Why Build-to-Rent Communities Are the Latest Trend in Real Estate
These last few years, real estate investors have been shifting their capital to build-to-rent communities. This trend first took hold in 2019, following consumer rental demand. But what made this pattern more noticeable is the fact that private investors weren’t the only ones seeing it as a source of income. Major homebuilders also began investing in residential neighborhoods full of single-family rental properties, creating entire communities of rental homes. Recent examples include builders like Blackstone, Lennar, and Toll Brothers. Both homebuilders and real estate investors are pouring billions of dollars into build-to-rent homes because of the change in market demand.
More renters have been choosing single-family homes because rental housing offers more space in comparison to traditional apartments. It’s a great option for larger families who want amenities like a backyard, a community pool, or nearby dog parks, while still having easy access to their workplace. And now that remote work is more commonplace, space has become a deciding factor for tenants. There’s been a high demand for single-family rental houses within the last year, and developers have found it difficult to keep up because investor demand has allowed this pattern to continue skyrocketing.
Ultimately, there are a variety of factors that have contributed to real estate investors flocking to build-to-rent communities. Below, you’ll learn about the shift in capital from multifamily properties to build-to-rent single-family rental homes.
One of the major factors of build-to-rent communities can be attributed to financial assistance. During the Great Recession, a lot of single-family homes became foreclosures as homeowners faced evictions. Major builders invested in these foreclosures to turn into rental homes. This was a solid opportunity for investors to increase their capital. Today, builders, developers, and real estate investors — big and small — are finding a new opportunity for the rental market in build-to-rent homes.
While multifamily apartments are attainable, lenders like Fannie Mae and Freddie Mac have made it easier to invest in single-family rentals. New options for financial assistance make it easier for real estate investors to take part in the trend of rental communities. Build-to-rent loans are much more commonplace because they’re more efficient than for-sale homes and yield a high return. The financing options for investment rentals have gained enough traction for lenders to have competition.
Millennials and Generation Z
The build-to-rent trend is bolstered by new generations. Millennials and Generation Z either want to remain renters by choice or find that homeownership isn’t within reach quite yet. As an age group, Millennials have gotten older and started having families. Single-family rentals allow them to inch closer to the “American Dream” of homeownership without having to fork over a large down payment. Generation Z is also full of renters. The prospect of homeownership is a large commitment at their age. With student loans, a two-bedroom rental property in a build-to-rent community is a lot more realistic for Gen Z than purchasing a new home.
Millennials are also no longer interested in urban areas as they settle down. They want more space for family offices now that they’re working from home. Rental houses in the suburbs allow for a small backyard, a gated community, and a good school district in comparison to an apartment complex within the city. Renters get the feel of a single-family home without having to deal with maintenance. Overall, tenants cover all age groups and demographics, not just Millennials and Gen Z. In fact, one in eight Americans live in a single-family rental home. That’s a lot more tenants compared to multifamily units. Knowing this fact, a joint venture for real estate companies to invest in build-to-rent communities starts to make a lot of sense.
Build-to-rent houses yields are higher than the average apartment building with multifamily units. This is one of many reasons why builders and real estate investors are flocking to build-for-rent communities. There’s also less turnover in single-family rentals compared to tenants in apartments. Having to constantly find renters for an apartment rental unit can be costly.
And there’s an increasing market demand for tenants to have more space. Ultimately, the rent for a single-family home is higher than an apartment. This could be due to the square footage, a garage, a community pool, or tennis courts. So, developers and investors are getting more money for build-to-rent real estate.
Lenders are more willing to provide financial assistance to investors in the build-for-rent sector. At the same time, more Millennials are looking to rent single-family homes. Construction for these types of rental properties includes more amenities, which increase the value in the eyes of renters. All of these factors in conjunction mean that it’s a lot easier for an investor to yield higher returns with single-family rental properties. And with large tracts of land available in states like Texas or Arizona, it’s a no-brainer.
Lastly, there’s the factor of flexibility. Single-family homes for sale tend to pose difficulties. This is because homeowners choose design elements to customize their single-family homes. The design process for materials, paint colors, and exterior finishes take time and can be costly. With build-to-rent homes, builders can simply move forward with new build designs of their choice. Tenants can move into rental units quickly, and investors see returns a lot faster. If a small investor has a build-for-rental property, they have the option to sell it to the tenant. How to invest in build-to-rent? Commercial real estate doesn’t allow for this flexibility.
Single-family rentals can be held over a long period of time to collect cash flow. They can be sold to tenants. And they can even be sold to another builder or property manager that owns plenty of other rentals. This is precisely why investors are inching toward build-for-rent communities. Today’s demographics are looking for more space but don’t want the responsibility of managing their own properties. On top of that, tenants stay in single-family homes a lot longer than they do in an apartment building. It’s only right for investors to keep up with the demand for higher yield and more flexibility as a real estate owner.
About the Author:
Annie Dickerson and her partner Julie Lam are founders of Goodegg Investments — an award-winning real estate private equity firm — and creators of the Real Estate Accelerator Mentorship Program. They are authors of the book Investing For Good and hosts of the popular Life & Money Show podcast: good egg investments
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.