about advanced wealth building strategies from real estate investing to creating massive ROI and secure retirement profits. So pour yourself a cup of coffee, grab a notepad, and lean in. Because Big Mike has got the mic, starting now. 

Mike Zlotnik: Welcome to the BigMikeFund Podcast. I’m the Big Mike, I’m Mike Zlotnik, and today it is my pleasure and a privilege to welcome back my really good friend, Jim Sheils. Hi, Jimmy. How are you?

Jim Sheils: Big Mike, good to see you.

Mike Zlotnik: Good to see you too. How you doing? What’s new and exciting? How’s, how’s family? How’s sunny Florida?

Jim Sheils: Family is good. Sunny Florida is good. Five kids are still rocking and Jamie’s good. I got to tell you this milestone. I hit 50 years old two days ago. So I am half a century old. Remember he used to know me when I was young. We both met each other when we were young, but

Mike Zlotnik: Well, congratulations. You’re catching up. I am a few years older than you, but 50 is a good, nice, nice round number. Yeah. Congratulations.

Jim Sheils: Thanks, Mike. Well, things are good down here. You know, it’s, it’s a different market right now, which I know you and I have had private conversations on when we saw each other a few weeks ago at an event. And, but, there are some very good things happening in real estate.

There’s some interesting things that aren’t great happening, but it’s definitely a good time to be doing what we’re doing.

Mike Zlotnik: She’s doing Build-to-Rent. Right. Right. Right. Clear. Clear. So you’re building Build-to-Rent, is it mostly in Florida?

Jim Sheils: All in Florida right now. We just did our first fee build project in Texas. So we have officially entered the Texas market as well. And if all goes right, our goal by the end of the year, Mike, is to enter Tennessee as well.

Mike Zlotnik: I gotcha. So you’re building, is it single family townhouses? Is it duplexes? What kind of product seems to be doing well? Yeah. Yeah. Yeah.

Jim Sheils: All residential, the single family, a townhouse, single family duplex and quads.

So we’re staying four units or less. And you know, what’s really helping all of them are still continuing to do well. And I think a lot of it because something called a builder forward commitment. Which I know you probably know what those are, but we’re now not only in the house building business, Mike, but we’re in the money mind business.

So we’re buying mortgages in large blocks and it’s not cheap, but we’re able to still lock our people in an interest rates of, you know, 4. 75 percent interest and that keeps the cash flow healthy where most people are struggling. So that has been an absolute key to what we’re doing and why I think, you know, the properties are in demand.

Obviously nothing is as hot as it was in 2021. But Florida is still growing and there is still an inventory shortage. So we’re feeling good in the overall, but the interest rate abilities right now, I think are key in whatever we’re doing. I think that’s where, you know, that’s where the commercial markets have struggled because of these dang interest rates and we’re able to, to work with them a little easier.

Mike Zlotnik: So just to explain, you’re pre buying large block blocks of mortgage pools and you are essentially pre paying number of points up front to lower the interest rates for your buyers. Yes, sir. Seven, let’s just call it seven, seven and a quarter percent, whatever the market is to some below five. Is that what you’re doing?

Jim Sheils: That’s exactly it, Mike. And that, that is a big two and a half points that we’re, we’re making the difference on. And when you’re buying a, you know, a million dollar quad in a high end of Jacksonville, that can be the make and break of instant cash flow or instant negative cash flow.

Mike Zlotnik: I gotcha. What is it costing you? Just curious if you were to Get somebody a loan sub 5 percent and you have to pre buy those points.

Jim Sheils: Every, every block is different, Mike. Every block is different of the money you’re buying. But here’s what I can tell you. If a person listening to this was to walk into their own mortgage company and name whichever one they want, but any of the, the ones that are working, you know, within Fannie and Freddie may have good standing.

Let’s say they do volume and they tried to get the rates that we’re offering. They would be paying over 10 points.

Mike Zlotnik: So it’s a four to one ratio to get two and a half. percent discount, they got to pay four times that in the formal.

Jim Sheils: They would have to. Now we can get it done for a little cheaper since we’re buying in bulk just like anything else. But for an individual, they’re looking 10 to 12 points to get what we get.

