Matt and Sam Blank always wanted to go into business together, and the housing bust in 2008 provided a once-in-a-generation opportunity for the two brothers to do so. They quit their jobs in New York and moved to Phoenix, Arizona. The plan was to buy houses out of foreclosure at bargain prices with their own money.
The only problem: private equity firms like Blackstone with bottomless access to capital had the same idea. “In about a period of two weeks they put us out of business,” Matt said.
To salvage their business—and their pride—the brothers shifted gears. Instead of buying houses and renting them, they decided build houses and rent them. And not just one house here and there, but whole communities of more than 100 single-family homes where every unit is a rental.
The Blank brothers’s company, BB Living, is one of a handful of home builders creating entire single-family rental neighborhoods—complete with all the amenities of a large apartment complex—to take advantage of growing demand from renters who want a single-family house without the responsibilities or risks of homeownership.
“We’re like a country club or apartment environment, where you have a community that has a social component to it as the centerpiece,” said Mark Wolf of AHV Communities, which has produced four built-for-rent communities in Texas. “The dog park, the fitness center, the pools, the clubhouse with the maintenance and management team daily. That’s the difference.”
Built-for-rent single-family houses are nothing new. Since the early 1980s, there have been at least 10,000 built-for-rent houses produced over any given 12-month rolling period, according to data from John Burns Real Estate Consulting. In the mid-2000s, built-for-rent production peaked at 45,000 units over a 12-month rolling period. Since the housing bust, built-for-rent production has steadily risen.
What’s different today is that entire communities of single-family homes are being built with the intent of renting them. They come with anywhere between 100 and 250 units, with three or four different floorplans available. The amenities vary by community and builder, but some including AHV Communities load up their communities with everything expected from an apartment complex.
After the financial crisis, the government-sponsored mortgage facilitators Fannie Mae, Freddie Mac, and Ginnie Mae implemented strict new standards for mortgage lending that made it much harder to get a mortgage, particularly if the prospective homeowner had bad credit or high amounts of debt.
This led many in the real estate industry to predict that single-family rental units would become common among Generation Xers who had good incomes but bad credit because of the financial collapse. NexMetro president Josh Hartmann was among them. His company produced a built-for-rent community in Tucson, Arizona, to test the waters, and the results surprised the fledgling company.
“What we realized is we were getting a totally different demographic than [we expected],” Hartmann said. “We were getting millennials with high income and good credit scores, a younger demographic. It wasn’t that they couldn’t buy a home. It’s that they didn’t want to buy a home.”
The builders producing these communities have similar business models. They build the communities themselves and then turn maintenance over to a third-party property manager with experience in multifamily. After the community is fully leased and operational, the builders have the option to sell individual houses within the community or sell the entire community itself to a high-net-worth individual, a multifamily real estate investment trust (REIT), or a single-family rental (SFR) operator like Invitation Homes or American Homes 4 Rent.
The rise of SFR operators has been one of the most publicized developments in real estate since the financial crisis. They bought foreclosed single-family homes en masse after the crisis and formed companies to rent out those homes. The companies have come under fire for excessive rent hikes and fees, itchy eviction triggers, and shoddy maintenance, among other things.
The pace with which SFR operators purchased homes slowed dramatically since the crisis as the foreclosure backlog has run dry, and they’ve turned to home builders to find new stock to add to their portfolio. Built-for-rent communities give them the option to add hundreds of brand new homes that are already leased and operational in one transaction, in cases where the builders want to sell.
Increased built-for-rent production comes at a time when there’s already a shortage of houses for sale, which has played a huge role in home prices rising well beyond their pre-crisis peaks in most markets. There have also been shortages of construction labor and softwood lumber, which have slowed the pace of home building in general. Built-for-rent production takes limited resources away from home builders who sell to an owner occupant.
But with strong demand from millennials who either can’t buy or don’t want to buy a house, SFR operators and home builders are developing relationships that will likely formalize a pipeline of built-for-rent housing.
“All the big guys need product right now,” Wolf said. “The foreclosures, the low-hanging fruit is gone. They have to [come up with] ways to find product.”