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Sean O’Dowd has done his homework, and he’s come up with a thesis.
Middle-class families have few chances to live in areas with some of the nation’s best school districts, so they’ll jump at the chance to rent homes there.
That’s why this 29-year-old real estate investor from suburban Chicago launched a fund in 2023 that is raising hundreds of millions of dollars to buy up to 250 single-family homes in just 21 ZIP codes over the next 10 years.
After that time, O’Dowd originally planned to sell the portfolio to an institutional investor. That’s part of why he and his team are being meticulous about the properties they buy. (They won’t touch anything with an in-ground pool, for example.)
But early investors have indicated they’re happy with initial returns, he said, and plans could end up shifting toward a long-term hold.
“We didn’t expect that, but it’s increasingly going in that direction,” O’Dowd said. “There’s a world where investors do have the ability to withdraw if they’d like to leave the fund early, but there’s also a world where we never sell.”
O’Dowd is part of a cohort of real estate operators who openly share their plans and ideas on X, the social media platform formerly known as Twitter, and in newsletters that are publicly available. He spoke to Inman to lay out his plan and explain how he picks which homes to buy.
Inman: Tell us about how you came up with this idea.
O’Dowd: I got obsessed with that idea of competitive advantage. I’m in the Chicago area. There are millions of housing units within an hour drive of where I live.
A really common one people throw out is, “Hey it has a nice kitchen.” That’s not, in my mind, a great competitive advantage. Hundreds of thousands of rentals have that. And a nice kitchen isn’t nice in two to three years.
I landed on the idea of school districts. A really high end school district is a really high competitive advantage to a piece of dirt.
So about six months ago you launched Scholastic Capital to buy and manage these homes. What’s the plan?
We’re structured as a rolling fund. We can only buy homes during the summer. We can’t buy more than 50 homes a year, up to 200-250 total. $450,000 is our target. We’ve got 21 ZIP codes. Some are well above 450 and some below.
We think of it from a ZIP code-specific level. It’s less than 21 school districts.
How did you narrow down to 21 zip codes?
We think of it from a supply and demand side of things. The demand side is a desire to be there, which is the school district being great. We look at sources of quantitative data around the percentage of students who end up going to Ivy League or Ivy League-equivalent schools. It’s really interesting and very predictive.
The supply side is actually very interesting. Rents are highest when there’s a lot of demand to be there but supply is lowest. We are looking for areas where there is no additional supply being added to the market.
In addition to great schools, let’s talk about other items in your ‘buy box.’ If you’re planning to sell to a bigger fund in 10 years, what do you think they’re looking for and what are you looking for now?
I got on the phone with people who worked at Tricon and Homes for Rent, [and] they said, “We’re not going to buy a home with a pool; it should be on a street that’s 25 mph or less; solar panels were a non-starter.”
The other interesting one was location. When we first thought we had this thesis nailed, my co-GP and I were looking nationally. The unanimous answer we got back from (bigger funds) was to put this portfolio in the Upper Midwest, which blew our minds.
The consistent message we got from them is they’re getting crushed on their insurance premiums (in other markets). They’re going up like crazy.
What kind of renters are you attracting?
Our average tenant makes $180,000 a year. People making $180,000 can certainly pay $4,500 a month in rent but might not have cash sitting around for a down payment. That’s maybe a third of tenants.
Bucket two is the bigger bucket, and it’s people who do the buy-versus-rent math. In most cases, people are moving to these school districts as their kids start high school. They want to get into a good high school to get into a good college. It takes six years from the first kid that starts high school to the last kid that starts high school. If you do the buy vs. rent tradeoff, it’s way longer than six years.
The last bucket is separated parents. Parents separate, one parent moves out of the house and wants to stay in the same district so they’re close.
What does your buying process look like?
We’ve built in-house software with a gentleman from Twitter who’s a fantastic engineer. If something hits the market it goes through our full buy box — 17 different things. That software is automatically spitting out the homes.
Our goal is always to be the first offer. These are great school districts, it’s highly competitive. We are finding everything on MLS right now.
A fascinating element of being midwest focused:
Local Fundraising Bias
To quote a Wisconsin family office: “We’re tired of being pitched deals in California and NYC”
These Midwestern RIAs/FOs like us, even being a first time fund, since we’re buying locally
— Sean O’Dowd (@SeanODowd15) December 11, 2023
How much data do you collect on these houses when you buy them?
When we go through the properties, we’re collecting the make, model and serial number of every system in the house.
When we have all that info, it allows us to sharpen our maintenance estimate for what we need to spend. It allows us to be better and faster at maintenance when things do come up, and it’s helpful data to the institutions if we can provide the average age of the HVAC systems across the portfolio, for example.
You and I previously spoke about #retwit, and your rise to a fairly prominent member within the real estate-focused group on Twitter. How has that helped you?
Of the money we’ve raised so far, more than half of it has been directly or indirectly from Twitter.
It’s been meeting and getting access to some really incredible people who’ve been able to lend great advice that has been extremely useful.