Jerry Ellenburg of ERC Homebuilders
Jerry Ellenburg of ERC Homebuilders

Traditionally, single-family homes were just that: residences for homeowners. But times are changing. Tour a single-family development and you may discover that all the occupants are renters. What’s afoot?

Changes in the tax code have made owning less advantageous, and consumers are no longer buying into the American dream of homeownership. Those two trends are fueling the growth of what’s known as build-to-rent (B2R). Today B2R is one of the fastest-growing sectors of the U.S. housing market, and demand from renters and investors is exceeding supply.

A popular new real estate asset class, B2R is attracting niche players and such high-profile operators as Toll Brothers and Lennar, which recently announced new investments in the space.

Statistics Tell The Story

· More than one-third (39%) of all U.S. rental properties are single-family homes – the highest percentage since 1965 – while homeownership is at an all-time low.

· About 16 million rental properties today are single-family homes, and another 13 million rental households are expected to be formed by 2030, the Urban Institute reports.

· From 2016-2017, B2R home building saw the highest annual increase in at least 14 years (6%), according to John Burns Real Estate Consulting, and the pace is expected to continue.

· The single-family rental home industry is a $3 trillion market, with 1 million homes trading hands among investors annually, reports Roofstock, an online market for investing in leased single-family rental homes.

Investors are flocking to B2R. Nearly 3 out of 4 real estate investors (73%) prefer the single-family sector, according to a Millennium Trust Company survey. And SVN | SFRhub Advisors, the first national, dedicated commercial real estate brokerage serving the B2R sector, reports a $2 billion backlog in demand from its clients. Here is the 411 on what’s driving this housing cycle and how to leverage it in its early stages.

Why B2R is Taking Off: The Perfect Trifecta

1. Affordability: Many millennials want a comfortable home with privacy but can’t afford a down payment. Some 92% of millennials consider homeownership a good investment, but 43% of this age group have saved less than $3,000 for a down payment, according to a Unison Home Buyer Survey. Baby boomers looking to downsize, as well as Gen Xers, also are shifting to renting.

2. Choice, influenced by economic and cultural changes: Owning a home doesn’t have the financial value it once did. Why? Home appreciation has slowed. What’s more, Americans lost a key incentive to own their homes when the Tax Cuts and Jobs Act of 2017 raised standard income tax deductions, for example, from $12,700 to $24,000 for a married couple. In addition, many millennials like the flexibility of renting and the simplicity of having a landlord handle maintenance.

3. Demand: Economic strength and growth, coupled with low supply (especially at the entry level), make certain areas of the country, such as the South and Southeast, ripe for B2R development. For example, Florida boasts 3% job growth, the highest rate among the 10 largest states; 3.5% unemployment in 2018, the lowest rate since 2007; and 13% population growth from 2010-2018.

How Developers and Builders Can Capitalize

For real estate developers and builders, B2R enables highly efficient construction, operations and maintenance, akin to those in the multifamily apartment segment – if you know how to maximize your benefits. Here are some tips:

· Develop mini-neighborhoods, with 20 or more contiguous homes.

· Presell homes to large-scale investors, to minimize risk and make property management easier and more efficient. · Obtain general contractor warranties, as well as limited product warranties for appliances.

· Use durable, low-maintenance interior products, including laminate faux-wood flooring, granite countertops, and stainless-steel kitchen appliances.

· Consider financing development using new, cost-effective online methods enabled by the JOBS Act of 2012, such as offerings under SEC Regulation D 506C, open to accredited and qualified investors, and Regulation A+, available to investors of all wealth levels.