Find Your Place in the Build-to-Rent Market

The single-family build-to-rent industry is accelerating, and is emerging as an asset class recognized by many in residential and commercial real estate. Demand is outpacing supply and financing is opening up to the industry, providing flexibility. Opportunity now exists to create new forms of business and streams of revenue. As a financing provider to the home building industry, I’ve been contacted by top builders, developers, capital groups, and private equity firms seeking to understand and pursue their best opportunities. Here, I offer some insight on the benefits of single-family build-to-rent (BTR) for specific industry groups.

Demand for Builders
The demand is vast and supply is short around the country as more people, especially millennials, are seeking the benefits of single-family homes without the need for a large financial commitment. With single-family BTR, they are able to participate in a hybrid of single-family home and multifamily apartment living in new homes with quality finishes, backyards, and no shared hallways. A place they can call their own in a well-managed community, which currently is a much-desired scenario for many people.

Increased Capital Opportunities
Financing plays a big role here as it does in traditional for-sale projects, however, some interesting nuances in the BTR space exist. The differences are aligned with the fact that BTR communities, when complete, are a cash flowing real estate asset. This allows different types of funding sources to enter the arena as these assets meet their investment and financing criteria. Many are coming over from commercial real estate with different approaches to capital. For example, I’ve seen funds with a willingness to lend up front on AD&C, both debt and equity, and will purchase the assets upon completion.

Residential Land Developers—Acquisition and Development Only
For pure land developers who entitle and develop property, you have options. A potential sale to either investor groups or home building companies is a high probability given positive market studies and financial projections. Investor groups won’t take entitlement risk, but they will provide you with a letter of intent up front for their purchase. This will de-risk your A&D lender and be beneficial to its underwriting. There are A&D lenders specifically seeking BTR opportunities in both debt and equity. Many lenders even have private equity groups contacting them about purchasing property upon horizontal completion.

Home Builders—Construction Only
A great opportunity exists as investor groups and land developers are in need of professional home builders who construct homes efficiently, promptly, and cost effectively. Builders become a pure manufacturer of homes on a fee basis. There are no extras or change orders, just simple plans and specs constructed repeatedly. There is no development or sales risk, either. It’s a fast-paced environment as investor groups want certificates of occupancy as soon as possible.

Home Builders and Developers—Acquisition, Development, and Construction
Do you want to sell the project to an investor group or hold it for your own portfolio? The longer you hold the property, fill homes with renters, and stabilize the project, the more value you create. Investor groups will purchase homes at various stages of project completion. For example, on a 100-home project they will agree to purchase homes when you obtain certificates of occupancy, say 10 per month. They will then lease and manage the homes as they acquire. Or you can choose to build the homes, and lease and manage the properties until all 100 homes are completed and leased. Then you can sell the community as a fully stabilized cash flowing asset like an apartment building. If you choose to hold for your own portfolio, a professionally run management company needs to be created or retained and permanent financing comes into play. As the BTR industry continues to prove out, more permanent lenders are entering.

Larger Investors Seeking an Attractive Asset Class
It’s become apparent that private equity firms see themselves as major players as they quietly and aggressively look to capture their share. These investment groups are ascending into the home builder arena, and they are not alone. As sectors of commercial real estate such as retail and office continue to fall out of favor, real estate funds and commercial entities are seeking alternative places to commit their capital and resources.

Home builders and residential land developers are great partners as they have spent years perfecting their expertise and operations in order to identify land to acquire, entitle, develop, and construct communities. It’s a perfect scenario where home builders don’t have and don’t want to have management operations, and private equity investors don’t have home building platforms. To partner with successful regional and local home builders makes perfect sense.

Smaller Investors
Instead of buying communities in their entirety, investors are also buying from builders in smaller portions. I am seeing anywhere from five to 30-plus homes in this scenario. Instead of buying older homes and rehabbing, they are purchasing new homes to grow their portfolio. So even on a smaller scale viable opportunities exist if the homes meet BTR purchase criteria. Funds are also being deployed through 1031 exchanges as investors are recognizing the benefits.

For generations, home builders have been looking for ways to diversify their business to offset the industry’s cyclical nature. Single-family build-to-rent is an opportunity for builders to use existing infrastructure, increase product offerings, and scale a new line of business. As the industry continues to grow we are seeing its reach expand to more builders, residential developers, and others in real estate.