Director and co-founder of Sunrise Capital Investorsa real estate investment company targeting accredited investors.
Across the country, billions of dollars of institutional capital are flowing into build-to-rent (BTR) communities. With record low housing supply and excessive demand from would-be millennial home buyers, this massive influx is no surprise.
The seed was planted in the wake of the Great Recession by none other than Warren Buffett. Buffett claimed in February 2012 interview with CNBCthat if he could find single-family homes concentrated in certain metropolitan statistical areas (MSAs) – and implement the necessary management – he would “buy a few hundred thousand.”
Within two months of Buffett’s comment, black stone began spending $100 million a month on single-family homes and built up a huge portfolio. In 2017, as the market slowly recovered from the recession, Blackstone and other Buffett-inspired investment firms began to realize the true potential of the portfolios they had amassed.
For the first time in history, investment groups focused on single-family homes and owned large, manageable portfolios filled with them. This new scenario led to the creation of a new kind of asset, the likes of which investors and tenants had never seen.
Single-family portfolios could now be managed and valued as multi-family apartment complexes, with a few added benefits. With a higher return on cost than multi-family housing, with more space and privacy for residents, single-family housing was on track to become the most desirable and well-rounded asset class on the market.
However, the limited housing stock and fierce competition in the market forced investors to be creative. The added pressure led several companies to realize that: building these single-family rental wallets (subscription required) would not only increase returns but also solve a major problem for the emerging class of homebuyers: millennials.
The scarce housing stock, coupled with record prices and interest rates, makes homeownership a dim prospect for millennials. BTR creates a great alternative for this generation while providing excellent returns for investors. Here are a few reasons why:
The millennial homebuyer
The millennial apartment renters of today are the first homebuyers of tomorrow, or, if the current market holds up, the first single-family renters of tomorrow. a dizzying one 60% of Americans can’t afford to buy a house. The STR industry offers this 60% a desirable alternative. As millennials grow into life stages that require the space and benefits of single-family homes, demand rises significantly.
Strong and increasing demand
demand for housing increased during the pandemic, and as of today, 36% of renting households (about 16 million people) have dumped their multi-unit apartment complexes to rent single-family homes. This trend is expected to accelerate after the pandemic. I predict that BTR will see even more demand as record high house prices continue to rise.
Serious Delivery Shortage
We don’t build enough homes. Between 1968 and 2000, at a time when about 1.5 million homes were needed each year, American developers built just over 1 million. Over the past 20 years, approximately 1.3 million homes were needed per year, but only 947,400 were built annually. In the next ten years, developers will have to build 2.5 million homes every year to make up for this shortfall.
Better cash flow
Single-family homes are pricey – and there are far fewer of them these days. The struggle to find inventory has only highlighted the benefits of BTR. The BTR model relies on the advantage of brand new, Class A units that offer much better cash flow than homes built decades earlier. As such, the stabilized return on expense for BTR is higher than cap rates for existing portfolios.
Location, location, location
In an effort to draw young tech professionals with a sense of the coast to the interior of the US, BTR developers are selecting top markets. Phoenix, Arizona, is a shining example of this phenomenon. Millennial tech professionals from Northern California and Los Angeles are pouring into Phoenix at breakneck speed. Builders provide these people with fill-in neighborhoods close to desirable jobs, transportation, and school districts.
The “stickiest” tenants
BTR provides the optimal housing solution for millennial professional households, which typically consist of two earners with a shared income of more than $110,000. People in this socioeconomic category are looking for homes with the premium building materials we see being used in BTR projects across the country. When you combine this kind of wages with a class A build, it’s no shock that we have a more than 70% renewal rate for BTR projects. We look at some of the “stickiest” and most reliable tenants across the real estate spectrum.
When the economy picks up, fewer people will buy a house, resulting in higher rental occupancy and longer rental periods. Higher unemployment leads to more single-family homes becoming tenants, as high-cost families who need more space are more likely to rent than to buy.
Inflation is good for landlords. Mortgages remain the same, but renters’ incomes are rising. This allows landlords to raise rents, resulting in excessive risk-adjusted returns for investors. BTR, in particular, is poised for explosive growth in 2022. According to buffett, investing in single-family homes is “basically a way to cut the dollar” – an excellent strategy in an inflationary environment. This strong performance is expected to continue in the coming years, with most markets expected to see rental growth well above inflation (with occupancy rates maintained). The aforementioned margin of safety and strong property management systems used by BTR communities only enhance the safety of BTR as an inflation-protective investment.
The above points are just some of the benefits that BTR offers. BTR simultaneously offers the best risk-adjusted returns in real estate and the solution to a major housing problem for the millennium generation. This is a rare win-win scenario. For the millennial looking for a home, there is a growing opportunity to escape from the shared walls of the apartment complex to the backyards and breathing space that only single-family homes can provide.
For the investor seeking the best return on real estate, financial heritage grows over time by making the right purchase, managing capital efficiently and investing for the long term. BTR creates a scenario where investors retain ownership over properties while receiving infinite cash-on-cash returns, with lifetime cash flow.
A bright future lies ahead.