It might be their reputation or how they write or speak or look.

And then you meet…and they do not have horns growing out of their head!

As a deep apartment lover – 50,000+ in acquisitions at UDR – I’ve long “loved to hate” the concept of investing in single-family rentals (“SFR”) on a major scale. And built for rent (“BFR”) was beyond my comprehension ten years ago.

• There is no efficiency in 3x the amount of roof surface to maintain (as apartments are typically stacked)!
• Maintenance is only a golf cart ride away with an apartment!
• Financing is readily available at low rates and great terms!

LEARNING TO ACCEPT

A long-time friend (Mahesh Shetty) has been my Sherpa in helping me to an understanding of how SFR houses owned in multi-markets can work well for some investors.

Why?

1. Turnover costs drop as tenants tend to stay longer in an SFR.
2. The average age of a renter of SFR is older than those living in apartments, therefore more stable in their lifestyle, resulting in less strain on property condition.
3. Once an existing house is renovated, where similar equipment is installed in all the homes in the portfolio, maintenance costs drop due to upgrades breaking less often, and repairs become easier with a move to consistency of equipment.
4. Rents per bedroom tend to be higher for SFR.
5. In many cases the cost to purchase a house is less per home than a similar-quality apartment.
6.  The SFR may be in a stronger neighborhood with access to better public schools.

BFR COMMUNITY DEVELOPMENT

There are many developers nationally bringing to market tens of thousands of BFR homes annually. Where demand for housing is fierce, some BFR communities are renting out in 6 months (versus typically 18 months for apartments).  

1. First shovel in the ground to full occupancy can be less than 2 years (versus 3 – 5 years for apartments).
2. Yet when the community is sold to aggregators, these developers are receiving prices in the $300,000+/unit range (mirror what is being paid for new similar-quality apartments).
3. The homes tend to be one story, often with a shared wall, but all have a small back yard. 
4. There is typically a little open space beyond a pool, a small clubhouse, and a postage stamp-sized dog walk area.  
5. They are substantially bigger than “tiny homes” but lack the size of similarly priced quality apartments (on average 20% smaller). 
6. There may be a 9-foot ceiling height (to help with sense of open space), and when you open the front door, you can see through the unit to the glass back door (so there is a sense of size beyond actual square footage).

Does BFR communities work everywhere? Absolutely no! There needs to be huge demand for housing to drive aggressive rental rate growth. 

How will the homes stand up over time? They compare in quality to tract starter homes. They will survive long-term but may not age well.  

BOTTOM LINE

Have I become a believer in SFR portfolios and BFR developments?

Yes, in markets with HUGE demand for housing which is not going to go away with ONE change in the market (e.g., major employer goes under, AI eliminates 30% of the jobs).

Local governments have yet to decide whether to treat a 100% leased community as desirable single-family homes or just another “to-be avoided apartment complex” (shades of NIMBY). 

Will the renters of SFR evolve into owners in a rent-to-own program (similar to condo conversion program) as the unit age and Wall Street moves onto some new hot-button investment?

Stay tuned – the future of rental housing seems to have arrived…and I didn’t see it coming!

Interested in learning more? Contact Rick Chess at Rick@chesslawfirm.com or 804-241-9999 to discuss your real estate investment goals.