Exciting times are ahead for investors who are looking to diversify their portfolios with housing.
While there’s long been a demand for traditional rental investments, in recent years, we’ve been seeing that demand give rise to a new subset: build-to-rent housing.
Following the recession years of 07/08, investors began buying up discounted foreclosed properties, adding them to their growing portfolios. Institutional-level investors also began to get in on this opportunity and started purchasing these homes at-scale, buying up multiple distressed properties, fixing them up, and turning many of them into rentals. Deals were easy to find and opportunities everywhere.
Today, things have changed. The housing market has made a complete recovery, home values are up, and foreclosures are few and far between. In fact, distressed properties (foreclosures and short sales) now make up just 2% of home sales now, down from the high of 49% in March 2009, according to the National Association of Realtors. Existing properties that are suitable for rentals are in high demand with investors and have prices to match. These days, it’s become much more of a challenge to find a property that will generate the type of returns that investors have become accustomed to. In light of these changes, investors are turning their attention to a new type of strategy. Instead of buying up existing housing stock, they’re buying new. This is where build-to-rent comes into play.
This level of interest from investors has caught the attention of developers, who are now working with brokers to facilitate deals direct to the investor. Instead of building homes just for homebuyers, many builders are employing a mixed approach, where a development contains homes for sale to homebuyers, with investment rental properties scattered in.
Now, the build-to-rent market is exploding, and investor demand is going through the roof.
Growing Demand for Build-to-Rent Properties
“If I had a way of buying a couple hundred thousand single-family homes….and managing them…I would load up on them,” Warren Buffet famously said during a 2012 interview with CNBC.
Today, thanks to the build-to-rent sector, there is indeed a way to buy up that many homes –often all at the same time. And thanks to recent advances in tools and services that are available now, these properties can also be managed at scale. These developments, along with the fact that financial institutions are getting on board with financing them, have helped to give rise to build-to-rent single-family rentals (SFR) as an attractive asset –even at the institutional level.
For investors, these properties represent a streamlined alternative to traditional rental investments. Rental property has long been an investment that tends to require a hands-on approach to investing and management, and these present issues with scalability, something that has largely been responsible for keeping institutional investors out of the market until recent years. An investor might own one home on one street and one home on another. Or, they may invest in a different market altogether. This can make overseeing the investments, or even finding a property manager to oversee them, something of a challenge. Then there’s the issue of costs; single-family rental properties tend to be older than owner-occupied homes and often require a great deal more maintenance and repairs.
The demand for these rental investments, of course, is being fueled by growing demand from consumers as well.
“There is a consumer rental demand that is driving these institutions to want much greater levels of inventory of this product,” said Gerald Ellenburg, CEO of ERC Homebuilders. “They are learning or have learned that new inventory is a much safer and more official rental product.”
Today, more than one-third (39%) of all rentals in the U.S. are single-family homes. That’s the highest it’s been since 1965. Meanwhile, homeownership remains at an all-time low.
And there are no signs of demand for these rentals waning anytime soon. Many people today, particularly Millennials, are opting to rent instead of buy. Simple economics of supply and demand are driving this. Rental properties allow Millennials to live in an area that they want to, and reside in a house that’s better than anything they’d be able to purchase. And for many, it’s preferable to apartment living. Build-to-rent properties are especially attractive, and represent everything a homebuyer would be getting, but without the monumental cost of a down payment, and homeownership.
In 2017, some 37,000 homes were purpose-built as rentals according to the National Association of Home Builders. That total grew to 43,000 the following year, representing just under 5% of total single-family housing starts.
Demand for build-to-rent properties is still strong, even though there has been an influx of new supply. Still, the vacancy rate for these properties has remained under 5% for the past five years. Additionally, rents for SFR are growing fast –at a rate of 4.5% annually, compared to 3% for multifamily apartments.
If you’re an investor who’d like to get started with SFR, build-to-rent can represent an excellent opportunity. And for developers who are looking for buyers, selling to investors can be a great way to move housing stock more quickly. With this in mind, let’s take a look at some of the reasons that build-to-rent SFR properties represent an attractive asset, and show you how you can get started.
Benefits of Build-to-Rent SFR Investments for Investors
First up, what are some of the key benefits of build-to-rent SFR properties –as opposed to say, investing in multifamily properties or even the stock market?
In a nutshell, build-to-rent SFR properties offer relative long-term stability as well as consistent cash flow that’s less dependent on current market conditions. In many ways, these properties represent an investment that’s largely recession-proof, particularly mid-tier properties (average income for tenants, $40,000+) and homes that are in in-demand locations.
For larger investors who are looking for scalability and ease of management, these properties are almost as hands-off as managing a stocks and shares portfolio. But unlike equity investments, which often stop paying dividends during a downturn, rental properties continue to cash flow. Their performance is much less connected to the ups and downs of the stock market.
As a bonus, these properties require fewer repairs and maintenance. They’re also very easy to rent, and are tremendously appealing to renters.
Let’s take a look at these, along with some additional benefits now:
- Ease of Management
Thanks to advances in tools, tech, and services in recent years, these properties are now easier than ever to manage, even at scale. Professional property management services are capable of overseeing these investments in their entirety; something that’s helped to bring them to the attention of large-scale investors.
- Strong Appreciation
SFR build-to-rent properties also tend to experience strong appreciation. Especially with tract housing developments that employ a scattered approach. These developments feature a blend of both homeowner-occupied properties and rentals. Renters that reside in these homes, live alongside homeowners. They’re able to enjoy the exact same house, and amenities as a homeowner, while renting. As a result, these homes tend to experience strong appreciation at a rate that’s often higher than their multifamily counterparts.
