Real estate investors are always looking for the next big thing. In the near future, I predict that that could be full neighborhoods with nothing but build-to-rent single-family homes, as investors like me are finding yields that are 100 to 200 basis points higher than traditional single-family homes or multifamily rental properties.
Build-to-rent single-family home neighborhoods, often with more than 100 homes, are built from the ground up, feature many of the same amenities as new, high-end apartment complexes and are built specifically to be occupied by renter. Typically, when people think of single-family rentals, they picture a portfolio of houses sprinkled throughout multiple neighborhoods, where some families rent and some own. When they think of multifamily rental communities, it’s usually in the context of a large apartment building.
As an active real estate investor since 2005, I’ve had success in both traditional single-family homes and traditional apartment buildings. I started with a $9,800 investment in a single-family home in Nashville, and eventually bought and sold more than 300 single-family homes throughout the Southeast. I’ve also bought and sold seven apartment complexes, the largest being 162 units.
Despite this success in traditional rental strategies, I have jumped headlong into the build-to-rent single-family home market, as there are several factors fueling potential growth: Millennials, consumers between ages 24 and 39, have reached or are coming into prime housing age; high student loan debts are making home ownership more challenging; there is easy access to low-interest capital from Fannie Mae and Freddie Mac and stable renters and higher net yields provide an attractive investment.
The Millennial Attraction
First, let’s look at why millennials are driving growth. Many among this group of consumers are beginning to grow out of the apartment rental phase. Now with spouses and children, they would like to put down some roots. Yet home ownership can be an elusive dream as millennials carry the largest share of today’s record $1.6 trillion in student debt.
Build-to-rent single-family homes are often more appealing than traditional apartments to families of all ages. Many parents want a yard for their kids to play in and yearn for the stability of a traditional home and neighborhood. This desire for stability also makes families great renters: They are more likely to stay in a home longer and keep up on their payments regularly. This ultimately helps investor cash flow by creating stable, positive rental revenue.
Access To Capital
Next, access to capital for build-to-rent single-family home neighborhoods is more accessible than ever. Agency debt through Fannie and Freddie can be obtained for as low as 3%. These programs are only offered for complete subdivisions made up entirely of single-family rental houses. Real estate investors and builders are actively seeking these loans, which is leading to more of these neighborhoods.
The low finance rates, high demand and stable rental rates all combine to help boost net yield. At my firm, we are seeing net yields of 6% to 7%. If a build-to-rent single-family home neighborhood and an apartment complex have similar amenities — think granite countertops, high-end fixtures and a clubhouse with a community pool — the neighborhood almost always has a higher yield.
A Smooth Exit
Finally, a build-to-rent single-family home has more options for a faster exit strategy when compared to a traditional apartment building. The property often can be sold to the tenant in a rent-to-buy scenario or sold to a traditional buyer; it can be sold to a publicly traded real estate investment trust or to another single-family rental home investor. An apartment building typically has one option — sell to another apartment building investor.
All of these factors — high demand from millennials and families, easy access to capital, stable renters, higher potential yields and easier exit strategies — make the build-to-rent single-family home and neighborhood a phenomenon likely to flourish in the next several years. In my humble opinion, it’s a good time for investors to take a serious look.
By: Bruce McNeilage (Forbes)
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