A growing trend in real estate has emerged, and is grabbing the attention of real estate investors and homebuilders alike: Build-to-rent.
Let's dive into the growing trend to understand build-to-rent and learn why investors are ready to jump in.
Instead of building detached, single family houses to sell to families, many developers are now creating entire neighborhoods (hundreds of homes at a time) with the sole purpose of renting them out.
While the term is relatively self-explanatory, there are a number of important factors to note.
These single-family homes are not only professionally managed, but they also offer the renters access to exclusive amenities, such as swimming pools, gyms, tennis-courts, etc.
It's similar to the way that large multi-family apartments work, but with detached, single family rental homes, or SFRs, instead.
In addition, living in a build-to-rent neighborhood means that renters are part of a community.
Most of the renters in these communities are younger individuals or groups of roommates between the ages of 20 – 40, and they often hang out in the common lounge areas, work nearby, and prefer the flexibility in renting.
There are a number of factors for the rapid development of build-to-rent homes.
As previously mentioned, the vast majority of people interested in renting (rather than buying a house) are millennials (those currently in their late 20s to early 40s), which currently count for close to a quarter of the U.S population.
While the younger generation tends to have well-paid stable jobs, many of them are saddled with huge student-loans and credit card debts, and as a result, their purchasing power is relatively small compared to generations before them.
Macroeconomics aside, it's more common for younger generations to rent out smaller apartments in large cities instead of buying detached single-family homes; the down payments and credit requirements are a bit much for professionals early in their career.
There are a host of other factors for why build-to-rent works for these types of renters. People are starting to prefer more spacious rental units, and multifamily and studio units in big cities just can't compare.
In addition to that, millennials tend to love flexibility. Instead of settling down in a particular area for extended periods of time, they want to seek out opportunities for their careers and may have to move quickly.
This trend towards renting larger homes was also exacerbated by the pandemic, where societal trends in working and living continue to evolve - "work from home", suburban expansion, population changes from the largest cities to places in the Sun Belt (North Carolina, Texas, Arizona, etc.), among others.
Now that we have covered the benefits for renters to choose build-to-rent houses, you might be wondering whether there's a chance of profitability for investors as well. The answer is YES!
Large home builders and developers have already seized the opportunity before the pandemic by noticing these stated trends. The demand for single family homes for both buyers and renters is staggeringly high, and it's created a real estate frenzy.
This kind of demand causes the economics to be more elastic.
People are willing to pay high rent prices for more space and amenities (compared to high rent for studio apartments), which is why entire neighborhoods are quite profitable to build.
By building homes specifically to rent out, builders can also partner with property management firms and/or investor syndicates.
The build-to-rent shift has allowed the scalability of the real estate investors business. It's become another type of asset in the ever-growing real estate investor portfolio.
Instead of owning a number of different properties in various locations and having to look for property managers for each one of them, investors can now easily buy multiple houses in the same location and partner with local firms for management.
Last but definitely not least, the process of singing a lease with a renter is much faster than selling a house, which means that real estate investors are experiencing a much faster return of their investments in a less risky manner.
There's even the possibility of renting these homes out as short-term rentals.
Additionally, the investors in these properties have options: If they no longer want to wait on the appreciation of their build-to-rent portfolio, they can sell these SFRs for a quick profit. There's enough demand to go around!
All in all, we believe the build-to-rent trend is here to stay. The trend will continue as renters seek out more spacious homes for their flexible lifestyles, and homebuilders will continue trying to keep up with the demand for single family homes.