- Rent Growth
Rents for single-family homes are growing fast at 4.5% annually now compared with 3% rent growth for multifamily apartments. There is also less turnover in single-family rentals as well, and these properties, particularly the ones that are located in nice communities, near good schools, tend to attract high-quality tenants.
- Potentially Higher Yields
These homes tend to produce higher yields than multifamily units. Of course, this will depend on the market in question, but there’s no question that a home with space, a yard for the kids or a dog, and privacy tend to command more than a cramped, small apartment. With growing demands and more stable tenants who tend to stay longer as well, there’s also great potential for higher yields.
- Less Maintenance and Fewer Repairs
Brand new homes will need far less maintenance and repairs. Additionally, warranties are available for many of these properties.
- Tenant Stability
Build-to-rent investments offer renters more security. When it comes time for the investor to sell, these properties can often be sold directly to another investor, giving tenants the stability of long-term housing. This long-term security means tenants will be happier, and more likely to stay put longer. Often, they’ll look after the home better as well.
- The Opportunity to Scale Quickly
Buying build-to-rent properties allows investors to scale extremely quickly. Rather than investing slowly over time, an investor can purchase an entire tract of properties and start generating cash flow quickly.
Build-to-Rent: Tips for Investors
As with any investment, there are a few things that you should consider before investing in build-to-rent property. Here are some things investors will want to keep in mind.
- Calculate the Projected Returns
As you would with any investment property, make sure you run the numbers and calculate the returns to make sure they’re in-line with your big-picture goals. How much cash flow are you looking for? What type of yields would you like your properties to generate? What type of appreciation are you looking for? Take a look at what local housing prices have averaged over the last 10-20 years to see what you are likely to expect. Sometimes areas experience a downturn, but often, you’ll find that housing is resilient and tends to recover quickly. Remember to consider both cash flow and potential appreciation when calculating your overall projected returns.
- Consider the Location: The Rise of Hipsturbia
As with an investment property, location is always key. Not all build-to-rent opportunities are equal, you’ll still want to primarily focus on the localized market conditions. Build-to-rent properties that are experiencing especially high demand now are located just outside of popular metropolises. Dubbed Hipsturbia, these are areas that are built around the “Live, Work, Play” model, which is something that’s appealing to many Millennial and Boomer renters alike. With these places, people can live, work, and find entertainment and amenities, all in one place. They get all of the privacy and benefits of an SFR home –one that they couldn’t afford to buy, while all of the amenities that they are accustomed to are available just down the road.
When assessing a location, make sure you research the area to see if the market’s healthy. Look for signs of an emerging market. Are new jobs opening up? Is the population growing? What have housing prices done in the last 10 years or so? Analyze the trends and data so that you’re clear on what’s happening in the area before you invest.
- Find a Good Platform
So how do you find these properties? Head over to a good platform that facilitates the sale. Our Renters Warehouse Select program helps to facilitate the acquisition process, while our property management services make the management of these properties a seamless process. We’re proud to be working with some of the top homebuilding companies in the U.S., including Century Communities, one of the highest-rated home builders in the country so that we can offer investors the very best in build-to-rent single-family homes. Take a look at our website to learn more.
How Developers and Builders Can Capitalize
For real estate developers and builders, selling to investors in addition to homeowners represents a highly efficient process. Unlike homeowners who are usually only purchasing one home, investors will typically want to purchase multiple properties, helping you to shift housing stock faster.
Take a look at these tips for success when building for investors:
- Develop mini-neighborhoods –for instance, 20 or more homes. Taking a scattered approach to these properties and selling off plots to both homebuyers and investors is a popular strategy. This helps homes to sell more quickly and makes them more desirable to investors as well. This is because these types of homes tend to experience stronger appreciation and rental yields than homes that are sold solely as rental properties.
- Presell homes to large-scale investors. This makes the transaction process more straightforward and can help to make property management easier and more efficient as well. At Renters Warehouse, we facilitate this type of sale. Get in touch with Noel Christopher, Renters Warehouse’s SVP of Portfolio Services, to learn more.
- Whenever possible, look to obtain general contractor warranties and product warranties for appliances.
- Use durable, long-lasting finishes and features. Look for low-maintenance as well. Think: hard-wearing laminate faux-wood flooring, granite countertops, and stainless-steel appliances.
At the end of the day, there are a number of benefits that make new-build rentals an option that’s worth considering. Just be sure to assess the viability of the individual investment in question before getting started. Then reach out to a broker who can put you in touch with developers and start scaling your portfolio with this in-demand, versatile, and tremendously valuable asset class.
If you are a builder or developer who’s interested in getting your tract homes sold quickly, head over to LinkedIn and reach out to Noel Christopher, Senior Vice President of Portfolio Services at Renters Warehouse. Noel is our in-house residential SFR expert who specializes in the acquisition and dispositions of SFR portfolios. He will be happy to walk you through the process, showing you easy it can be to take your homes from the presale stages on to sold. Investor demand is high and your properties can be sold quicker than you think. Visit his LinkedIn page, connect with him to keep up with his updates on SFR and the build-to-rent sector, and don’t hesitate to reach out directly to him today.
Finally, for more information on the built-to-rent sector, or if you’re an investor who’d like to get started, be sure to check out Renters Warehouse Select. Our exciting new platform helps to connect real estate investors with new-build homes that are occupied or ready-to-be occupied. Learn more today.
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