That’s right. Home builders are going into the single family rental business one nail at a time. They building new homes from scratch and either selling them to investors or renting them out and managing them through a subsidiary.
With inventories of foreclosures and short sales at multi-year lows, their timing is perfect. Single family vacancy rates are down and rents are up. Now investors find themselves competing for tenants with apartments, hundreds of homes owned by hedge funds, investment properties owned by other small investors and homes designed to be rentals and managed by the builders who built them.
There’s nothing terribly new about building single family homes to be rented out and for years builders rented out a handful of homes they had a hard time selling. However, the single family rental market, initially a way to create demand for foreclosures and provide needed rental housing, has become the fastest growing rental category. Some 27 percent of renters now live in single family homes and the number continues to grow. Building homes for rent is growing too.
Five Percent of New Home Construction
In 2011, when foreclosures were plentiful and home builders were hurting for work, homes built-for-rent accounted for 5.35 percent of new home construction. According to data from the Census Bureau’s Quarterly Starts and Completions by Purpose and Design, the market share of single-family homes built for rent, as measured on a one-year moving average, stands at 5.1 percent for the third quarter of 2012. This is only slightly lower than the recent peak of 5.35 percent set at the beginning of 2011, and is considerably higher than the 20-year average of 2.7 percent.
In 2011, however, heads turned when Beazer Homes formed a REIT to buy and then rent single-family homes. The Atlanta-based company joined with buyout firm Kohlberg Kravis Roberts & Co. to form the REIT, which eventually plans to go public.
“It’s not a short term, opportunistic thing,” Allan Merrill, Beazer Homes’ chief executive, told the Wall Street Journal. “It’s not buy as many as you can, lever it up as far you can, and flip them as soon as you can. It’s building a durable rental stream.”
As of last May, Beazer already had accumulated 192 single-family homes in the Phoenix and Las Vegas areas—more than 10 percent of them houses the company built and sold in the first place. Most were purchased at steep discounts from their original prices through foreclosure auctions, short-sales or other distressed home-buying strategies.
Those homes will go into the new company, dubbed Beazer Pre-Owned Rental Homes Inc., which hopes to expand beyond Phoenix and Las Vegas to at least one other, as-yet unidentified market. Within two years, Beazer said the number of rental homes under the new REIT’s control could number in the thousands.
In for the Long Haul
“You walk into these homes and it has the feel, smell and look of a reconditioned home,” said Patrick Whelan, the new company’s chief executive, a veteran of the rental-apartment business. “We’re delivering the message of, ‘you don’t need to worry about the stability of the landlord and of the property you want to rent for the next three years.’ ”
Another entrant in the built-for-rent market is Jacksonville Wealth Builders, which had been buying foreclosed homes to sell to investors. So many investors are pursuing bank-owned homes to operate as rentals that it’s pushed prices as high as it would cost to build them, so the company began building from scratch.
With demand for single-family rentals on the rise, Jacksonville Wealth Builders has turned its attention to buying foreclosed residential lots, building rental homes to sell to investors, renting the homes and providing property management services.
“We’re starting to see prices go much higher [on foreclosed homes],” said Greg Cohen, Jacksonville Wealth Builders managing partner told the Jacksonville Business Journal. “We’ve basically bought 95 percent of our properties through [the Multiple Listing Service]and the connections we have, but those opportunities aren’t there as much.”
The Rent-to-own Option
One option that turns renters into owners is rent-to-own programs that reduce carrying costs on unsold inventory and helps convert more homes to sales. Some builders have a separate division to handle the rental side of their business, while others prefer to work with customers on a case-by-case basis. T&M Building Co. of Torrington, Conn., and Classic Communities Corp. of Harrisburg, Pa., are two examples.
Renters sign a use-and-occupancy agreement that allows them to live in the home until they can refinance it and take T&M out of the equation. In most cases, customers are able to purchase their home after renting for one year. Occasionally it takes two years. Customers can also elect to sign a conventional lease, but they always have the option to buy.