Managing Principal and cofounder of Sunrise Capital Investors, a real estate investment company catering to accredited investors.
Across the nation, billions of dollars in institutional capital are flowing into build-to-rent (BTR) communities. With record-low housing supply and outsized demand from prospective millennial home buyers, this massive influx is no surprise.
The seed was planted in the wake of the Great Recession by none other than Warren Buffett. Buffett claimed, in a February 2012 interview with CNBC, that if he could find single-family homes concentrated in particular metropolitan statistical areas (MSAs)—and implement the necessary management—he’d “buy up a couple hundred thousand.”
Within two months of Buffett’s remark, Blackstone started spending $100 million a month on single-family homes, building an enormous portfolio. In 2017, as the market slowly recovered from the recession, Blackstone and other investment firms inspired by Buffett began to realize the true potential of the portfolios they’d amassed.
For the first time in history, investment groups targeted single-family homes and owned large, manageable portfolios filled with them. This novel scenario sparked the creation of a new kind of asset, the likes of which investors and renters had never seen.
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Single-family portfolios were now in a position to be managed and valued like multifamily apartment complexes—with a few added benefits. Boasting a higher yield-on-cost than multifamily, with more space and privacy for residents, single-family was on its way to becoming the most desirable and well-rounded asset class on the market.
However, limited housing stock and tight market competition forced investors to get creative. The added pressure brought several firms to the realization that building these single-family rental portfolios (subscription needed) would not only yield higher returns but also solve a major problem for the emerging class of home buyers: millennials.
Scarce housing stock, combined with record-high prices and interest rates, has made homeownership a dim prospect for millennials. BTR creates a great alternative for this generation while providing outstanding returns for investors. Here are a few reasons why:
The Millenial Home Buyer
Today’s millennial apartment renters are tomorrow’s first-time homebuyers—or, if the current market holds, tomorrow’s first-time single-family renters. A staggering 60% of Americans can’t afford to buy a home. The BTR industry provides this 60% with a desirable alternative. As millennials grow into life stages that require the space and benefits provided by single-family homes, demand significantly rises.
Strong And Increasing Demand
Housing demand surged during the pandemic, and as of today, 36% of renting households (roughly 16 million people) have ditched their multi-unit apartment complexes to rent single-family homes. This trend is expected to accelerate post-pandemic. I project that BTR will see even more demand as record-high housing prices continue to rise.
Severe Supply Shortage
We are not building enough homes. Between 1968 and 2000, at a time when roughly 1.5 million homes per year were needed, U.S. developers built just over 1 million. The past 20 years called for roughly 1.3 million homes per year, but only 947,400 were built annually. Over the next decade, developers will need to build 2.5 million homes every year just to make up this shortfall.
Better Cash Flow
Single-family homes are pricey—and there are far fewer these days. The struggle to find inventory has only emphasized the benefits of BTR. The BTR model rests on the advantage of brand new, Class A units providing much better cash flow than homes built decades earlier. As such, the stabilized yield-on-cost for BTR exceeds the cap rates for existing portfolios.
Location, Location, Location
In an effort to bring young tech professionals with a coastal sensibility to the inland U.S., BTR developers are selecting top-tier markets. Phoenix, Arizona, stands as a shining example of this phenomenon. Millennial tech professionals from Northern California and Los Angeles are funneling into Phoenix at breakneck speed. Builders are providing these folks with infill neighborhoods that have proximity to sought-after jobs, transportation and school districts.
The “Stickiest” Tenants
BTR provides the optimal housing solution for millennial professional households, which typically consist of two earners with a shared income of over $110,000. Folks in this socioeconomic bracket are looking for homes that boast the premium building materials we’re seeing employed in BTR projects nationwide. When you pair these types of wages with Grade A construction, it’s no shock that we’re seeing a more than 70% resident renewal rate for BTR projects. We’re looking at some of the “stickiest” and most reliable tenants across the entire spectrum of real estate.
When the economy tightens, fewer people buy houses, resulting in higher rental occupancy and longer-term tenancy. Higher unemployment leads to more single-family renter household formations, as cost-burdened families in need of more space are more likely to rent than buy.
Inflation is good for landlords. Mortgages stay the same, but tenant incomes rise. This allows landlords to raise rents, creating outsized risk-adjusted returns for investors. BTR, in particular, is primed for explosive growth in 2022. According to Buffett, investing in single-family homes “is a way—in effect—to short the dollar”—an excellent strategy in an inflationary environment. This strong performance is projected to continue for years to come, with most markets expected to see rent growth well above inflation (while maintaining occupancy). The aforementioned margin of safety and strong property management systems employed by BTR communities only strengthen BTR’s security as an inflation-shielding investment.
The points listed above are merely a few of the benefits provided by BTR. BTR simultaneously provides the best risk-adjusted returns in real estate and the solution to a major housing problem for the millennial generation. This is a rare win-win scenario. For the millennial looking for a home, there is a growing opportunity to escape from the shared walls of the apartment complex into the backyards and breathing room that only single-family homes can provide.
For the investor looking for the best returns on real estate, financial legacy grows over time through buying right, managing capital efficiently and investing for the long-term. BTR is creating a scenario where investors retain their ownership over properties while receiving infinite cash-on-cash returns, with lifetime cash flow.
A bright future lies ahead.