There’s a growing trend and opportunity in new construction: single-family, for-rent housing. Homebuilders and master planned community developers should consider adding for-rent to their portfolio. Manufacturers and trade contractors may also reap benefits due to a more standardized and (often) higher spec end product, as well as more consistent production.
Here’s a more detailed snapshot broken down into Market Drivers, Product Scope, Consumer Impacts, and Business Impacts.
MARKET DRIVERS
Single-family rental housing is not new. Forty or fifty years ago, homebuilders built for sale and for rent, with a property management function often within their businesses.
What’s making this retro approach relevant in today’s market?
- A wealth of foreclosures and unsold spec homes—at least initially
- Innovative business models like Built to Rent and disruptive companies like Colony Starwood Homes, a leading single-family rental real estate investment trust (“REIT”)
- Housing affordability issues
- Changing attitudes regarding home ownership
PRODUCT SCOPE
Of the 15 million single-family homes rented in the U.S., only 1% are owned by institutional investors; the rest are owned by “mom and pop.” There are more single-family rented homes than there are rentals in apartment complexes of 10 or more units.
New, single-family rentals can be:
- Unsold spec homes or unsold to-be-built lots
- Bought as one-offs from builders and put into a rental pool
- Built for the express purpose of renting – either as a long-term asset for the builder or as a for-sale product to institutional investors
From a design perspective, they generally have small square footage, architectural consistency and style, and compact lots. They may be attached homes, townhomes, or clusters.
CONSUMER IMPACTS
These homes offer benefits to those who live in them and the communities in which they are located, along with a few tradeoffs.
- Supports the sharing economy – it fits the psyche of the Uber and Airbnb set for whom ownership isn’t essential
- Requires less financial commitment – no down payment and mortgage eligibility issues and easier qualification for those who want new homes and can’t afford to buy, BUT none of the financial and tax benefits of investing in a home
- Try before you buy – allows people to live somewhere and test drive a new home offering and the surrounding community before making a long-term commitment
- Embraces the nomad lifestyle – provides the advantages and amenities of a new home for those who need (or want) the flexibility to relocate for business or personal reasons, and allows for a quicker move with less hassle – no home to sell
- (Often) higher-end product – better materials and construction practices may be used since the builder/developer sees the property as a longer-term asset, and volume purchasing can make upgraded materials more cost-effective
- “New”, professional rental vs. old “mom and pop” – most likely better ongoing maintenance and service of the home and property and less hassle and turnover than people renting off of Craig’s list
- Good upsizing and downsizing option – can be an ideal stepping stone to home ownership, and allows empty nesters to keep the feeling of ‘their home’ without the maintenance
BUSINESS IMPACTS
More Master(fully) Planned Communities
- Differentiated product and rentals drive more traffic and can increase sales
- Occupancy can be 3 to 5 times faster if the community is a mix of for-sale and single-family rentals
- Demand is even greater if the community is close to city limits or if it offers the only townhouse product, for example, within a few miles
Benefits for Builders, Trades and Manufacturers
- Financial stability – steady income from rentals can offset slow sales and allow a builder to better ride the housing wave
- Better value on time and materials – consistency and lack of customization allow for bulk purchase of materials and provide a steady stream of simple and repeatable work for the trades
- Volume selling – builders needing volume can find ready bulk buyers that are 100% qualified, rather than dealing with individual homebuyers and their ability to pay
- Fewer “carrots” – inside/outside sales commissions and buyer incentives aren’t needed
- Financial leverage – tax advantages and depreciation can be applied to building and operating single-family rental homes, compared to building and selling homes