Wednesday, September 25th, 2019 September25th2019

Sell for More News: Build-to-rent houses are a new asset class

Published on September 25th, 2019

Sell for More News is a weekly blog series with interesting information from the world of commercial real estate.

 

During the foreclosure crisis a decade ago, investors plowed into the housing market, buying millions of distressed homes and turning some of them into rentals.

They transformed the once mom-and-pop market of single-family rentals into a large-scale, formally managed asset class that is still growing.

Foreclosures, however, are now few and far between. Distressed properties make up just 2% of home sales today, down from a high of 49% in March 2009. The regular existing home market is very pricey, so investors are now turning to a new strategy: Buy new. And suddenly, the so-called “build-to-rent” market is exploding.

For example, a Tampa, Florida-based builder, ERC Homebuilders, is launching a “soft” IPO, hoping to raise $100 million to build more than 1,000 rental homes across the state. It’s offering investors private shares using Regulation A+, a form of investment crowdfunding that allows small companies to raise limited funds from the general public. Accredited and nonaccredited investors can participate.

The homes will be built in contiguous tracts and sold in bulk to large-scale investors. Putting dozens of homes in one location makes property management much easier and far less expensive.

“There is a consumer rental demand that is driving these institutions to want much greater levels of inventory of this product,” said CEO of ERC Homebuilders. “They have learned that new inventory is a much safer and more official rental product.”

Toll Brothers recently announced a $60 million investment in a joint venture with BB Living, a build-to-rent company based in Phoenix.  “More and more renters may prefer to raise a family or live in a single-family home versus an apartment complex or community or building,” Toll Brothers CEO said.

Lennar, the nation’s largest homebuilder by revenue, experimented with a build-to-rent community in Sparks, Nevada, and announced this week it is moving further into the space.  “This community is in Florida and is the first in what we believe will be an ongoing business strategy and relationship where we build and sell homes in bulk on land owned by third parties with no lease-up risk,” said Lennar’s president.

“We’ve got clients with well over a couple billion dollars worth of capital looking to place in this space,” said an executive at a new Phoenix-based commercial brokerage firm focused on single family rental and build-to-rent investment portfolios. “They are looking to acquire 5-6,000 homes in the next two years.”

Many millennials are choosing to rent largely for the flexibility of renting. For baby boomers, they’re moving into smaller homes where they can have a lock-and-leave mentality. They’re tired of home ownership.

For investors, buying new has many benefits, especially when the homes are in the same community. They are immune from some of the typical repairs that come with 15-20 years of ownership. There is also a general contractor warranty and limited product warranties on appliances.

Also, rents for single family homes are growing faster (4.5%) than apartments (3%). There is also much less turnover in single-family rentals, and the rental market is much less volatile than the home sales market.

Finally, the stigma around renting, along with the historical drive toward homeownership, are waning.

In my opinion, if you can make the numbers work – demand will be there.  This can be a great business model. Look for whole neighborhoods of new, rental houses in your market soon.

 


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About Beau Beach, CCIM

Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.

Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee, South Florida and Chicago markets.

He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.

Beau can be reached at 800-721-3287, click to schedule a call or Beau@ProwessIRES.com