Scholastic Capital Update #16 | The Growth of SFR

Scholastic Capital is an evergreen real estate fund that buys single family homes in elite school districts. We then rent those homes on long term leases to highly qualified tenants interested in being there for the school district.

We do this on behalf of our investors looking for a “high floor, bond-like” real estate fund. Our investors, and new investors who may join us, are typically interested in our monthly cashflow distributions, equity appreciation, and depreciation tax benefits.

As always, italic text below is explanation of datapoints and normal text is our commentary

Hello Friends of Scholastic Capital,

In 2024, we published an update every month to this public facing newsletter. Investors also received a much more detailed, data heavy update each month to go alongside with their distribution.

In 2025, we are going to make some small changes. We’re going to move this public facing newsletter to weekly. There’s a lot going on, and a lot we’re thinking about each week.

If we are going to truly “build in public”, then monthly is just not enough to fully capture what is going.

So, for this week, I’m going to talk about a big piece of work we’re doing this week to improve margins for our investors.

To understand the context, we need to understand the state of the industry of SFR.

Large Scale Single Family Rentals is an “adolescent” business….

The idea of buying and renting homes has existed forever. You might own a rental or two, or know someone who does.

Historically, it was limited to a smaller scale of an individual owning a handful of homes.

Warren Buffett famously said he would buy a “couple hundred thousand” single family homes if he could as recently as 2012.

He couldn’t do that in 2012. Now, he could.

SFR is firmly established as an industry to the point the Wall Street Journal is writing cover stories about it.

…which means SFR specific vendors are now established

Since SFR is now an “adolescent” industry instead of a “newborn” industry, there are now many companies that exist specifically to serve the SFR industry.

A few examples are:

  • Propify: SFR specific property management software

  • Inspectify: SFR specific inspection company

  • Entera: SFR acquisitions

  • Conservice: SFR utilities

  • Mainstay: SFR HOA management

Some of these companies are already vendors that we use and were willing to work with us as we first got started. Some wanted us to get to a certain scale before they entertained working with us.

We are now big enough for a new batch of SFR specific vendors, and that should dramatically improve margins for our investors.

Let’s talk about some of the specifics.

Benefit of the Growth of the SFR Industry #1: Lowered Insurance Cost

This has been my main focus this week to improve margins for our investors.

Right now, the Scholastic Capital homes are insured by a general insurance company, Auto Owners Insurance. That’s fine, in that they provide sufficient coverage and meet lender requirements.

Total insurance premiums for the year are a touch over $52,000.

However, we are now big enough for SFR specific insurers. There are a couple who specialize in this product, and we’re starting to get quotes from them.

Since the understand the industry better, they are better at pricing risk associated with tenant damage. And since we are exclusively buying homes in low-insurance risk markets like the Midwest, our policies are reasonable in general.

Our best quote came in thus far at $29,000/year for the exact same coverage.

Said differently, the SFR specific insurance is ~45% cheaper.

Rough math, we’ll save about $3M on insurance over the life of the fund. That incremental $3M can get passed straight back to our investors.

Without the SFR industry maturing to the point there are SFR specific insurers, we wouldn’t be able to save that $3M for our investors.

This SFR specific insurance has been a big focus of my time this week. I am waiting for a few more quotes and still have diligence to do, but I’m happy with progress to date.

Benefit of the Growth of the SFR Industry #2: Better Talent

As Scholastic Capital grows, we’ll need to hire a senior leadership team. A CFO is a particularly important hire that I am very excited to make.

If we launched Scholastic Capital 8 years ago, we would have had to hire a CFO outside of the SFR industry.

That would be sub-ideal, because SFR has unique financial characteristics. A good example is property taxes. Every county does property taxes differently and bill at a different time of year.

When you own homes in ~100 counties, you could have property tax due every week in a different county with a different forecasting methodology.

Ideally, you’d want a CFO who has experience within this industry.

Now, Scholastic theoretically will be able to hire an experienced SFR specific CFO. A quick Linkedin search shows there are dozens of people who:

  • Have significant experience within the SFR industry

  • Work at an investment fund now

  • Are the #2 within the finance department and could be interested in stepping up to be the #1 at Scholastic

My ideal candidate would also:

  • Have a CPA and accounting experience

  • Have high level athletics, military or similar experience

Even with those filters on, there are still roughly a dozen candidates to consider. We should be able to find a rockstar to join our team.

Benefit of the Growth of the SFR Industry #3: Better Debt

10 years ago, SFR was considered risky. It was an unknown product without operating history.

That last sentence is a mortgage underwriter’s worst nightmare.

However, the underwriter can sleep soundly at night now as SFR becomes more established.

Scholastic’s weighted average interest rate is 6.15% and that’s with 30 year fixed debt. It’s “solid” debt now. Probably a B.

However, we can access even better, A+ debt terms as we scale and we larger.

The consistent feedback we get is at ~$50M loan size (so, ~$100M in assets at a 50% LTV), we could get some exceptionally good debts terms.

An SFR fund a decade ago would have killed for that, and certainly a benefit we get in joining an adolescent industry.

Benefit of the Growth of the SFR Industry #4: Exit Opportunities

There are only three paths for an SFR fund to take:

  1. Exist forever and keep paying distributions to investors (like Invitation Homes does)

  2. After a period of time, sell the homes individually on the MLS to regular buyers

  3. After a period of time, sell the homes in a package to a bigger SFR player, like Invitation Homes.

Path #3 did not exist 10 years ago, because there weren’t a lot of bigger SFR funds to consider an acquisition.

As Scholastic is an Evergreen fund (meaning, we are set up to last forever), we could theoretically take any of the three paths.

However, we do believe that path #3 could very well have the highest financial return for our investors.

For that reason, we are deeply benefiting from the fact that the SFR industry is rapidly maturing and there are funds big enough who could acquire us down the line.

Get to know us

As always, we love getting to meet more folks interested in niche real estate thesis.

For that reason, we have an open Calendly link with 15minute slots.

If you’d like to chat niche thesis like Scholastic, real estate, or even joining us as an investor, feel free to grab time HERE.

Share

More Posts