Why I Love Single-Family Rental Investments!

Single-Family Rental developments can add easily diversification to most portfolios. They are surprisingly easy to add to your existing taxable or IRA brokerage account portfolio.

I’ve always been intrigued by owning commercial real estate. Commercial real estate intrigues me because of the inherent leverage with real estate. I also like the coinciding terrific potential return on all types of real estate. I own a few rental properties that provide me positive cash flow, but new developments excite me much more.

Have you ever wondered when you see a new development or building who made all the money off that project?

In the past year, I’ve been researching and investing my own money in projects known as Single-Family Rental (SFR) developments.  Lately, I’ve been buying equity units within an account at Charles Schwab. I’ve been testing the waters before I share this information with anybody.

How does investing in a Single-Family Rental (SFR) development work?

It starts by investing with a developer that controls a large piece of land. The developer then entitles, improves, and ultimately builds out (100+ single-family units) the property. Once the units are built and leased the developer sells the entire development to a large institution that wants the net operating income driven by the tenant leases.

Start to finish takes roughly three years. As an investor in an SFR, you may receive a preferred return (I’ve been receiving 10% annually) while the development is under construction. When the development is sold investors should share a portion of the ultimate profit. Depending on the sale price, it can mean a very attractive return.

Accredited Investors* can purchase equity in these projects if they have a relationship with an advisor with access by using their brokerage account. The custodian must have the (Alternative) investment on their approved list. You can buy in with IRA or non-IRA money.

I’ll get into the weeds a little bit and explain why these SFR’s are so attractive to Millennials and empty-nesters.

Simply put, instead of opting for a standard apartment unit, some renters prefer a single-family residential experience with the benefit of a professionally-managed and amenitized community. One fast-growing developer in this niche, NexMetro, markets its Avilla brand as “Rents like an Apartment. Lives like a home.

These rental single-family communities typically offer one-, two- and, three-bedroom (and sometimes four-bedroom) attached or detached homes with upscale finishes, high ceilings, and private yards for each unit, a step above what renters can get in an apartment building. Unit appointments and finishes are often higher than in typical apartments, including stainless-steel appliances, quartz countertops, in-unit washers and dryers, and hardwood-style flooring throughout the home.

Developers say that renters of this type of product are “stickier” than typical apartment renters because they see their rental home as more of a long-term decision. Renewal rates are often higher than those for apartments.  This adds to the sale price when the project is ultimately sold.

Demand Jumps in Single-Family Rental Market

Rent increases have consistently outpaced those in conventional apartments, and sometimes the margin is quite wide. “Across our Avilla neighborhoods, we have seen rent growth rates of 6% to more than 11%,” said Jacque Petroulakis, executive vice president of NexMetro. NexMetro developed 11 communities in the Phoenix area between 2014 and 2019, and now they are expanding into more areas.

Forbes: The New Face of Rental Housing: Single-Family Built-For-Rent 

Per Freddie Mac’s recent survey of renters, of those planning to rent their next home, 45% indicated they prefer to move into a single-family detached or attached rental home (“SFR”).

Build for Rent (BFR)

BFR offerings have been enthusiastically accepted by households looking for rental homes. These tenants are willing to pay a premium to combine a single-family home’s privacy with the services of an apartment community. From an operational perspective, BFR communities have many competitive advantages.

• Rent premium. Most BFR communities are able to command premiums over comparably sized stand-alone single-family rental homes and apartment units. That premium can be as much as 30%, but of course, it varies widely based on the product, community amenities, and services provided by the BFR operator.

• Solid rent growth. Rent growth for SFR REITs in the past 12 months has averaged 4.5%, above the 3.0% for multifamily REITs, on stabilized occupancy levels of 96% in the latest quarter (the same level as multifamily REITs). On a national level, single-family rental rates never experienced negative growth. Even during the Great Recession, SFR rent rates were less volatile than apartment rents and resale home prices.

• Reduced turnover. With lower turnover than apartments (approximately 30%–34% for SFR vs. about 47%–51% for apartments), total costs associated with turnover are also lower.

• Benefits of new construction. New construction will provide lower repair, maintenance, and CAPEX costs relative to older single-family stock for up to 15 years. Planning and building single-family homes for rent allows the use of materials, technology, and structural design to minimize future maintenance costs.

Developing BFR communities. We have been conducting market studies for BFR projects around the country for the past two years. Our database of active projects and statistical analyses shows that:

• BFR communities average about 130 units, with the largest comprising over 450 units.

• The lot size for single-family home renters is not a critical factor, and the limited premium is attributable to larger lot sizes. Increased density should not materially impact revenue in most markets.

• Absorption typically ranges from 8 to 10 units per month, with the best operator achieving up to 35 units per month when properly marketed.

• Typical cap rates for BFR communities range from 4.0% to 6.5%.

• BFR communities are often built in desirable locations, sometimes adjacent to new for-sale projects, including within master-planned communities.

Contributed by Don Walker, John Burns Real Estate Consulting

CNBC:  Build-to-Rent housing market explodes as investors rush in

Single-Family Build to Rent developments is an attractive growth industry and an alternative asset class that adds diversification to most portfolios. I like the diversification it brings to my portfolio as it seemed to get more attractive during these Covid times. The real return potential is very attractive to me, while there are no guarantees.

Let me know if you would like to discuss if this might be a good fit for you.

*In the United States, to be considered an accredited investor, one must have a net worth of at least $1,000,000, excluding the value of one’s primary residence, or have income at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to make the same amount this year. The term “accredited investor” is defined in Rule 501 of Regulation D of the U.S. Securities and Exchange Commission (SEC).