Traditional real estate financing typically involves securing a mortgage loan from a conventional lender that…
Inspired by an article from Laurie Goodman and Amalie Zinn at the Urban Institute
The United States is experiencing a severe housing shortage due to the decline in residential construction for sale. Even with the pace of construction increasing over the years, it has yet to return to normal levels, creating a supply shortage. As a result, the Build For Rent (BFR) real estate industry has grown and emerged as a potential solution to bridge the supply-demand gap.
These BFR properties serve as a subset of the single-family rental (SFR) market, focused on constructing homes specifically for renting purposes rather than selling. They are new-builds, often part of master-planned communities with shared amenities such as parks or swimming pools, and are owned and managed by builders, institutional investors, or combined partnerships between the two.
Over the last few years, these rentals have changed the rental market dynamics, presenting opportunities for both renters and investors. However, understanding the purpose and the people it serves is essential for its continued growth and the BFR industry’s future.
Why Build For Rent?
The Build For Rent market has become increasingly attractive to real estate investors, homebuilders, and commercial multifamily developers due to various factors. The demand for housing, particularly in metropolitan areas, has outpaced new construction, leading to a shortage of available units for institutional SFR investors. As a result, sourcing units in desired locations through traditional channels became increasingly difficult, fueling the BFR market as an alternative and appealing solution. The COVID-19 pandemic accelerated this trend, as the desire for single-family homes with remote workspaces and outdoor areas rose. The continued demand for BFR properties gave participants confidence and has fueled the growth of the BFR market.
While BFR homes may involve higher upfront costs, they offer several advantages to investors. These include reduced maintenance, production, and management efficiencies, and the inclusion of warranty-covered appliances and systems, resulting in long-term cost savings. As a result of strong demand and favorable economics, Build For Rent communities are multiplying and adding to the housing supply.
For homebuilders, BFR investments provide an additional avenue for property disposition. They can choose to rent out the properties themselves or sell them to institutional SFR investors who will manage the rental operations. This flexibility reduces risk, enabling homebuilders to continue construction even during economic uncertainty within the housing market.
Build For Rent homes have also attracted commercial multifamily developers, who view it as a complementary and similar addition to their existing business. Additionally, developers from the hospitality and resort sectors have also made strides into the BFR market. These developments target the needs of various individuals in a growing and key market, including those wanting single-family homes without the obligation of homeownership, those seeking temporary residence, and individuals with income limitations preventing them from owning a home. In a market where majority of available homes are unaffordable for households with median incomes or less, Build For Rent properties play a significant role in bridging the reality gap.
Key Figures in the Build For Rent Sector
The Build For Rent industry has seen significant growth in recent years, with approximately 131,000 completed BFR units built between 2019 and Q1 2023, and another 112,000 units in various stages of development. Although this accounts for less than 1 percent of total SFR housing units, a deeper dive into the numbers reveal significant growth of the BFR sector.
The National Association of Home Builders estimated 68,000 single-family BFR homes started construction between Q2 2022 and Q1 2023, compared to 52,000 in the previous four quarters, and from the previous annual average of 29,000 from 1990 to 2020. On a broader scale, the estimated 68,000 BFR starts made up 7.3% of total single-family starts from Q2 2022 to Q1 2023, up from its 3% average from 1990 to 2020. Because these figures are based solely on homes held by the builder and exclude homes that are sold to another party to rent out and homes built for individual ownership that have been sold to investors or operators to be rented, industry surveys suggest an additional 5% of single-family starts are actually Build For Rent, bringing the total BFR starts up to 12%.
Despite today’s high interest rates, construction and land purchases for projects are already underway, although at a slightly slower pace than in 2022, BFR starts are expected to continue. Additionally, with realities of the housing supply shortage and investors continuing to face challenges purchasing units in their buy box, more will turn to the BFR market, continuing to drive its rapid growth.
Build For Rent: Use Cases
The Build For Rent (BFR) market has many use cases which can be categorized into four main models: the vertically integrated model, the contractor model, the partnership model, and the one-off sale model. Many operators utilize multiple models depending on the community or project.
In the vertically integrated model, an organization handles the entire process of building, owning, and managing the homes. This model requires significant capital and expertise in construction and building management, and allows for complete control over every aspect, from land selection and community layout to unit design, construction, and eventual sale.
With the contractor model, an SFR investor acts as the developer and operator, while collaborating with a homebuilder who undertakes the construction part of the project. In this setup, the SFR investor purchases the land, finances the project, and provides input such as floor plans and amenities, but the actual construction is managed by the homebuilder.
The partnership model typically involves an SFR investor partnering with a builder. The specific terms of the partnership vary, but usually, the builder purchases the land and partners with the SFR investor to buy a predetermined number, or a significant portion of the completed development at a preset price or based on a preset formula. The investor pays a deposit upfront, assuring the builder of the deal’s completion and helps cover some construction costs, thus reducing financing risks. The SFR investor may have some influence over unit size, design, and amenities.
In addition to these models, the BFR industry also provided an alternative for builders to sell properties initially intended for individual homeowners but did not sell through traditional channels. These one-off sale homes can be sold to rental operators at a lower price to be converted into rental homes.
Understanding the Characteristics, Locations, and Residents of BFR Homes
BFR homes come in three main categories: horizontal apartments, townhomes, and single-family detached homes. Horizontal apartments are affordable, single floor units with one to two bedrooms, offering some of the benefits of single-family living. Townhomes are larger, multi-level units with two to four bedrooms, providing more space and often including a garage. Single-family detached homes resemble for-sale properties but with distinct features like three or more bedrooms, garages, yards, and durable finishes.
BFR communities offer a range of amenities, varying based on community size and developer preferences. Smaller communities may feature a dog park and walking paths, while larger ones could include a clubhouse, fitness center, and swimming pool. Smart home technology, such as alarm systems, is also incorporated to enhance the rental experience.
BFR homes attract renters seeking flexibility, convenience, and the comfort of a landlord handling maintenance and landscaping needs. Affluent renters with higher incomes, education levels, and families with children are often drawn to BFR homes, particularly single-family detached homes, as they provide a sense of space without the responsibility of homeownership and the flexibility to live in an area for a short time. BFR renters typically prioritize well-located neighborhoods with good schools and low crime rates. For this reason, BFR operators focus on suburbs outside of growing metropolitan areas with high job growth and an influx of higher-income residents. States like Texas, Arizona, Florida, North Carolina, and Georgia have seen significant BFR growth due to relatively lower land costs and favorable local regulations facilitating land acquisition and custom build specifications.
In conclusion, the Build For Rent market is rapidly growing, but further research, data, and analysis are needed to fully understand its size and potential to drive market efficiencies and create evidence-based policies. As the BFR market continues to expand and evolve, gathering more information on its renters’ demographics and the property types they occupy will benefit the BFR community, researchers, and policymakers to better understand the market and its potential growth. Given the severe housing shortage in the United States, BFR housing has emerged as an opportunity to bring new capital, however policies encouraging homebuilding are still needed to combat the supply shortage. CoreVest has been at the forefront of this BFR boom, having closed approximately $2 billion in loans on more than 10,000 BFR units. To help investors explore the key aspects of BFR that make it a viable, scalable, and potentially rewarding opportunity, we have created the Complete Guide to Build for Rent Investing below.
CoreVest is a market leader in rental loans, also known as DSCR loans, and has helped thousands of investors finance their properties and improve their holdings. We’d love to talk with you directly on how we can maximize the value of your rental or investment portfolios. Call us today at 844.223.7496 or email or email [email protected] to discuss how CoreVest can help you grow!