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What if you could live in a house with a yard and a garage without having to crowdfund a down payment, endure 8% mortgage rates, or replace a leaky roof? This is attractive to many people. They take advantage of single-family living without the need to set aside funds. This is the story behind building a rental housing market.
Build-to-rent is a subset of the single-family rental market and remains an undervalued niche in real estate.according to Yadi MatrixBuild-to-lease accounts for 1.7% of the 20 million apartments in the single-family rental market. However, the market is growing.
CoStar reports that investors recently $3 billion invested in building rental housinganticipating continued demand for this product.
We are equally interested in the long-term investment potential of build-to-rent, which taps into several fertile markets: younger homeowners who are not interested or have the cash to purchase and retirees who want to invest their home equity in a lifestyle component. Here’s why we like build-to-rent and why the market should grow.
Basic knowledge of build to rent
The concept of rent-to-build is simple. Many people want to live in single-family homes and communities but can’t or don’t want to deal with the stress that comes with ownership. So they rent a house.
After the subprime mortgage crisis of 2008 destroyed many assets, single-family rentals, and subsequently communities, became increasingly popular. The rental market has grown significantly over the past few years as mortgage rates and construction costs have risen, and the interest rate cycle has returned.
Build-to-rent has reached its current economic sweet spot thanks to relatively strong employment and generationally high mortgage rates. This combination has prompted many people, including young families, to rent for longer.
Additionally, build-to-rent is the best lifestyle choice. Tenants have their own four walls, often with more interior space and perhaps some green space and maintenance support. They won’t get a mortgage, real estate taxes, or headaches when the HVAC starts failing.
For young renters, building to rent is attractive due to financial considerations. For older renters, the lifestyle benefits may be the draw. Markets bring benefits to a variety of audiences.
Why build-to-rent is growing
The real estate market will continue to grow slowly in 2024 due to pricing and financing issues. However, demand has not declined. Build-to-rent meets demand by adding to a housing market that is lacking inventory. According to CBRESeven percent of single-family residential construction is in the build-to-rent market.
Although Millennials are earning good wages across all professional ranks, they have more debt, especially student loans, and lack the funds for a down payment. As a result, they have longer leases and are more willing to do so.
A Real page research The study found that 66% of renters are satisfied with their rental and 63% rent for reasons other than financial. These tenants often transition to single-family rentals as they outgrow multifamily rentals or seek to change to multifamily rentals.
Meanwhile, American homeowners sit on more than $30 trillion in home equitySome are taking profits, according to the St. Louis Federal Reserve. In particular, retirees may choose to sell their home, rent it in the single-family market and use the funds for other purposes.Renting a house is a Popular choice For those who want to ditch their high maintenance home and rent a house to go to Thailand.
In many submarkets, renting is cheaper than owning. Redfin finds widespread home ownership Monthly cost increases by 25% Than renting. Redfin said only four markets (Detroit, Philadelphia, Cleveland and Houston) offered better value for homeowners.
What’s more, as many homeowners learned during the housing crisis of the late 2000s, equity can be fleeting. Single-family homes without financial worries are an increasingly popular option for generations.
Invest, build and rent out
The single-family rental market continues to be a strong investment. The submarket overall outperformed multifamily, at 4.6% Annual rent increase By 2023, according to Zillow. Zillow predicts that single-family rents are more than 35% higher than before the pandemic. “New starter home.”
In 2023, we purchased an 87-unit single-family development in Knoxville, Tennessee that had 100% occupancy and a long waiting list.
Demand requires supply, and build-to-rent can meet that demand.CBRE sees Strong investment fundamentals: High rent growth, low vacancy rate (4.8% in Q4 2022), and lower turnover than multifamily.
The existing inventory is relatively small but growing in the single-family home market. RealPage reported in late 2023 that approx. 113,000 build-to-rent units under construction. The market demands more, especially in the Sunbelt, where about 67% of construction is concentrated.
Still, investors should remain cautious for a few reasons. Build-to-rent requires scale, making it a growing area for institutional investors.MetLife predicts institutional investors can take control 40% of single-family rental stock By 2030, some U.S. lawmakers are proposing protections for such purchases.
Additionally, construction and borrowing costs remain high, causing some investors to be hesitant to build.Research Associates Ivy Zelman, CEO of Zelman & Associates, said in a recent report Oxbow Consultant Interview The build-to-rent market is “under pressure”.
“We’re seeing build-to-rent developers trying to offload a lot of communities to builders for the for-sale market because of the challenges posed by rising costs,” Zelman said. “We’re seeing a lot of pressure on that market right now, but don’t expect it to go away.”
The last point is crucial. Multifamily housing is a long-term investment across all platforms. During times of real estate turmoil, the single-family home market has shown tremendous resilience and even growth. Despite short-term challenges, build-to-rent is still expected to be profitable in this market.
MetLife Investment Management expects single-family homes to account for 80% of rental housing construction these ten years. Within this framework, build-to-rent communities will be a beneficial asset.
While it can be tested, the single-family rental market manages economic and regional forces better than other markets and remains a sound investment. Build-to-rent represents an emerging subset of this market. Headwinds will intensify, but long-term forecasts show few clouds on the horizon.
Michael H. Zaransky is founder and managing principal of MZ Capital Partners in Northbrook, Illinois. The company was founded in 2005 and primarily owns multifamily properties.
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