Investors Are Betting Big on Rental Homes
If one real estate trend defined 2020, it was the reevaluation of living in urban areas. First-time home buyers sought space and refuge in the suburbs, while vacation communities saw a surge of interest among those looking for new full-time homes.
With that increase in demand, however, has come a rise in prices that puts the renewed interest in homeownership out of reach for many, even at a time when interest rates are so low. Now, a building boom of single-family rental properties has arrived, with investors betting that those who are unable to pay for a suburban mortgage would be willing to settle for a lease.
According to recent reporting in the Wall Street Journal, a range of individuals and institutional investors are looking at build-to-rent projects and seeing dollar signs. As of June, data from John Burns Real Estate Consulting cited by the Journal estimated a total of 16.417 million single-family rental homes across the U.S. During the 12-month period ending on September 30, 2020, more than 50,000 such houses were built, a significant jump from a four-decade average of 31,000.
The bet on building homes specifically designed as rentals is the product of trends that began before—but were no doubt exacerbated by—the pandemic. During the 2010s, the share of homes that sold for under $200,000 plunged from well over 40% to less than 10% of total new home sales. That’s contributed to a situation where average earners in 55% of America’s counties now can’t afford homes there (up from 43% a year earlier), according to real estate analytics firm Attom Data Solutions.
Simultaneously, the build-to-rent trend has its ties to the fallout from the 2007–2008 housing crisis. Once the large landlords who consolidated their holdings by snatching up foreclosures ran out of distressed assets to acquire, the next logical step was to start building up the housing supply themselves. Add in lender hesitance to finance homeownership for the lower middle class, and you have the recipe for companies like American Homes 4 Rent to add more than 2,500 newly built rental homes to its portfolio in recent times.
Increasingly, these build-to-rent developments have started to resemble sprawled-out apartment complexes, with freestanding single-family properties clustered together in planned subdivisions and cul-de-sacs. In addition to giving investors more control over the look and feel of their properties, the new housing stock is often appealing to renters looking for a modern home.
These snazzy properties clearly have their advantages over other options on the rental market. “Imagine if consumers could only lease old cars, not new cars,” John Burns Real Estate Consultings’ Rick Palacios Jr. told the Journal. “That’s how single-family rentals have been.”
With some experts predicting that the percentage of newly built single-family homes sold directly to investors could hit 5% in the years ahead, it could be that leaving city high-rises behind will become less likely to involve a mortgage. How exactly this might reshuffle the housing market—or what happens if demand cools off—remains to be seen.