Why Build for Rent (BFR)?
Build-for-rent (BFR) communities make up a unique asset class similar to gated residential neighborhoods with amenities such as pools, gyms and dog parks. Yet as a rental property, these homes don’t come with the stresses of home ownership.
Single-family renters prefer BFR because it allows them:
- The space of a single-family home
- The flexibility to move if needed or desired
- Little to no home maintenance
- Significantly less financial responsibility, when compared with home ownership
Thus, BFR allows for the convenience and community feel of a multifamily rental, but with room to spread out and grow.
Why Invest in Build for Rent?
- Demand for rental properties is growing rapidly. Renters are renting longer for many reasons. An increasing number of younger renters do not have the resources to own their own home, and many older residents with fixed budgets are likely to rent indefinitely. The average interest rate on a 30-year fixed home loan more than doubled recently, and would-be buyers have pulled back. Rental living answers a real demand, offering financial and leasing flexibility to those who need it.
- U.S. housing has been underbuilt for over a decade. Developers need to build more than four million housing units nationwide to keep up with demand. In addition, the U.S. is experiencing a cumulative 20-year production shortfall of over 600,000 apartment units, while many older homes in the rental marketplace are becoming obsolete. Increasing demand for build-for-rent homes led to the construction of more than 6,700 such properties in 2021, the highest yearly total to date, while an estimated 14,000 build-for-rent homes will be completed in 2022. But this doesn’t begin to cover the difference.
- Single-Family Rentals (SFR) historically provide a hedge against inflation. The short-term leases of single-family rentals can adjust to inflation, remaining flexible and increasing annually to the maximum that the market will bear. A net leased asset, such as a retail or office property, may have a 2% or 3% rent “bump” per year, but when inflation is over 8%, short-term leases, like residential rental communities, enable growth even in challenging environments.
- Build for Rent tops private market return expectations. Examining all multifamily asset classes, built-for-rent records a risk-adjusted return of 8%, the highest of all classes, followed by manufactured housing at 7.2%.
With the formation of our private equity group in 2022, Capital Square established a new focus on build-for-rent communities. We believe BFR has a powerful future ahead, and we’re going to be there for it.