June 9, 2022 3:19 PM
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Investing in build-to-rent properties can be especially profitable because of long-term tenants and generational shifts.
Home prices and rents have been increasing by record numbers. Many companies, especially hedge funds like Blackstone Inc. (NYSE:BX) and REITs like American Homes 4 Rent (NYSE:AMH), are building homes with the sole purpose of renting them as opposed to buying homes to sell to long-term owners.
Aside from just building single homes, many companies are creating large communities of row homes for this purpose. Horizontal apartments and duplexes can be designed as build-to-rent communities as well.
Homeownership is on the decline because of many factors like record inflation, high down payments and student loan debt. These factors and other reasons make build-to-rent investments even more enticing.
Longer Tenancy
One of the most important but overlooked components of a profitable real estate investment is the tenant. Regardless of the type of real estate, it’s ideal to find model tenants who pay rent on time, respect the property and stick around for the long run.
Tenant vacancy and turnover can lead to lower if not negative returns. Fortunately, tenant vacancy rates are declining with the national average being 5.6%. About 41% of these properties have been vacant for two months or less with only 6% being vacant for greater than two years.
Many build-to-rent homes are multi-family properties that provide more space than a standard one- or two-bedroom apartment. More space lets tenants own more possessions, making it harder for them to abruptly leave. Having this extra space makes it easier to raise families, which can also result in longer-term tenancy.
Greater Demand
Demand for housing has been skyrocketing across the U.S., with the median U.S. home price increasing to $438,263 in 2022 up 12.7% from 2021. One of the main factors behind this demand was a shift to remote work.
Despite more employers calling their employees back to the office, remote work is here to stay. Many employees have become accustomed to saving money on gas and eating out. With more people working at home, the demand for larger homes has risen too.
For example, some remote employees might want to have separate rooms for home offices and workout areas. Other children are still taking remote classes, which also creates higher demand for more open living conditions.
Remote work has also caused a boom in rural markets, where there were fewer high-paying jobs compared to hubs like New York or San Francisco. This shift has resulted in higher demand and prompted builders to create more build-to-rent communities in once sleepy towns like Osceola, Missouri, and Williams Bay, Wisconsin. Home prices in Williams Bay, Wisconsin alone jumped 20% from 2020 to 2021.
Demographic Shifts
Millennials are coming of age with the oldest millennial being 40 years old. As they age, millennials likely want to move on to the next stages of life like getting married and starting a family.
However, most millennials have significant student debt with the average debt being $37,014 in 2022. With rising home prices and mortgage rates, homeownership is becoming even more out of reach for this generation.
Larger multi-family build-to-rent properties can help older millennials live in a house suitable for raising a family. Many of these properties can also be in suburbs and close to good schools.
As renters, they won’t need to deal with paying to repair a leaky toilet or broken roof, which is the landlord’s responsibility. Many of these unexpected expenses can set millennial families back since the average cost to repair a roof is $1,017.
ERC Communities is currently planning an initial development of 216 units in Zephyrhills, Florida, a suburb in Tampa, that is seeing massive growth. ERC communities wants to develop build-to-rent communities both in and outside of Florida. It’s projected to have 5,000+ rental units that offer total rent revenue north of $100 million.
A few companies are answering the demand for build-to-rent housing with internet-based crowdfunding via Regulation D and Regulation A+offerings to enable individuals to invest in build-to-rent homes.
Fundrise has been investing in several rental communities with its Flagship Interval Fund and CrowdStreet recently launched an offering on behalf of a third-party sponsor to acquire a portfolio of single-family rentals.
Liquidity
Liquidity refers to how easily an asset can be bought and sold with minimal price change. Real estate, especially commercial real estate, is generally illiquid since it can take months to buy and sell property. Besides that, many expenses including closing costs, financing costs and broker commissions impact profits.
Residential properties have a shorter buying and selling time, which can be as little as 18 days. It provides a larger pool of buyers for single- and multi-family residential homes, compared to traditional commercial properties.
Demand is generally stable for residential property since everyone needs a place to live. Conversely, demand for certain real estate sub-niches like office space can plummet as seen during the COVID-19 pandemic. Many office buildings saw lower valuations during this time, and it was harder to sell these properties.
Bottom Line
With record inflation, rising home prices, stagnant wages and rising consumer debts, individual homeownership is on the decline. In fact, young adult homeownership (ages 25-34) declined by 10% from 1960 to 2017, representing a transition from owning to renting.
However, renters still want the comforts of multi-family homes, without the high down payment or responsibility for repairs. This factor has motivated companies like Blackstone and Goldman Sachs Group Inc. (NYSE:GS) to invest in build-to-rent homes.
Build-to-rent real estate is even more appealing since it attracts long-term tenants and is more liquid than other types of real estate like office space.
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