Redevelopment and rental professionals like the Chicago-based Mack Companies, which turns foreclosed homes into quality single-family rentals, are seeing significant growth—so much so that the federal government is looking at this sector of the housing industry for answers as to how to address the continuing high inventory of distressed properties.

According to a recent Morgan Stanley Research report entitled ‘A Rentership Society,’ the homeownership rate, which officially stands at 66.4 percent, is actually 59.7 percent when delinquent borrowers are excluded, and the demand for multifamily and single-family rental housing throughout the country is likely to remain strong over the long term.

NREI spoke with Jim McClelland, president and CEO of the Mack Companies, about the growth his company is experiencing.

An edited transcript follows.

NREI: Tell me about the Mack Companies.

Jim McClelland: We specialize in redeveloping distressed single-family properties and renting them in the southern and southwestern suburbs of Chicago. We currently own and operate 512 properties, 500 of which are single-family homes located within a 30-minute radius of our headquarters in Tinley Park in the southwest of Chicago. We like to be close to our properties because it’s easier to manage them that way.

NREI: How and when did you get started redeveloping and renting single-family homes?

McClelland: I’ve been in business for 36 years. I started out as a real estate agent, then I became a real estate broker, and then I opened up my own real estate company and ultimately, I sold it to ReMax. I then started doing planned unit developments—new construction single-family homes.

Fourteen years ago one of my community banks called me up and said, “We’ve inherited a single-family home—would you like to buy it from us?” I said, “Why would I want to buy a single-family home from you?” And [the bank representative] said, “Because you’re a developer and I’m a banker.” So I said okay. That started me buying bank-owned properties that are single-family homes.

Fast-forward to today. We’re the largest redeveloper in the Midwest. We buy about 250 properties a year—all bank-owned single-family homes—redevelop them to new construction standards—I come from new construction, so that’s all I ever knew—and keep them for long-term appreciation, which means 10 to 15 years.

NREI: And your company serves as the property manager of all those properties as well.

McClelland: We own our own property management company, so everything we own, we manage. That’s key.

NREI: What is the Mack Companies’ approach to turning a distressed home into a rental?

McClelland: We almost completely rehab a home before renting it out. In four to six weeks, we supply all new HVAC, electrical, plumbing, kitchens and bathrooms, appliances, flooring and often a new roof. We want the rental family to feel like the place is new. Also, when an asset starts out in good shape, it’s easy to keep it that way and be cost-efficient.

NREI: How popular has your approach been with potential tenants?

McClelland: Our waiting list is always long; the average tenant stays with us for 4.8 years.

NREI: How has your business changed due to the down economy?

McClelland: It’s interesting: The phenomenon of foreclosures or bank-owned properties is viewed as if it’s a situation that just occurred over the past three years. Remember, I’ve been doing this for 14 years—the reality is that there have always been foreclosed bank-owned properties. The difference is that since there is more inventory now, the types of homes that you can buy are more varied.

For the same amount of money I paid for a home five years ago, I can get a later model home now. Instead of getting 1960s homes, now I can get 1980s homes for the same amount of money. It’s not that I’m buying them cheaper; it’s that I’m getting better inventory.

NREI: So have you increased the number of units you’re doing per year?

McClelland: Five years ago we were doing 100 properties a year and we’re currently doing 250, so during that five-year period we’ve had to increase our infrastructure. We do all our redevelopment in-house—we have our own plumbers, electricians, roofers, carpenters.

NREI: It seems like the single-family rental phenomenon has really taken off over the last five years as foreclosures have increased. What kinds of investors are getting involved? What are the challenges?

McClelland: Let me answer that a couple of ways. Investors have come into the market and said, “That looks like a good investment for me—cash-flowing, appreciating assets. And I don’t have many cash-flowing appreciating assets, so I think this is a good play. And it’ll appreciate because I’m buying it low and eventually it’ll go up high.”

So, yes, investors have been getting in the market. Anyone can buy a property and anyone can even hire a subcontracting crew to redevelop it. It’s the operational side—the property management side—that’s the challenge. In this industry, the word that’s starting to seep out is “operators.”

The inventory is there and it’s growing. There are people who can buy inventory and there are people who can have it redeveloped. But there’s where the rub comes in—right at that redevelopment/operating line—and for a lot of investors, the answer is, “We can buy it, we can develop it, but can we manage it? No, not right now, we can’t.” That’s where I’m seeing the shift.

Now big money—like hedge funds and insurance companies—is starting to look at what I’d seen as a cottage industry, thinking maybe it’s something more, maybe it’s somewhere they’d like to put their money.

Because banks are saying, “We’ve got 250,000 of these units and we’d like to get them off our books. How are we going to sell them?” And the banks are starting to understand that the key element to getting this inventory off their books is operations—and operators. There are only 15 operators that have been identified in the whole United States that have the experience necessary to take it to the next level.

NREI: Would you say Mack Companies is building hope for the end of the housing crisis?

McClelland: We currently operate in about a dozen communities that have been around 50, 75, even 100 years, and were very vibrant. These are communities that I’ve been involved with my whole life. One of the communities is where I built my first home.

Every time a person is displaced from their home and that home is boarded up, it tears at the fiber of the community—financially and emotionally. Financially it’s bad because without the homeowners, now the villages don’t get their tax revenue, and when they’re not getting the revenue, the services in the village diminish. That’s not good. Also, how would you like to live next door to a boarded-up property? What would that make you think about the value of your own property or the direction the community is going in?

My view is that every time we take one of those homes and redevelop it up to new construction standards, it not only comes back, but it comes back in a glorious fashion. It breeds hope for people.