Mike Zlotnik: I got you. So you are significantly helping them. You’re subsidizing effectively the mortgage and these are 30 year fixed mortgages, right?

Jim Sheils: We do 30 year fixed and we do a 10 year fixed with a 30 year am. So whichever one you want, we can do either.

Mike Zlotnik: I got you. So from your ability to sell into the marketplace, that’s a critical feature that helps your buyers to be able to afford paying those mortgages and to make these investments economically feasible. So and, and obviously you are subsidizing. This is coming out of your profit. So you’re, you’re forced to discounting the properties, but you’re paying these large sums of money. On behalf of borrowers to cut the trust cost.

Jim Sheils: Yeah, we’re selling them at market value. So, you know, if you try to go above market value, they’re not going to appraise. So we sell at market value and we take a a discount to our profit margins. And we’re okay with that. As you know, we were partially acquired by Sumitomo about a year and a half ago and they’re, A very good partner to have we have no bank debt, which is pretty incredible for a builder of our size.

No bank debt. They’re 330 years old. So they look at things very long term. And the instruction they had is said, Hey, let’s take lower margins and just keep doing your volume. And these things will correct. We’ve seen lots of situations. So we’re in a great situation where some builders, even by their bank requirements, if they’re getting bank loans, they have to be hitting a certain profit margin.

We don’t have any of that. So we’re lucky to have really good long term partners that are saying, no, no, let’s, let’s keep, let’s keep your, your pipeline healthy. Let’s just take a lower margin per property and keep a good volume. And that’s kind of our strategy, Mike, that we see for. Okay. You know, at least the next year as we, we feel rates are going to go down.

I don’t know where you were at, but I do feel there is going to be some drop that will help with, with some of the market conditions again. But who knows?

Mike Zlotnik: Yeah, who knows? I, I, I happen to believe that. The rates have to come down. The question is when, just at the end of the day the Fed is, is not in a hurry and overall market seems to be reflecting the sticky inflation type of situation.

But that aside on a long term basis, if the Fed is able to hit their 2 percent inflation target, And the long term interest rate should not be where they are right now. They, they, they, they should be a healthy spread over 10 year treasury yield. But for now, we are at a very restrictive territory. So we’ll, we’ll leave that alone.

We just don’t know where it’s going to go. Now, as far as the product, I assume it’s all investor focused or any of the properties you’re selling owner occupied, or that’s not really kind of the not too much over that product. And then the other question that I had. Was we are in Florida, you know, I know you were doing Jacksonville, Ocala and in between and just curious what other areas of Florida. That seems to be,

Jim Sheils: yeah, so we’re, we’re in northeast Florida, Jacksonville, Palm coast, and then over to Ocala, Inverness, Citrus Springs, and then head down to, you know, greater Fort Myers area. We’re in about 7 different markets in Southwest Florida. So those are our main hubs right now and our, our main focus. Those are the areas.

Mike Zlotnik: And, and again, the first question was Investors or owner occupied where they’ll buy live in 1 unit and rent.

Jim Sheils: Great question. So, it’s very interesting, Mike, we’ve seen in the last 6 months, a big jump in. So we focus on investors. Yes, we have some properties and we have a small retail division Sumitomo on to sell some retail properties.

So we do. And at the affordability level, we’re at for these, they do sell well, but we like to work with investors. That’s our main BTR model. That’s the bulk of our business, working with investors, building portfolios, and we want that to continue. And so that is, that’s where I focus most of my time is in those types of properties, but there is a quasi buyer right now called the house hacker.

Where, you know, in November, when they dropped the FHA guidelines from 25 percent down on a duplex, triplex, or quad to 5%, we’ve seen a lot of people come out of the woodworks to buy a duplex or buy a quad and live in one unit and then rent the others. So that’s been very interesting. It was.

Something we came across once in a while, you know, years back. Now I’d say it’s a weekly occurrence where someone is putting an offer in on one of our properties as a quote unquote house hacker. Again, which just means they’re going to live in one unit. They’re going to rent the others.

Mike Zlotnik: That makes a lot of sense in, in big cities like New York where I live, it’s a very common occurrence.

