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Redesign of the oldest investment class in the world

At the end of 2012, I was invited to an end-of-year party at a friend of a friend’s house. It was one of those gatherings where everyone vaguely knew each other, or at least had gone to the same school.

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The hosts were extremely welcoming and made everyone feel at home. At the time, I didn’t really know them. But given the size of their house, I knew they were involved in something serious.

We sat for dinner at a long dining room table that probably had 20 chairs. At one end of the table sat a rowdy group of teenagers, while the other end was reserved for older adults. I was seated in the middle, within earshot of both ends.

There wasn’t a lot of eavesdropping on the teen side, but on the other side a conversation started to develop that piqued my interest.

Looking back now, I probably should have taken better mental notes, but I guess I was totally unaware of the whole opportunity…

They were talking about houses they were buying. Not one or two houses. Not a few dozen… but tens of thousands of single-family homes…

You see, they had just founded a company, called American Homes 4 Rental (NYSE:AMH), and received a $600 million investment from the Alaska Permanent Fund. This investment was in addition to the initial money the company had started with Wayne Hughes – the host of the party.

Hughes, the billionaire founder of public storage (NYSE:Message of public interest), was one of the first people to recognize the huge real estate opportunity in the United States (and more importantly, to seize the opportunity).

AH4R went public in 2013 on the NYSE and currently sports a market cap of over $13 billion. While this opportunity that Hughes took advantage of with AH4R seems obvious now, it wasn’t so simple back when the company was founded…

Technology solution for property management

“How are we really going to handle all these houses?!”

Not a direct quote, but the gist of the conversation I was hearing that evening.

Apart from AH4R, there was only one other major player in the market that pursued the same strategy: Black stone (NYSE:Bx).

Both companies recognized the incredible opportunity that existed in residential real estate in the United States, and they had the money to start buying at a breakneck pace…

But managing these massive portfolios was still uncharted territory.

The logistics of managing tens of thousands of single-family homes across the United States is enough to make even the best professionals’ heads spin.

Think about it… AH4R was trying to scale a company that had tens of thousands of assets that are not… scalable!

Not a single house in his portfolio was the same. Location wasn’t the only difference. Each house had its own peculiarities. Different floor plans, different maintenance requirements, different local taxes, different types of tenants and so on…

All of this required an enormous amount of management. And that made it extremely difficult to scale effectively while ensuring that every home in the company’s portfolio was taken care of and rented out at a profit.

This is where technology came in… Proptech, to be precise.

What is Proptech?

Proptech is nothing new, and that’s exactly what it sounds like…real estate tech. The current definition is “the use of technology to help individuals and organizations, including homebuyers, tenants, investors and real estate agents, improve the way they search, sell, buy and manage properties. real estate”.

For AH4R, proptech has played an extremely important role in its growth. Forget the running part of the business for a second and think about the paperwork that surrounds a real estate transaction.

For those of you who have been through the process of buying or selling a home…you know what I’m talking about.

There is an enormous amount of paperwork attached to it. Now multiply all that by 50,000!

As of September 30, 2021, AH4R owned 56,077 single-family homes in 22 states…and there are companies that own even more…

Invitation houses (NYSE:INVH) has over 80,000 homes.

That’s a lot of roofs to maintain!

And there’s more…

Great opportunity in Proptech right now

Although AH4R, Blackstone, and Invitation Homes have been in this game for quite some time, there are still more players entering the market every day. Additionally, existing stakeholders are beginning to venture into other residential real estate projects as Wall Street continues to gobble up US residential real estate…

Just this week it was announced that Blackstone had acquired Preferred Apartment Communities for $5.8 billion. This cash purchase was for 12,000 units spread across Georgia, Florida, North Carolina and Tennessee.

From the wall street journal:

“Investors invested a record $335.3 billion in apartments across the country in 2021. Nearly a quarter of that sum went to just four Sunbelt metro areas: Dallas, Atlanta, Phoenix and Houston. In some other Sunbelt cities, total multifamily investment more than doubled from a year earlier, according to a report by real estate firm CBRE Group Inc.

“Buyers are closing an unusually high number of offers for properties that were not listed for sale,” the investors said. The appetite to capitalize on rapidly rising rents far outweighs the number of assets available for purchase.

The need for real estate efficiency has never been greater…

Proptech to the rescue.

fifth wall, the largest venture capital firm specializing in technologies for the global real estate sector, has just announced a new fund of 140 million euros. This fund brings Fifth Wall’s total capital under management to more than $3 billion.

The list of investors is stacked with all the who’s who of global real estate companies. These investors are just as interested in access to future companies in the fund’s portfolio as they are in the actual return on the fund’s investment.

As more and more large companies acquire large real estate portfolios, the need for technological efficiency only increases.

This is both exciting for investors and entrepreneurs who may be looking for ways to capitalize on this trend.

The real estate sector has long been waiting for a major overhaul. When that happens, we will be ready to claim our right.

As of the date of publication, Cody Shirk had (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to Publication guidelines.

Focusing on megatrends that will shape the future, Cody Shirk uncovers generational wealth in the private investment space. To make sure you never miss Venture Capital Digest, click here to subscribe.


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