A combination of a lack of housing inventory, especially discounted and distressed, and a surge in demand for rental housing has caused more investors to turn to the build to rent strategy—that is, building a single-family home with the specific intent of renting it rather than sell it to an owner occupant.
Recent research from John Burns Real Estate Consulting indicates that approximately 10 percent of detached single-family households in the country (12.7 million out of 120 million) are renting. In fact, Burns said 25,000 single-family detached homes were built for rent last year—a number he expects to increase over the next few years.
“Typically when you build a home, you have 15 to 20 percent gain in the sale,” said Tim Herriage, CEO of Dallas-based 2020 REI Companies. “A builder’s normal margin is anywhere from 10 to 20 percent. If you’re having trouble finding inventory, specifically where you can hit your yield, which typically means buying below market or buying something that’s going to appreciate, it makes perfect sense to build it to where you’re creating that equity and that embedded value.”
Herriage added that because the homes are new, operational expenses, turn times, the cost of repairs and maintenance, and capital expenditures are all lowered through the lifestyle of the investment. In addition, builders select durable materials that can withstand tenant behavior.
One of the obstacles the build to rent strategy is up against is a shortage of financing, however. While some are offering it, Herriage said feedback within the market is that not a lot of people are doing it well. Concentration is also a concern among lenders who are trying to avoid having a large number of rental houses in a small geographic area.
“Some of the more successful models I’ve seen are homebuilders that are going in and building 100 houses and turning 40 of them into rental houses and selling 60 of them to homeowners,” Herriage said.
"If you’re having trouble finding inventory, specifically where you can hit your yield, which typically means buying below market or buying something that’s going to appreciate, it makes perfect sense to build it to where you’re creating that equity and that embedded value.”
Alternatively, some developments are 100 percent renters but investors offer amenities such as landscaping that are included in the monthly rent. Herriage said some investors are using wrought iron fences instead of wood fences to protect their investment—wrought iron doesn’t deteriorate, and the yard can be seen through the fence.
“They can (provide landscaping services) at scale because once a week the big crew shows up with their truck and they mow all the yards, and they pick the weeks, and do the flowers,” Herriage said. “In those communities, they fetch a higher market rent on a dollar-per-square-foot basis than competing rental houses in the area, because they’re new and they have all these amenities and services.”
Herriage expects to see an increase in the number of developments where such amenities are offered.
“People want to live in quality, they want to live in a nice place, and they want to have services and amenities,” he said. “I would imagine you’re going to see even more subdivisions pop up that have a community pool, shared services, and fitness centers that are based around renters.”