You know, you buy a three family house, you live in one and then you try to run the other two. Yeah. Not, not sure if it’s a frequent occurrence in Florida, but I guess it does happen from time to time.

Jim Sheils: Starting to now.

Mike Zlotnik: Starting to, yeah. And the other quick question is as far as the supply demand, so the interest rates are high, you are working through financial engineering to offer them the low interest rates.

You’re sort of supporting the the market. And you’re building quite a bit. You see the trend continue. In other words, if interest rates fall, of course it will be a tailwind. It’ll support what you’re doing. Yeah. Hopefully the rates will not go much higher from here. It, what about supply and demand equilibrium?

You’re seeing, you know, U. S. turning, especially Florida, where you’re building into renter nations. A lot of people retiring to Florida. Are they, are they retiring to be renters in these built to rent properties? I’m just curious who, who are the folks actually living in these properties?

Jim Sheils: Yeah, I mean, we have some new retirees that move into our properties, but I think more people are moving here with more base level replaceable job income source that actually provides service to the new retirees and the baby boomers.

So I’d say we have more of that workforce. Community moving into our properties. That’s who the main bulk of our renters are and again, everyone’s always looking at inventory levels. It’s been a very interesting time in Florida, you know, where I think we had about 2 weeks inventory at 1 point in the past.

In the in the pandemic on our major markets, which is just very unhealthy. But right now we’re still just at about, you know, there’s been lots of properties come back on cause I couldn’t sustain, but there’s probably, we’re at about the levels of 2019 now. Which was by all means a normal market. So you’re seeing more properties on the market.

There was a larger stabilization period from especially two years ago to get properties leased up. Nothing more than a few months, but but definitely a longer stabilization. So that’s something that we always keep an eye on as well.

Mike Zlotnik: Interesting. Yeah, I appreciate that, that clarification. So the market is sort of normal right now.

What would happen if, if a formal recession hit? I’m just curious. It’s a stress test question, and I don’t know if it’s an easy question to answer, but something is, is, you know, sort of soft lending, whatever you call it, whatever’s happening out, out, out there right now. But higher for longer rates that are certainly damaging the economy.

Overall at some point they will damage it to the point where consumer is going to be really hurt. At that point that may start easing, which will be sort of a tailwind. Nonetheless we might see more unemployment. We see more challenges in the economy as a result of this. Are you sort of preparing for it, modeling for it?

Jim Sheils: Yeah, the nice thing again, Mike, is had we not been acquired partially by Sumitomo, that would be a big stress. I know that we, there are really good builders out there. They’re really good commercial syndicators out there. And the banks are just being really, really good. Little screwy, they’re just scared.

And so I think access to capital is key right now. The fundamentals from what I’m seeing are there, especially as you know, we’re, we’re not going to the low end areas, but we’re also not high end builders. We like to place ourselves just below the median. And that has a really. Good safety score through past recessions, and that’s where we’re sticking to.

So that that gives us, a certain degree of comfort, I wouldn’t say complete safety. There’s never complete safety in any of these things, but that’s where we stick to and we’re still feeling like we’re in that range of where. Okay. If. People have to downsize they’d want to downsize into our properties.

So we’re, we’re, we’re, we’re holding fast to the model that we’re in. And we’re continuing to build again with, with having a long term partner. That’s looking out. Not the next 2 quarters, but the next. 8 to 10 years, they’re allowing us to build with a degree of comfort. And there’s a need right now because, you know, this, a lot of larger commercial developments have gone on hold.

They’re not putting the units on the ground that are needed here in Florida. They’ve stopped because of the financing. And and that gives us an opportunity to deliver these smaller units in bulk that we think will fill a, a needed void.

Mike Zlotnik: Yeah, I appreciate that. The other question is are you dealing with insurance challenges? So insurance has been massive nightmare for florida. In some, the hurricane zone. Towns have massive spikes in insurance or it’s completely not insurable. So are you able to get these properties insurable? Are there companies that are, that insure? Have you seen significant spikes in the insurance costs? Just curious, what’s the impact?

Jim Sheils: Great question. Here’s what I always say, Mike, that I’ve learned because you and I have both done old and new properties together, right? I didn’t realize the degree of. Difference in analysis that insurance companies do between those 2 properties and they absolutely completely and totally favor new construction.

