On the podcast, I recently sat down with Sean O’Dowd, the founder of Scholastic Capital. Scholastic Capital is a real estate investment firm that buys single-family homes in elite high school districts and rents them to families on three-year leases. Sean started this venture in 2020 with his wife using their own funds, and now he has recently begun raising capital to expand their operations.
Listen to the full episode or keep reading for the best real estate investment insights from Sean.
How did you transition from private real estate investments to raising funding?
Having moved an impressive 22 times as a child, Sean observed that areas with great schools always had high housing demand. Everyone wants their kids to attend that school and will pay top dollar to move into that location.
Early in his career, Sean worked in private equity and keenly studied what gives companies that competitive advantage. He realized that owning a house in a top school district offers a significant edge in real estate.
So, he and his wife started buying and renting houses in key school districts to see how they would perform. They ended up performing more strongly than he could imagine.
Now, he is working to expand his business and capture the entire Midwest market for high-income housing near elite schools.
Why raise capital instead of using his own capital?
Raising capital brings more headaches and stress, including increased reporting requirements, higher accounting bills, and more work managing investors. Despite these challenges, it made sense for Scholastic Capital and its investment goals.
How can this be? For starters, only 21 school districts in the Midwest fit their high parameters. This creates limited rental opportunities in their market. With such a small market, it is relatively easy for Scholastic to gain a dominant market share position without requiring much capital. Once they gain a dominant market share, they can set rents in their areas and deliver the desired returns to investors.
Furthermore, their market is intentionally supply-constrained. With real estate being such a supply-and-demand game, it is a huge advantage to know that the market is supply-capped, and there is no way for other investors to flood the market or for anyone to add a significant number of homes in the area.
How did you prepare to launch Scholastic Capital?
Sean spent a year preparing to launch Scholastic. This may sound like an exceptionally long timeline, but it was ideal for his situation.
Most lease activity happens in the summer, so they wanted to time their launch around this season. They started preparations in late 2022/early 2023, opting to skip the summer 2023 season and instead take their time to hit the summer 2024 target.
Sean advises that it is essential to pick high-quality vendors to help build and organize your company properly—including qualified attorneys, accountants, and more. They will help ensure your company follows rules and regulations and is set up for success.
He uses the following metaphor for these priorities:
1. Get the right people on the bus
2. Get the bus going in the right direction
Since organizing and aligning various vendors is a very involved process, it is best to provide excess time for this step—at least six months or more.
When does it make sense to raise a fund vs. syndicate each deal?
Whether it makes sense to raise a fund or syndicate each deal can be a function of the price point of the deals.
Scholastic’s current average purchase price is $487,100. At that price point, syndicating individual deals is difficult.
Additionally, the homes they’re targeting can go under contract within 24 hours because they’re highly desirable in a supply-limited market. Speed is crucial. A fund allows them to act quickly and efficiently, securing desirable properties before others rather than wasting time putting together an investor deck.
How do you compete against emotional home buyers?
Emotions typically run high with home buyers, but real estate investors can look at the situation from a logical and analytical viewpoint. This gives real estate investors like Sean a competitive edge because they can leverage their ability to make the best economic decisions, free from the emotional influences that often affect mom-and-pop buyers.
For example, instead of getting tied up and delayed by their in-laws’ or friends’ opinions, they can work efficiently and follow straightforward processes each step of the way, like having inspection reports reviewed by general contractors.
How can you find new listings before other buyers?
The majority of listings Scholastic considers are on-market, so monitoring listings and getting someone onsite immediately after a property of interest hits the market is key.
How does he do it?
Scholastic developed an advanced system that automatically filters through listings, quickly identifying those that meet their parameters. Most listings are filtered out, so they only have to review the properties that meet their strict parameters. This saves time and allows them to move quickly, make offers almost immediately, and beat out higher bidders by being the fastest to act.
Sean says he does not need to be the highest bidder on every property. The trick is to be the fastest.
Another key advantage Scholastic has that helps them get their offers accepted quickly is that their company is much easier to finance than a standard loan, so sellers appreciate that they are easier to work with than your average home buyer.
How does Scholastic’s business strategy differentiate them?
Today, Scholastic Capital’s average purchase price on single-family homes is $481,778, with an average of 3.1 beds, 2.1 baths, and 1753 sq ft total. They are renting these homes for an average of $3,932 per month, with an average lease of 33 months. Most of their tenants are on a three-year lease.
The average income of their tenants is $218,178, so they are renting to relatively well-off families who want long-term security.
This strategy allows them to do things a bit differently.
For example, they pay monthly distributions to investors, which is uncommon. They’re able to do this because of their exceptional 3-year lease structure. This provides strong security in their cash flow and allows them to look 12 months out. By contrast, typical real estate investment firms might find themselves with 40–80% of their leases up for renewal in 6–8 months and unknown renewal rates.
What does the fee structure look like for the fund?
The fund follows a traditional structure with an 8% preferred return and an 80/20 split beyond that. They also charge a 1.5% management fee, covering employee salaries.
This means the investors get 100% of the profit the fund generates until they’ve made 8% of their investment. For example, if someone invests $100,000, they’ll get 100% of the profit the fund generates until they make $8,000 from their investment. Every dollar distributed beyond that is split 80/20.
For the fund, this fee structure aligns incentives with the investors. The fund doesn’t get paid until after the 8%, so the firm is incentivized to make money for the investors.
How long is the process from purchasing a home to leasing to a tenant?
Scholastic’s average time from purchase to lease is 10-11 days. However, there is variability. Sean says some homes have leased within 8 hours, while others have taken 3-4 weeks. These discrepancies can even happen within the same town.
To provide more insight into this process, Sean and Scholastic are prioritizing gathering leasing data and figuring out what the differentiation drivers are.
When to create evergreen funds vs open-and-close funds?
Scholastic is an evergreen fund, meaning the fun could theoretically go on forever. This is in contrast to the more popular model of open-and-close funds, which have a set timeline after which they are dismantled. This structure is common because it is often easier to start by raising a smaller fund and selling it and then raising a bigger fund rather than raising a large fund from the start.
However, for Sean and Scholastic, an evergreen fund fits better with their investment goals.
Scholastic Capital operates as an evergreen fund, recalculating equity value quarterly with third-party appraisals from House Canary.
What is the best investment advice for new investors?
The top advice Sean has received from advisors is, “Build it slow, build it right.”
Many people get excited and move fast, but it is better to take your time, get the right people on the bus, get the bus going in the right direction, have a plan, and have a backup plan for everything. Real estate investment is a 40-year ball game, so don’t try to win the entire game in the top of the first inning.
The best advice Sean would give someone interested in investing in a real estate fund is to figure out precisely what you’re looking for. There are many different investment options available.
For example, is your priority monthly cash flow? Or do you prefer one big payout after several years? Or do you not care about the money and are just looking to own a core piece of real estate?
Understand your priorities and how they fit into the broad spectrum of investment funds, and find what works for you.
