SFR scaling: Rethinking vertical integration and outsourcing

As single-family rental portfolios continue to scale, investors are increasingly facing a fundamental operating question: how much of the model should they manage themselves?

For many owners, vertical integration can initially appear to offer greater control over performance. But as portfolios grow, the economics of running those operations become an increasingly important consideration. The question shifts from simply asking what investors can manage internally to where their time, capital, and capabilities can create the most value.

Ahead of Single-Family Rentals West this December, we sat down with Doug Brien, President & CEO of Roofstock, to explore that question. Drawing on his experience building and operating within the SFR industry, Doug shared his perspective on which decisions investors should retain control over, why achieving sufficient scale in property management can be difficult, how the balance between in-house and outsourced operations can change, and what he believes a more efficient SFR operating model should ultimately look like.

Key Takeaways

• Investors should retain control over rent approvals, turn costs, and repair and maintenance spending above a defined threshold.
• The vertical integration decision should be driven by where an investor can add the most value and where their time is best invested.
• Property management economics depend on factors including scale, market concentration, operating model, and technology.
• Investors should consider whether an internally managed property management operation is creating enough value to justify its cost.
• Technology can give investors greater visibility and transparency into operations without requiring them to manage every function themselves.

What parts of the operating model become most important for owners to control as portfolios scale?

For Doug, the starting point is identifying the decisions that have the greatest impact on returns.

As portfolios grow, there are more operational decisions to make, but not all of them carry the same financial weight. Doug believes three areas stand out:

• Rent approvals
• Turn costs
• Repair and maintenance spending above a defined threshold

These costs, in his view, have significant leverage and can have a meaningful impact on returns.

The distinction is important. His view is not that owners necessarily need to execute every operational task themselves. Rather, the focus should be on maintaining control over the decisions that have the greatest potential impact on portfolio returns.

As portfolios scale, that can mean paying particular attention to the areas where individual decisions have the greatest financial consequences.

Where does vertical integration create value, and when is outsourcing the better option?

For Doug, the vertical integration question begins with a simple one: Where does the investor add the most value, and where is their time best invested?

The answer, he believes, is personal to each investor and depends heavily on their individual capabilities and core competencies. In general, Doug finds that many investors are good at three things:

• Raising capital
• Allocating capital
• Asset management

Property management requires a different set of capabilities. And while many investors have attempted to build vertically integrated property management operations, Doug emphasizes the difficulty of reaching sufficient scale to make those operations break even, let alone become profitable.

Taking on property management internally can also spread an investor thin and make it harder to focus on the areas where they can add the most value. That makes the decision less about whether vertical integration is inherently good or bad, and more about where a particular investor's capabilities are best deployed.

For some investors, that may include operating property management themselves. For others, the greater opportunity may lie in capital allocation, capital structure, asset management, or identifying and aligning with the right operating partners.

The underlying question remains: where can the investor create the most value?

Why is scaling property management becoming more difficult?

One of the central challenges Doug identifies is the economics of property management itself.

SFR property management companies need a certain level of scale to be profitable, or at least to reach break even. But there is no single threshold that applies to every operator. The number of homes required depends on several factors, including:

• Operating model
• Number of markets
• Market density
• Use of technology

Many groups entered the SFR sector with a strategy of managing their properties internally. Doug acknowledges that there can be good reasons to do so. But if the operation does not reach sufficient scale, the property management business can become a cost to the investor rather than a profitable operation.

That calculation has become particularly important in the current environment.

Doug points to higher interest rates and legislative risk as factors that have made it harder to raise capital to acquire new homes and deploy capital in a way that is accretive. He also points to the challenge created by interest rates remaining higher than cap rates.

Against that backdrop, investors may need to take another look at the economics of maintaining an internally managed property management operation. As Doug said:

“If investors are losing money being a vertically integrated PM, they should think long and hard about whether that burn rate offsets the value they add.”

The point is not that internal property management is necessarily the wrong approach. Rather, investors need to consider whether the cost of maintaining the operation is justified by the value it creates. For Doug, that also means recognizing that there are now external options that investors should at least consider.

How should the balance between in-house and outsourced operations evolve as portfolios grow?

For investors considering whether to manage property management internally, Doug emphasizes scale and market concentration.

“The truth is that you probably need 5,000 doors with good market concentration to make it work.”

For investors that do not have that level of scale and concentration, Doug believes outsourcing should be considered.

As portfolios become larger, however, investors can also consider different ways of managing relationships with external property managers. One approach that Doug highlights is a “champion-challenger” model, in which multiple property managers are used, and their results, performance, and pricing are compared. Competition can then be used to push performance and pricing. That approach can work particularly well when an investor has several property managers they already like.

There is, however, another consideration: adding more providers does not necessarily make the operating model better.

Doug references Warren Buffett's term “deworsification” to describe the risk of investing in too many companies to the detriment of performance. In the context of property management, the same principle can apply: if an investor already knows which provider is performing best, adding more providers simply for the sake of diversification may not improve the outcome.

The objective, therefore, is not necessarily to work with as many property managers as possible. It is to find an operating structure that works for the investor's scale and portfolio, while using competition where it can genuinely improve performance and pricing.

What does an efficient and scalable SFR operating model look like in practice?

For Doug, the goal is to make investing in SFR simpler and more accessible. “It’s funny you should ask because this is exactly why we originally built Mynd,” he says, pointing to the decision to develop the company’s own property management system from scratch.

The reason was straightforward: investing in SFR was not simple or easy when investors had to stitch together software that had been built for a different asset class, particularly multifamily. That thinking shaped the development of Otto. The system was designed to give investors control over the things they should control, while providing full transparency into the rest of the operation. That transparency is supported by Mynd’s iOps package, which Doug says gives investors real-time visibility into more than 600 operating metrics that they can access at any time. The aim is to allow investors to see what is happening across their operations without having to rely on the property manager to tell them.

Doug also sees an opportunity to make that information even easier to access. The vision is to leverage AI to make iOps data available through a conversational agent or co-pilot that can generate different views and reports based on the individual needs of each investor.

There is another important part of the model: national coverage. To work effectively for investors, Doug believes the platform needs a broad enough footprint to cover the markets that are most attractive to them.

“Our model doesn’t work well if we can only cover some of them.”

The business currently operates across 48 markets, with the aim of giving investors reliable, consistent, and high-quality service outcomes.

For Doug, an efficient and scalable SFR operating model ultimately comes down to making the investment process simpler, while giving investors control over the areas they should control, transparency into the rest, and the ability to access the markets they want to invest in.

Rethinking vertical integration

Doug’s perspective points to a broader shift in how investors may approach the SFR operating model. Vertical integration is not an objective in itself; its value depends on whether an investor has the scale, concentration, and capabilities to operate each function efficiently.

For many investors, the answer may be a more selective model: retain control over the decisions that have the greatest impact on returns, while using specialist operators and technology to manage the rest. As portfolios scale, that approach can provide access to operating expertise and market coverage without requiring investors to build every capability internally.

Ultimately, the question is not how much of the operating model an investor should own, but where ownership creates the most value. As the SFR market matures, the opportunity may lie in building an operating model that combines control, transparency, and specialist expertise without adding complexity that does not improve outcomes.

Join us from 7-9 December, at the Fairmont Scottsdale Princess, AZ to continue the conversation at Single-Family-Rentals West.