Single family build for rent (BFR) communities are quietly catching on across the country. In markets like Texas and Arizona, they’ve been a part of the real estate market for some time. Renters looking for more living space, a yard, garage, additional storage and no neighbors above or below are creating renewed interest in building single family detached homes in BFR communities.
The Business Advantages of Build for Rent Communities
The great recession of 2008 showed an uptick of BFR development with a leveling off as the economy improved. Some builders changed their stripes, adjusted their pro forma and became landlords (at least until lease up), and began to build for rent single family homes. Many firms became quite successful with this strategy and continue to build this product type.
We’re curious to see how (or if) the COVID-19 pandemic affects the single-family rental market. Prior to COVID-19, these communities had about a 97% occupancy rate. Will this type of property see a surge in demand? After sheltering in place in a cramped apartment, many renters may seek out more space. The option to turn an extra bedroom into a home office or area for the kids to learn from home will become much more sought after. Not to mention avoiding the shared door handles, hallways, elevators and staircases that come with apartment living.
According to John Burns Real Estate Consulting, even with the growing number of build for rent communities, the single-family rental market is still dominated by small investors. In fact, approximately 78% of rental homes are owned by investors with only 1 to 2 properties. Institutional owners and developers – those with over 100 units – own just 4% of the approximately 16 million rental homes in the US today.
Interestingly, most build for rent communities command significant rent premiums ranging from 10% to 40% above equivalent-sized apartments or SFR homes owned by individual investors. Why the premium? Rental communities can offer services and amenities that one-off rentals can’t. 24-hour on-site maintenance, lawn service, a gated entrance, and a pool or clubhouse are just a few examples.
What’s the Appeal for Renters?
COIVD-19 notwithstanding, there’s a lot of appeal to living in a single-family home instead of an apartment. The biggest drivers for most renters are space and privacy. They’re looking for the option to have a small yard or outdoor space, and more bedrooms. Approximately 65% of SFR homes have 3 or more bedrooms, versus just 11% of apartments. This makes single-family rental properties a natural choice for families who aren’t in a position to own a home, or any renter who is simply looking for more space. Rentals can even be an attainable way for families to get into quality school districts.
Another appeal of build for rent communities is the level of home design and finishes. Many existing rental homes are older, with outdated floorplans and finishes badly in need of replacing. Since build for rent is a relatively new concept, homes generally feature the latest in modern floor plan designs. And, since they’re intended for renting, have high end, durable finishes that are easy to take care of. More about design and finishes later.
Typical Build for Rent Product Types
Horizontal apartments – or “cottage homes” – are one of the most popular BFR product types. These are small single-family detached homes that range from approximately 650 to 1,400 SF. They normally have 1 to 3 bedrooms and 1 to 2 baths. While they don’t offer much more square footage than you’d find in a traditional apartment, horizontal apartments have added privacy and often have their own outdoor space. Cottage homes combine the best of both worlds, with the privacy of a single-family home, and the flexibility and added amenities associated with apartment living.
Other typical BFR product types include:
- Townhomes or rowhomes, typically in two to seven-unit building configurations
- Traditional single-family detached homes on traditional lots
- Luxury single-family detached and attached homes
Design Tips for Build for Rent Homes
Thoughtful design goes a long way when working on build for rent product. The differences between build for rent and build for sale homes are often subtle, but not to be underestimated. The right design choices can make a huge difference to your renters, your maintenance costs, and ultimately your bottom line. Here are some of our top design tips for rental homes:
- Rental homes are often smaller, since there are diminishing returns on what renters are willing to pay for more square footage. To make small homes feel larger, go for 9’ ceilings or higher.
- Minimize circulation space.
- Consider door placement to minimize hallways.
- Laundry spaces can be small, a closet with a little extra space in front of it will work fine. If you can provide a small storage space or cabinets adjacent to the laundry, that’s a bonus.
- Durability is key. Finishes and appliances should be selected with durability in mind. Weigh upfront cost versus life cycle maintenance costs. Often, spending a little more in the beginning can save a lot of money in the long run. Think laminate faux wood flooring with minimal carpet, granite versus laminate countertops, and stainless-steel appliances.
- Minimize interior doors. Doors cost money and break easily. Examine closets, linen closets, and pantries. Do they really need doors, or would recessed open shelves work just fine?
- Offer as much storage as possible. The downside of many rentals is the lack of storage! Get creative. If the home is 2 stories, is there an opportunity for storage under the stairs?
- Offer the option for a garage. If units don’t already have an attached or dedicated garage, offer one-car garage rentals onsite. If you’re looking for density, cluster the garages and add a unit or two above the garages for additional revenue potential.
- Create small to medium sized private outdoor spaces that are easy to maintain. Families with young children, pet owners and BBQ lovers appreciate outdoor space and are willing to pay a premium for it. Providing cover or shelter at these spaces is an added bonus.
Changing market conditions create the need to provide new product and innovative ways of doing business. The current uncertainty of the national economy and the hit to the consumer’s pocketbook creates a challenging environment for home builders. Attainability of single-family homes, although not a new topic, is at the forefront of conversation. Rental homes in BFR communities provide less barrier of entry for the consumer, with the added privacy of a single-family home and the amenities and flexibility that apartment dwellers are accustomed to. For builders, land owners and capital investors, BFR communities are an opportunity to build a portfolio of assets that can easily be converted to SFD for sale.