Build-for-Rent (BFR) vs. Existing Asset Single Family Rental (SFR) Rental
Since the 1970s, there’s been a direct correlation for homebuilders in this country between selling to the retail end user, and the buyer’s desire to build equity while chasing the American Dream.
Since then, institutional money has become a huge player in the multifamily arena, culminating with the recession of 2008. As a result, SFRhub is now seeing the institutional players discovering what their predecessors have known all along; single-family rental homes are a safe, solid and lucrative investment strategy.
Today, those looking to acquire existing SFR homes to create portfolios, need to be smarter, perform greater due diligence, understand the submarket, and drill down on each home in the portfolio to fully understand the capital expenditures required to hit the desired rents and returns on investment.
According to John Burns Real Estate Consulting, currently, about 95% of all single-family rental homes across the country are occupied, the highest level since 1997. Furthermore, the current demand for all rental homes will soon exceed the historical average in the oncoming quarters. In the U.S., single-family permits gain 10% year-over-year in 2020, with a current total of 916,000 that is estimated to increase to 950,000 in 2023.
From 2017 through 2018, the existing SFR market is seeing compressed cap rates as competition increases along with home value appreciation. These cap rates for existing portfolios fall within the 5%-6.5% range – in Tier I & Tier II submarkets – thus pushing investors out to tertiary markets chasing yield.
Great deals are still out there however, and SVN | SFRhub Advisors (SFRhub) is strategically positioned to support buyers and sellers to help them accomplish their goals through the use of quality decision data and market expertise. Even though returns are compressed, SFR investors benefit from stability, lower risk, higher liquidity, and more stable tenants in single-family rental homes, compared to other asset classes.
Today’s build-for-rent (BFR) model of single-family homes in master planned communities and/or self-contained subdivisions is attracting the attention of institutional players, along with family offices, high net worth individuals, and numerous commercial real estate investors with whom SFRhub is working. Given the higher cost of existing single-family homes and the struggle to find existing inventory, builders and investors are realizing the advantages of BFR opportunities. In many cases, yields are exceeding those of existing portfolios, averaging 6%-8% cap rates. Attesting to this, in 2018, builders completed 41,000 new build-for-rent single-family attached and detached homes, further supporting the growth of the single-family rental sector.
SFRhub’s BFR portfolios are an excellent way to find scale in the markets operators wish to be part of. This model has a very hands-off approach for operators. There are little to no capital expenditures required within the first three to five years since the homes come with builder warranties. To make the opportunity more attractive, SFRhub sets the stage for operators to take advantage of a five-year home warranty package plan for big-ticket items, extending past the builder warranty.
Purchasing a new BFR community is a savvy way to create safe, steady returns at strong cap rates, as investors can realize strong returns for three, five and seven years onward. Alternatively, investors can take advantage of their basis to sell individually to either the renter, or to a market rate homebuyer when prices are high. This ability to shift strategies to take advantage of the liquidity in this asset class is unparalleled, compared to any other CRE asset class.