[REN #951] Build-to-Rent: New Go-To Strategy for Single-Family Rentals

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Build-to-Rent: New Go-To Strategy for Single-Family Rentals, Real Estate News for Investors Podcast Episode #951 Header

The pandemic isn’t the only reason that demand is growing for single-family rentals, but it is one of them. And with an already tight supply of existing homes that can be turned into single-family rentals, the build-to-rent strategy is gaining momentum. There’s a new report out from RCLCO Real Estate Advisors that says that demand for single-family rentals will likely outstrip supply for the next ten years, creating “a strong opportunity” for developers, builders, and investors.

The report says that build-for-rents only account for about 6% of all new home construction right now. If builders continue at their current pace, that would produce about 700,000 new single-family rentals over the next ten years. According to RCLCO, that will probably not be enough to meet demand. (1)

During the Great Recession, we had a foreclosure crisis which pumped vast numbers of existing homes into the rental market. We’re now in a pandemic-induced recession that could produce another round of foreclosures, but economists don’t expect that to happen to the same extent as the Great Recession. Much will depend on the virus and whether people get back to work so they can pay their mortgage. Congress may also approve another stop-gap measure to temporarily prevent foreclosures while the job market recovers.

Demand for SFRS

What we do know right now is that inventory is tight for entry-level homes while demand for those homes is growing. After months of being cooped up in apartments, many renters are looking for more space including millennials who may need to accommodate a growing family. The pandemic has also left many potential homebuyers without the means for a downpayment or the credit to get a loan, which is contributing to the demand for single-family rentals. Real estate investor Tim Herriage told DSNews, “People value good, quality housing now more than ever.” (2)

In addition to the RCLCO report, the Urban Institute is also forecasting a strong demand for single-family rentals in the coming years while the market struggles meet that demand. (3) In a study on housing demand Urban Institute researchers concluded that “demand for rental housing over the next 15 years will dramatically increase—and we as a nation are not prepared.”

That analysis projects the rate of growth for rentals and homeownership from 2010 through 2030. It estimates that we’ll see the formation of another 9 million homeowner households and another 13 million renter households during the entire 20-year time span. The increased need for rental housing is much different than the previous 20 years when homeowner households grew at twice the rate of renter households, and that time-frame also includes the 2007-2008 housing crash.

New Construction Income Properties

As you may know, Real Wealth has been helping people invest in single-family rentals for almost two decades. Because of the inventory squeeze on existing single-family homes, many property teams are now providing build-to-rent homes, or what Real Wealth calls, “New Construction Income Properties.” At last count, we had eight property teams offering new construction income properties to our members in Houston, Dallas, Cincinnati, Atlanta, Huntsville, and several locations in Florida including Orlando, Tampa, and Jacksonville.

You might think newly built rentals are too expensive to cash flow, but the numbers are working in our markets. If you’re wondering how we can provide new construction income properties with an attractive ROI, here are a few of the cost-savings that make them a good deal for investors.

  1. Property teams hand-pick lots within owner-occupied neighborhoods that may be less expensive than lots within a larger development project.
  2. They may also negotiate a discount on new homes within a development project by purchasing them before they are built. 
  3. Construction costs are slightly lower for new rental homes because they don’t have some of the high-end finish work that you’ll find in new retail homes.
  4. That said, the new rental homes will have some high-end features such as granite countertops, stainless steel appliances, laminate floors, and other optional upgrades. An attractively finished rental helps get high-quality tenants into rental homes more quickly and reduces the risk, and expense, of vacancies.
  5. The materials used for rentals are often more durable than what you’d find in a typical home so they’ll need less maintenance and will minimize turn-over costs, which investors can calculate into their savings.
  6. The purchase price of newly built rental homes are also based on rental income goals, and not how much nearby retail homes are selling for, and the advantage often leans toward the investor. According to our property team director, Tim Horvath, those prices are typically a discount to the retail market. As an example, Tim says, “We know what investors will buy as an investment home based on the ROI. For example: If a rental can get $1,000 in rent then the price should correlate as close to the 1% rule as possible or a sale price of $100,000. Even if it’s slightly less than the market value of the home, it’s more efficient to sell homes quickly than let them sit on the market.”

We will be offering more details on our “New Construction Income Properties” in a four-part webinar series. We’ll be rotating through different markets for each webinar and capping them off with one on the whole build-to-rent concept. We’ll have all the information in a weekly newsletter. You can participate by joining our network and getting on our email list at realwealthnetwork.com

Links:

(1) RCLCO Report

(2) DS News Article

(3) Urban Institute Article

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