Why Are Build-to-Rent Homes the Next Big Thing?
How popular is this trend among investors? According toâŻReal Estate Magazine, 50,000 build-to-rent homes were constructed from September 2019 to September 2020 in comparison to a 40-year average of 31,000 units per year.Â
Build-to-rent ownership is usually larger in scale than the familiar single-family rental portfolio, a hybrid ofâŻmultifamilyâŻand single-family investment properties ranging across income levels and geographies. Specifically built as rentals, several BFR homes are typically located in one tract or neighborhood.Â
Who lives in build-to-rent homes?Â
There are a growing number of renters who, for whatever reason, canât or donât want to purchase a single-family home but still want the amenities that are not available in an apartment or condominium situation. They are willing to forgo the equity they could acquire in their own home for convenience, more space and private yards.Â
A build-to-rent property usually looks like a traditional, suburban family home without the homeowner having the responsibility for making their own repairs, doing their own maintenance and paying property taxes. Many of these communities are enhanced by security gates, swimming pools and other high-end amenities.Â
As reported by Forbes, âTenants at these kinds of developments span professional millennials, move-up families/life transition (i.e., divorce), and empty-nesters. Most renters are younger households tired of apartments but not ready or able to buy a home.âŻIn addition, there is significant demand from Boomer households who are downsizing from owned single family but donât want apartment livingâŚÂ And the lock-and-leave convenience of renting is appealing to all generational groups, particularly the Baby Boomers whose kids have left the nest.âÂ
Yardi Matrix says this desire by families for more freedom and privacy without a mortgage âhas prompted many institutional players to jump into the niche, with more than $10 billion allocated to the sector by institutions over the last few years,â according to corporate announcements and news reports.Â
âSome 12 percent of new single-family construction in 2021 is being done for rentals,â according to John Burns Real Estate Consulting, a national company with offices throughout the U.S.Â
Build to rent, often known as BTR, BFR or B2R. âenables investors to control the product from start to finish, to create a âbrandâ as opposed to a random pool of assets, to concentrate a larger number of holdings in fewer locations, and possibly to improve liquidity by adding to the potential number of market participantsâ reported Paul Fiorilla, director of research, and Casey Cobb, senior analyst, with Yardi Matrix. âAs such, build-to-rent is likely to flourish in the next economic cycle.â Â
Build-to-rent communities offer tenants upscale amenitiesÂ
As an example, Curve Development is currently pre-leasing 72 single-family homes designed as rentals near South Mountain in Phoenix with attached two-car garages and fenced-in rear yards. The development is part of 3,500 rental homes the company has under development throughout 26 communities in several states, according to a recent release.Â
Scheduled to be completed in the first quarter of 2022, Cyrene at South Mountain offers three- and four-bedroom floorplans as well as a private dog park, a ramada with barbecue, a multi-purpose event lawn, outdoor seating with fireplace and more. Rentals for the three-bedroom detached homes start at $2,400 a month and the four-bedroom units begin at $2,665.âŻAlong with SMART home technology and covered patios, each home even includes a doggie door.Â
Other amenities found in build-to-rent neighborhoods, such as The Bungalows on Pine Cliff by St. Clair Holdings, include a leasing center, clubhouse, modern kitchen, fitness center and a dog washing station. Outdoor features include large gas firepits with seating areas, a bocce ball court, a dog park, barbecues and two electric car charging stations.Â
Clean Living Communitiesâ˘Â of Florida, has recently been buying newly-built houses from builders throughout the southeast, Texas and Nevada and renting them for $1800 to $2500 a month. These homes are 15% to 20% larger than typical apartment units in the area and 60% of their renters are young families. Â
âDemand is strong,â said Jordan Kavana, founder of Clean Living Communitiesâ˘.âŻâWe are seeing 8% to 9% growth in rents within some of our communities; never less than 4%-5%.ââŻÂ The companyâs tenants sign 24-month leases and 80% renew when their lease ends.Â
Investing in build-to-rent homesÂ
There are definitely financial benefits to building to rent. Renters tend to move into a single-family home on a longer-term basis than apartment renters, who are inclined to be more temporary. This stability results in less tenant turnover. As noted in a new survey by Zelman and Associates, âturnover rates have consistently remained in line with the low end of the 27%-34% range.âÂ
 In addition, rents increase at a faster rate for single-family homes than they do for multifamily proprieties. According to a CNBC investigation, rent payments for single-family properties have been growing by 4.5% annually, while rent payments for multifamily apartments are growing at an annual rate of only 3%.Â
Major players currently entering the build-to-rent market include Toll Brothers, Lennar Homes, JMC Homes, AHV Communities and Camillo Properties. American Homes 4 Rent and Invitation Homes report that they enjoyed revenue and rent growth of 2.8% and 3.5% respectively in 2020.Â
Interestingly, build-to-rent developments do not fall into the category of single-family financing. It is actually multifamily financing and is underwritten in the same manner as, for instance, an apartment building. A recent white paper by GlobeSt MULTIFAMILY indicates that âBFR investors and developers will find familiar terms in debt financing as wellâexamples include a 2+1 interest-only bridge loan at 3.75%, a 3+1+1 non-recourse construction loan or a 10-year Fannie Mae permanent fixed rate loan of 3.11%.âÂ
GlobeSt MULTIFAMILY also reports that âBFR has experienced an influx of capital on the equity side from large institutions, mid-market funds, family offices, smaller private equity firms, and high net worth individuals.âÂ
If you are intrigued by the build-to-rent concept but donât have the time, money or experience to build a new community on your own, consider buying stock in a Residential REIT that specializes in new rental homes. Another good way to get started might be through one of the more reputable crowdfunding sites. Â
The build-to-rent model offers a mixture of financial advantages to an investor as it provides a residual income, as well as the capital growth you get from owning a property. However you choose to ride the build-to-rent wave, it is good to remember that new construction in planned communities is attractive and rewarding for investors and renters alike.Â
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