Lately, the hottest topic in real estate investing is “building-to-rent.” Before the housing crash, very few investors would have considered this strategy because everyone wanted to own their own home and lenient mortgage lending requirements made that a very real possibility for most people. Today, however, thanks to the combination of tighter lending requirements and changing multigenerational views on housing, however, the build-to-rent industry is taking off.
Here is what you need to know about this emerging industry sector and how I believe it will evolve over the remainder of 2018:
First, build-to-rent only works if you have the right type of land available. You need available, affordable lots to build on, and you need to be able to build the right types of homes on those lots and still manage to generate returns. I was a home builder before the Great Recession in 2009. I built a lot of 1,350-square-foot, three-bedroom, two-bath, two-car-garage homes for mostly first-time homeowners. When the market crashed, the lots for those types of homes were available at a huge discount directly from the bank, and that has meant I am able to leverage a really big advantage in this new sector because I can afford to build the rental homes that people really want in a market that is, increasingly, struggling with housing affordability. That leads me to my second point…
Second, you must be able to afford to build houses people want to live in. I mentioned that I was a builder before the recession. Most people do not realize that first-time homebuyers were not the only people who purchased the bread-and-butter houses I was building. We definitely had a lot of young couples buying their first homes, but we also had empty-nesters coming out of much bigger homes they no longer needed, divorcees, and single parents looking for the stability that a community offers for their kids but also something affordable. Those people are still looking for the same bread-and-butter homes, but now they are looking to rent them instead of buy them. And there are simply not enough of them to go around because if you are buying lots for these properties today, the cost may be three times what I paid back in 2009. If you pay three times the price that I did, you simply cannot afford to build the small, attractive rentals this population is seeking. Which brings me to my third point…
These houses are not old-school rental properties. When I used to think about rental properties, I would think, as most investors probably do, about an older home that was probably serviceable but not particularly high-end. You’ve probably heard plenty of people talk about slapping on new paint and new carpet, then putting a rental right on the market. That is not what build-to-rent is all about. You are catering to a really high-quality tenant that will likely stay in place for years. That tenant is looking for a high-quality place to treat like their home right up to the point they are ready to move out. They may value the shorter-term commitment of renting, but they do not want their home to feel short-term.
That means when you build to rent, regardless of square footage, you have to include some very specific things. In my market, Memphis, Tennessee, we are building those nice, 1,350-square-foot houses out of brick. They have gorgeous, green yards. We don’t put a stitch of carpet in them, but instead install the really trendy, low-maintenance, hard-surface floors throughout the house. “Reality real estate” television has made those floors really popular, and they are great for investors and tenants because they are beautiful and much easier to keep clean than carpet. We bring everything in the home to 2018 standards if we are rehabbing, and we start off at the high-quality level in our new construction. That means stainless appliances, nice landscaping, stone countertops, cabinets with attractive metal fixtures, etc.
You cannot be of the mindset that you are “just dealing with renters” because first off, these people are moving into your property with the idea that they are going to be part of the community, and second of all, everyone has a Pinterest page on home design or watches those real estate flipping shows and has very strong opinions about what should be included in new construction. Basically, if you want a really strong renter in your build-to-rent property, then you need to do the things that you would do to a home in order to make it attractive to a buyer.
Affordability Isn’t Just for Homeowners and Tenants
Through the whole process, you have to remember that you need to be able to afford to build the right kind of property (and they’re not always cheap) and then rent it out at an affordable price when you are done with the project. That is the really tricky part. I would estimate that this year, my company will be able to build about 100 houses in our market because there are about 100 lots available to us that meet the affordability criteria on our end as well as on our buyers’ or renters’ side. If I could get 400 of those lots, I would, but since real estate prices are rising they simply are no longer available in that kind of quantity.
The answer, I believe, is to start focusing more on really high-quality rehabs that can then be leveraged as rentals. In our market, we plan to do about 300 of those by the end of this year, and I predict we’ll have more applicants to live in those homes than we have properties available because the demand for this type of property at this price point is just huge. You just have to be able to make the numbers work on the investing side as well as the tenant side, so be sure to check your math!
James Wachob is an investment broker with Memphis Investment Properties. MIP will host its annual Live Event, which includes a chartered tour of the market’s hottest rental areas guided by MIP’s team of turnkey rental experts, May 18 & 19, 2018. Learn more at ThinkMemphisRealEstate.com.
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