Why, because, you know, since 2004, after that big hurricane hit Punta Gorda, they changed the building requirements. You know, how, how high does it have to be built? Where where are the fasteners and, and the, you know, structural designs have to be. And so, you know, that last big hurricane that hit here, Hurricane Ian, Mike, we had almost 300 projects down there and we had four, only four that needed insurance claims.

And those four, they were just freestanding walls. We didn’t have time to tie the roof on, which really gives it that strength through the wind. So the wind knocked over the freestanding walls, but we had no flooding and the insurance companies look at that, you know, they, well, how did you perform through big situations and new construction?

Our new construction has performed very well and that gives them. the ability to underwrite us more and for better pricing. In fact, we got from one of our main carriers here of notice of reduction on a ton of properties for our investors in Q1 of this year. So everyone has been saying to me, and I know this, I mean, you’ve been to my house, Mike, and you know, I live one off the beach house was built in 2004. Good sized house. You know, my little barrier Island is only 11 houses wide. You go down about six houses where the gland gets much lower their little house is built in the fifties, low line land, different structural design their insurance. Even though the house is 1 3rd of the size of mine will be 7 times 5 to 7 X.

What my insurance rates are, and this is where if you’re going to come to Florida, look at the individual property because one property a block from each other could have a totally different insurance rating and therefore premium. And that’s something you want to look at. Obviously,

Mike Zlotnik: that’s a very interesting observation that I guess it’s a new construction meeting the new hurricane standards.

All the requirements. Yeah. Significantly better. Product for the insurance underwriters versus the, the older properties where there’s a, there can be water or wind damage. And then, yeah, that’s very interesting that that’s, I guess, builds the case for your product over the older product. So

Jim Sheils: that’s not something we planned. That’s not something we planned. Mike, I didn’t understand. You know, all of this until afterwards going, geez, how did, how did, you know, houses survive so well? Well, you know, if you’re buying and building a house in 1955, you could be at 2 feet, 3 feet above sea level. Now, you’re required to bring in tons of dirt, which is expensive.

And we kind of groveled about. Now we’re glad we did it, but then we got to build up to 13, 14 feet above sea level. I mean, that is a monstrous difference when there’s water coming through. And, you know, normally if you’ve ever been through hurricanes and I’ve been through plenty of them now, that water rush is a very short term thing.

You know, it could be less than an hour to a few hours normally. And so, you know, that, that is a huge difference in how will the property hold up depending on that height and let, let there be no mistake. Flooding always has caused more damage in hurricanes than wind ever has. That’s a big misconception that, that I believed years ago being a Northeasterner, you know, we didn’t face too many hurricanes up there together.

Mike Zlotnik: Well, Jimmy, I can tell you my, my memory of Sandy, Hurricane Sandy that hit New York City area. And yeah, it’s, it was only a category one, but when you have narrow waterways and then you have a lot of wind pushing the water in and things get jammed, really jammed and the water rises. I remember in an area where I live in Brooklyn, the water went up all the way to the top of the of a stop sign, you know, near, It was that high, all the houses in the area, that they got flooded.

And you don’t need a lot of water to destroy a house. You just need one or two feet of water to create damage on the first floor. And if you have a basement, obviously it gets flooded. So it’s it doesn’t take much for water damage to create a gigantic problem. So yeah, versus the wind damage is, is, is much, much less.

So it’s a good point. Forward outlook. Later this year, next year, interest rates soften up which will give you some more ability to continue to provide. Affordable rates for your investors, if the rates fall from where they are now seven and a quarter, seven and a half down to six and a half, you’ll probably continue to do what you do today.

You’re still going to buy it down to 5%, maybe 475. It might just improve your margins because your buy down cost will come down.

Jim Sheils: Come down, yeah.

Mike Zlotnik: But fundamental demand, you still see people moving to Florida. You don’t see an oversupply of product in Florida. Because it’s, it’s, you’re building now when interest rates are high and buyers are still buying.

When the interest rate will come down, it should only support the demand in theory. But what about fundamental forces supply and demand, people still moving to Florida? And the other question I had, and I’ll let you answer this question first, then move to the next one. Florida has seen all kinds of issues with condos.

