The Built-For-Rent (BFR) Investment Market Starts to Take Off

Real estate investors have traditionally had two basic options when seeking new opportunities, new housing or existing homes. Those have been the traditional choices, but now a new alternative has begun to emerge, single-family homes built-for-rent (BFR).

The BFR market has been with us for some time, but it’s been small to the point of irrelevance for most investors. That’s now beginning to change. According to the National Association of Home Builders (NAHB), about 42,000 BFR were constructed during the last four quarters. They represent 4.1% of the market, up from the 2.7% long-term average.

However, according to Robert Dietz, the NAHB’s Chief Economist, the BFR market may be larger. The 42,000 BFRs include only homes constructed and held by builders, another 2% — about 20,000 units — are sold to buyers for rental purposes.

In effect, BFRs may represent 6% of the single-family market, a figure likely to grow.

“The pandemic created a lot of economic displacement,” said RealtyTrac Executive Vice President Rick Sharga. “With jobs coming back, we’re seeing an uptick in household formation, and many of these are rental households. A built-for-rent property is a practical choice for many post-pandemic investors. It requires a smaller financial commitment when compared with a typical new or existing home and yet the buyer still gets new home advantages to offer to prospective tenants.”

Some big players in the real estate field have noticed. For instance, when American Homes 4 Rent (NYSE: AMH) opened the 34-unit BFR Cactus Glen project in Arizona last year it had a lot of experience in the field — the Arizona property was the 53rd new rental home community built by the company.

Affordability

A 2020 report by RCLCO, a real estate consultancy based in Bethesda, MD, points out that for many Millennials “traditional apartment living has become less desirable, and the single-family housing lifestyle is appealing, but ownership attainability is at a low point. While many lack the resources to purchase, they are attracted to the lower density and private outdoor spaces that single-family rentals offer, but without the down payment and commitment of ownership.”

In its first-quarter 2021 U.S. Home Affordability Report, ATTOM Data Solutions found that because of rising wages and falling mortgage rate, median home prices for “single-family homes and condos were more affordable than historical averages in 52% of counties with enough data to analyze.” That’s a sharp and sudden affordability drop “from 63% of counties in the first quarter of 2020 and 95% during the same period five years ago.” It means that even with mortgage rates near historic lows, affordability is still an issue.

Built-for-rent (BFR) units are different

It might seem that BFRs are hardly different from the new units sold to owner-occupants, but that’s not the case. BFRs are purpose-built as rental units. They differ from typical for-sale units in several ways, according to NAHB.

• BFRs have fewer bedrooms and bathrooms as well as less square footage.
• BFR’s are typically townhouses, however, Brad Hunter, writing on Forbes last year, explained that among large investors, “some are creating single-family communities on a single plat, similar to an apartment building (hence the term “horizontal multifamily,”) while others, like American Homes 4 Rent (AH4R) have individual lots/plats for each house.”
• BFRs likely have one garage or no garage.
• They are most common in Texas, Oklahoma, Arkansas, and Louisiana but can go up in any state.

Bidding Wars

A major problem for realty investors is that the market now has lots of buyers and little inventory. Bidding wars often mean that final costs are well-above initial asking prices. Redfin, as one example, says that in April 72% of the offers written by its agents competed with other bidders.

BFRs bring peace. The investor goes to the builder and orders one or more units. Maybe a lot more. Maybe a whole community. It’s a business deal. There’s no need to worry about competitors who will bid far more than the property is worth.

Large Scale and Small

There may be whole communities that are simply build-to-rent properties. As usual, there are advantages of scale when working with larger projects.

“Investors,” says The Wall Street Journal, “have been buying up single-family houses to rent out for some time, typically in disparate bunches in communities where most people own their homes. Tenants may have absentee landlords. Built-to-rent developments, however, are entirely new subdivisions designed for renters. They are managed more like new apartment buildings, with designated staff for repairs and maintenance. In the past few years, the model has taken off around Phoenix and elsewhere—and is likely to become a dominant force in the rental housing market in the coming years, with implications for the communities that surround them, and the nature of home ownership.”

While builders might prefer to sell in volume, there’s no rule which says they can’t sell off a unit or two here and there, or that a single BFR property cannot include multiple investors. As always, it pays to ask around and speak with brokers and builders.

Buying BFRs new has a number of investor advantages

There are reasons why investors might want to consider BFRs. Think of structural guarantees and appliance warranties. You’re buying new, so you get to pick the colors and finishes. There’s no damage from prior occupants. You may have a significant rental price advantage when compared with newly-built single-family homes that were intended for owner-occupancy. Likewise, you’re offering new and not used, plus fewer square feet can be attractive to renters who want less to clean. And, if you’re in a community that does the external maintenance, so much the better.

BFRs will not replace the single-home investment market, but they do represent a new and interesting strategy. Speak with builders and commercial real estate brokers for more information.