Is Build-To-Rent the Future of Residential Investing

As foreclosure inventory sinks to record lows, institutional investors are looking to an alternative acquisition strategy to combat the lack of available rental housing stock - build-to-rent. Build-to-rent is a fairly new submarket in the single-family rental space. Instead of building homes to sell as a primary residence, the new homes are rented out to a tenant and owned by an investor.

Institutional investment firms like American Homes 4 Rent and Starwood Waypoint have turned to build-to-rent opportunities as a way to compensate for rising home prices, low inventory availability and dried up foreclosure stock. They’re paying attention to the market, noting affordability issues, low personal savings rates, increased expenses and tight credit markets pushing down national homeownership rates. Coupled with psychological shifts toward rentership, investors are still looking to single-family rentals as a viable and sustainable investment class.

Both firms have begun striking up deals with new home builders to purchase properties in bulk, sometimes even entire neighborhoods, to use as rental properties. While buying new requires a larger initial investment, institutional investors are relying on both discounted prices and lowered maintenance costs and capital expenditures to offset the higher purchase price. Insurance tends to be lower on new homes and it’s not unrealistic to expect higher yields on new-builds. Rental increases of 5-8% are generally attained* on newly built rental properties as compared to their older, renovated counterparts.

Homeownership in the US remains at a 50 year low and analysts expect the decline to continue. Build-to-rent may become more prominent in upcoming years with larger investors transacting in the single-family residential investment space. One thing is for sure; rentership is on an upward trajectory with no signs of slowing. Build-to-rent may help to combat the lack of available housing supply, solving the problem for large investors looking to buy rentals but unable to find affordable inventory. It behooves not only the investors as they are able to lease the property faster than a traditional sale and begin cash flowing sooner but also the renter as they get the opportunity to live a newly built, modern home that they may not have been able to afford if their only option were to buy. Build-to-rent holds promise to be a solution to some of the national housing problems we're facing and is something we will continue to watch as the space evolves. 

*Bloomberg

BlogBrittany Nelson