So many condo buildings are forced to go through major expenditures, and the maintenance charges are through the roof. A lot of properties are in distress as a result. And I’m just curious if this condo boom is gonna Basically change into let’s get away from these condos and go into a single family or built around your product So i’m just curious if you have any thoughts on a forward Because i’m hearing horror stories in the condos it’s just just people are retired they can’t afford their maintenance because The requirements are through the roof and the charges that they are forced to collect are just economical

Jim Sheils: Yeah, and, and special assessments are never a happy situation. If you’ve owned a condo before, I’ve been there years ago and that can, that can definitely get costly and be quite a surprise. We we’ve stayed completely away from the condo market, Mike, and really a lot of the markets for condos of, you know, Orlando and, and Fort Lauderdale. Miami, maybe St. Petersburg, which I own property in, but it’s, you know, it’s these areas, Tampa, that’s not where we invest.

We go very 2nd tier, you know, where there’s still population growth and economic growth, but it’s very 2nd tier, you know, Jacksonville, all the property areas that I named are not the main ones, you know, about, and they’re not big condo markets and, and from what we’re seeing is there can be over supplies, especially you’ve seen the national home builders, you know, Pull back, but they build a different type of property than us.

You know, I think it’s like less than 8 percent of all new builds since 2008 have been under 1400 square feet. And, you know, that’s the majority of what we do, whether it’s one of our small single family homes, our duplex units, our quad units, we’re trying to. Fill that void in the market because again, the national homebuilders, we’re not trying to compete with them.

They do what they do. They make their bigger spreads on bigger properties. They have zero interest in building our little homes are duplexes or quads are completely foreign to them. So we’re seeing that there’s still a need for our type of housing. Also, you know, being an investor. Focused company, the investors are still coming here because we have one of the most important things that I believe right now.

Mike is not only returns fundamentals and projected growth, but also landlord laws and you have to be able to collect rent and there’s certain areas in the U. S. And it’s gotten dang hard to collect rent without a huge fight. You know, we were in Atlanta. Lanta has great fundamentals. We’ve completely pulled out of Atlanta.

Many of the build to rent people that I know, and with some deep pockets have pulled out of Atlanta. Why? Because it went from about 45 days to evict a tenant who wasn’t paying or treating the property well. To 14, 15, 16 months. And so this is something that I think really for our niche, the investor niche keeps us in a good position.

Because investors are doing their homework and saying, we want to go where there’s fundamental growth and good landlord laws. And we still have that.

Mike Zlotnik: Yeah, I live in New York. Having somebody here.

Jim Sheils: I apologize. I’m sorry, Mike. I’m sorry. I was joking with you. Big Mike.

Mike Zlotnik: No, it’s all good. Listen, you don’t have to tell me these on a mental the, the, yeah, the, the, the, the, the landlord tenant laws make a big difference.

So in New York, I, I know the drill. It’s tough. It’s absolutely tough to evict. So if Atlanta has become that, and I heard that. And certainly not a good built to end market on a forward basis. So Florida is one of these more landlord friendly states. So it makes a lot of sense. All good things come to an end.

Unfortunately, so does this interview. How would folks reach out to you if they want to learn more about your properties that you’re selling? What’s the best way to reach out?

Jim Sheils: Yeah. If you want to learn more about us, just go to southern impression homes. com. You can learn about our bill to rent a company who we work with anyone from individual investors to some of the largest institutions in this space.

I would love to help you out if we can, and you can download a free copy of my book, The Passive Income Playbook, which is all about Bill Durant and how it came to fruition. This is a very new niche, as you know, Mike, and we tried to tell the story of it.

Mike Zlotnik: Thank you, Jim. Appreciate you coming on the podcast. Thank you for sharing, and great to chat with you again, and hope we do it again soon.

Jim Sheils: Hope so, Mike.

Mike Zlotnik: One thing I can tell you, that your story has been very consistent over the years. It continues to be a consistent story. Well, the few developments here are there, but overall, what you’re doing, this, this business seems to be a steady Eddie and it works really well. So that’s my, my two cents.

Jim Sheils: Thanks, Mike. It’s always good talking with you. Likewise. Thank you, Jimmy. 


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