That saying, “If you build it they will come,” is resonating throughout the real estate industry, although it’s extending far beyond the cornfields of Iowa. The build-to-rent (B2R) concept that has caught fire in Europe is becoming the new wave in real estate and edging into the U.S. single-family space. Homes are being purpose-built and professionally managed specifically for renters in and out of city centers. The concept has garnered the attention of large institutional investors, including pension and insurance funds.
B2R is a collaboration of developers, construction companies, investors and management companies to build single-family housing on a large scale, much the same way as it’s done in multifamily housing.
But single-family investors and developers are taking the concept to a new level, building single rental homes or even entire subdivisions with similar flavor as highly amenitized and managed apartment communities.
Developers and owners can save significantly on building costs and earn greater returns by constructing a whole neighborhood at once, as opposed to building one-offs or buying properties in other areas and converting them to rent houses.
By contracting with a single general contractor, risk isn’t passed on to owners until the property receives a certificate of occupancy. Also, renters are more likely to stay longer in a brand-new home compared to one that’s been lived in, which reduces turn costs for the management company, say single-family industry experts. And a new home with a new tenant is more desirable when courting long-term investors.
Opportunities for single-family
It’s becoming the industry’s most exciting opportunity for single-family rental investors and property management companies to grow doors and expand their portfolios whether they build one at a time or enmasse. Subdivisions, which can include 50 or more homes, require large sums of capital versus buying existing properties are building a handful here and there, and experts say the potential for revenue generation, diversification and growth is good at any size.
“We look for subdivisions typically over 100 units, so we’re looking at a minimum $25 million investment,” said Jay Byce, senior vice president and co-founder of ResiBuilt, which plans to deliver 400 homes this year and 800 next.
Byce was one of four panelists who offered insight into B2R , which in “Build to Rent: Everything You Need to Know,” a webcast hosted by Propertyware Vice President, Single Family Inaas Arabi. Dennis Cisterna, founder and CEO of Guardian Residential; Bruce McNeilage, co-founder and CEO of Kinlock Partners; and Corvest Finance Vice President, Originations Stephanie Casper each offered how to make B2R a viable business for single family rental owners.
Demand for B2R grows
The demographic tailwinds that support renting as a lifestyle plus demand for entry-level housing makes the business model work, panelists said.
Casper has witnessed demand for B2R financing grow since joining Corvest four years ago. Corvest, a private lender that specifically provides loans to real estate investors, created a product that finances stabilization and construction of B2R properties and the take-out financing via term loans to meet customer needs.
“During that time we saw the need to tweak our existing loan programs to solve some of the financing needs specific to a build-to-rent model,” she said. “That included tweaks to leverage levels on our short-term side as well as underwriting adjustments we can make that are more specific to term loans that are for newly built homes.”
Investment costs are more manageable building communities at one time. While the homes are not necessarily of a cookie-cutter mold they share some of the efficiencies of building in bulk. Cisterna said that many of the materials are the same, including countertops, appliances and flooring.
Homes often get built quicker because there are no special materials that have to be ordered from one home to the next and scheduling the work is easier.
“When you’re looking from speed perspective, that’s great,” he said. “All of your subcontractors and vendors are able to work much more efficiently. In addition you have cost savings because of a bigger volume discount, and you don’t have change orders. For that perspective it’s absolutely incredible.”
With large investments come large communities that inevitably take on more of a multifamily appeal with a design for the complete resident lifestyle in mind, Byce said. Neighborhoods are filled out with some of the same community perks, like swimming pools and a gathering areas yoga classes or wine tastings. Onsite staff manages resident needs and maintenance.
“At that point it becomes more like a Class A apartment complex,” he said. “That’s why we think it’s important to amenitize the community with swimming and tennis, provide onsite staff that not only handles maintenance but weekly wine tastings and yoga. When we’re able to do that we see tremendous leasing velocity, upwards of 25-30 units a month in some subdivisions we’ve looked at.”
In most cases new properties command greater premiums − some generate upwards of $300 more per month for a basement − than their aged counterparts. Typically, tenants are willing to pay $50 to $100 more for the privilege of being the first to live in the home.
McNeilage said owners are building the homes with turns in mind, even though there are typically fewer than older properties. Kitchens usually have granite countertops and vinyl floors are a no-no. Carpeted rooms are limited to stories above the first floor and the master bath shower has a door to prevent leaking.
“I think the main thing is the finishes,” McNeilage said. “If you’re planning to sell to them or keep the product, you really want to build product where it minimizes wear and tear. The less turns for us as owners and making it easy to turn that house when the next tenants come are very important when building house to rent versus for sale.”
B2R gains traction
Kinlock Partners believes B2R will get further traction and become a larger piece of the single-family rental space. New household formations driven by millennials who are settling down is one contributing factor. Another is that inventory of available homes is insufficient for entry level buyers.
Byce notes that a shortage of affordable homes exists because many that were built in recent years sold for $400,000 to $500,000 or more. Such properties may be out of reach for new families because of the high rents that come along with them.
“There’s been a tremendous undersupply of new houses in entry level price point,” he said. “Everybody is kind of scratching their head and trying to figure out how to efficiently bring more supply on at an affordable price point.”
Large national home builders struggle to meet lower-end price points because of huge operating costs, an advantage that Byce says small single-family rental operators can gain through B2R.
“We are looking at this as a very big opportunity to help small investors grow,” he said. “The big rental companies only own 300,000 or so homes compared to five million rental houses across the U.S. We think the entry level price point has been so underserved and it’s going to be difficult for us to catch up over the next three or four years.”
When panelists were asked to offer one tip to single-family rental investors wanting to get into the B2R, McNeilage offered up the old real estate adage of location, location, location.
And, “schools, schools, schools.”
To hear what other panelists suggested, watch the webcast.