Our Washington, DC home portfolio has made substantial progress over the last twelve months. During the first half of last year, we were focused primarily on acquiring properties and building up the portfolio. We are now pleased to report that we have acquired 23 homes and continue to actively pursue more. In addition, we began to move forward with renovating the first set of homes, which are expected to start delivering to market through the spring and summer.
Chronic undersupply of homes in DC continues to create opportunities
One of our core investing strategies is to target areas with a significant undersupply of homes for sale, and DC is a prime example.
Six months of supply is generally considered a “balanced” housing market, meaning that if no new homes were listed, at the current rate of sales, the existing inventory would last at least six months. In DC, supply levels have consistently held at around two months over the past five years, significantly below this measurement of health.
We expect this pressure on DC’s housing inventory, combined with the arrival of Amazon HQ2, to drive increased potential for returns on the portfolio over the coming years. Late last year, Amazon announced that it would bring a minimum of 25,000 jobs to the DC metro area — with an average salary of $150,000 per year — while the Virginia state government released a report estimating that an additional 22,000 positions would be indirectly created by the influx of new residents and capital.¹
While Amazon’s announcement was certainly exciting, we believe that even prior to the news our portfolio was well-situated to meet the high demand of DC-area homebuyers with a preference for a walkable, urban lifestyle. The coming growth from Amazon has only served to strengthen our beliefs, with the 20011 ZIP code (where roughly half of the homes are located) being a short 20-30 minute commute on the Yellow line Metro to the company’s planned headquarters in National Landing (formerly known as Crystal City).
Renovation progress
Across the portfolio, we are actively working through the design and permitting process for the majority of the homes. Meanwhile, we are also moving ahead with demolition, allowing us to begin construction as soon as plans are approved, with the goal of bringing several homes to market over the coming months.
Design and permitting stage
Below are floor plans for one of our rowhomes, which provides a good illustratation of our vision for a modern update to the classic DC rowhome (click to enlarge in a new tab):
Our aim is to design family-friendly homes, with open floor plans, large kitchens, and a minimum of three bedrooms and two and a half bathrooms. By being thoughtful in designing an efficient layout, we believe we can deliver a home that works well for a growing family but also still falls within a reasonable budget, given the median income in the DC area.
As of this writing, we have twelve single-family homes and two condo conversions that are currently in the design stage. Once we finalize the designs with our architect, we will submit the plans to the city in order to secure building permits.
Demolition and construction stage
Our contracting crews have begun demolition on the interior of eight homes in the portfolio, as we await building permits which can take several months. Demolition permits for the interiors have been issued for all planned renovations.
Construction on one of our rowhomes in the Petworth neighborhood kicked off in late 2018. Windows, insulation, and drywall are in place, with expected completion in the coming months. We look forward to sharing more photos soon as we move into interior finishes.
Rental homes
In addition to the homes currently going through the renovation process, we also have five homes that we are renting for the immediate term as we let the market continue to mature around us. Four of the five are currently leased and we expect to have a lease signed for the fifth shortly. Our goal with these homes is to earn consistent cash flow from rent payments while capturing what we believe will be continued strong appreciation in the value given their locations within specific emerging neighborhoods.
How this affects your portfolio
We are fond of the strategy of essentially creating new housing supply in emerging neighborhoods, not only because of the potential to generate attractive returns, but also because we think it is less correlated with the broader market. While many investors will flip homes on a “one-off” basis, we believe we can achieve better performance by developing a more systematic program aimed at reducing costs and increasing our ability to scale.
We see the strategy as being similar to what large public home building companies do, but instead we focus on urban areas, and deliver homes that better match the demands of tomorrow’s homebuyers.
The near term trade-off of this approach has been a longer ramp-up period, as we develop more efficient processes, evaluate vendors, and negotiate pricing. From an investor’s standpoint, the DC eFund has not reported a NAV change to date, as we continue to hold most of our investments at the same value which we initially purchased them.
To be clear, this is not to say that we are unhappy with the performance so far. On the contrary, we see the portfolio as having a great deal of built-up potential that we believe will be unlocked as we begin delivering homes to market. As an active investor in the market, we can confidently say that we would have an extremely hard time buying any of the homes in our current portfolio for the same price today.
At the high level, we believe that the urban housing strategy of our eFunds offers a compelling option for investors seeking a more tax-efficient, and overall higher potential return profile, who are comfortable with the tradeoff of an inherently longer time horizon with fewer dividends in the interim.
We look forward to providing you with ongoing updates on the progress of the DC home portfolio. As always, please don’t hesitate to reach out to investments@fundrise.com with any questions or feedback.