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Investors Filling Low Distressed Inventory Gap with New Homes

With inventory dropping, including the distressed sale inventory, investors are moving to built-for-rent sales. Bloomberg reports that more and more investors are building rental homes themselves to make up for the gaps.

Putting the blame on tight mortgage standards and rising prices, many younger buyers are holding off on buying a home, and investors are cashing in on the desire for detached-homes without the down payment.

Homeownership is close to a 51-year low, according to U.S. census data, but Bloomberg notes that owner-occupied homes have been rising faster than rental homes over the past few months. Still, investment firms probably aren’t taking too much of a gamble.

“People have good intentions, but they’ve never been able to save for a down payment,” said Bruce McNeilage, Co-Founder of Nashville, Tennessee-based Kinloch Partners LLC. Many tenants ask for short leases, saying they plan to buy, but they rarely do, he said. About one third of the 42 Nashville homes Kinloch sold to investment trust American Homes 4 Rent in 2014 were leased by people who had been on month-to-month arrangements for about seven years.

One of the advantages for investors buying newly constructed rentals is costs. While newly-constructed homes may cost more than used and distressed sales, builders often give discounts, and early maintenance and repair costs are much lower.

In the long run, investment companies pull in more revenue due to their ability to charge higher rent on newer rentals, 5 to 8 percent more. Building entry-level homes for ownership as an affordable price level has proved difficult for many, and rental may be the solution.

“It can be a challenge to build entry-level homes at a price level that is affordable for ownership,” said Drew Flahive, president of Amherst Holdings LLC’s single-family residential division, which has purchased new homes to lease and manages 12,000 properties. “Converting single-family properties to rentals often makes the most sense to maximize real estate value while providing affordable housing.”

About Author: Seth Welborn

Seth Welborn is a contributing writer for DS News. He is a Harding University graduate with a degree in English and a minor in writing, and has studied abroad in Athens, Greece. An East Texas native, he also works part-time as a photographer.
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