Build-For-Rent Communities: This Wave of the Future Attracts Prolific Investment

Many of us hear a term bandied about in real estate these days: “Build-For-Rent” (BFR) communities also known as Build-To-Rent. But look back 15 years ago, and the concept of developing single-family rental home communities really didn’t exist. The closest thing to it was a local investor buying up a few scattered homes as fixer-uppers to rent out for cash flow income and then flip down the road. It was a “mom and pop” business, says Charles Johnston, Managing Director of Development at DLP Capital.

Then came the financial crisis of 2008 and with it a housing bubble that burst, creating foreclosure opportunities and a bevy of investors scooping up larger quantities of homes to rent out. American Homes 4 Rent (AMH), Invitation Homes (owned 9.7% by Blackrock), and other now-megaliths were founded on the tatters of a decimated housing market. Fast forward to 2024, and the BFR market has not only become an incredibly successful business model—it is now the fastest-growing segment of the US housing market, according to Urban Institute’s Housing Finance Policy Center.

This seismic shift is arguably due in part to the American dream shifting from that of homeownership to an increasing preference by many for the freedom and flexibility offered by rental homes. The nation’s largest investors are taking note.

Horizontal Multifamily

What exactly is a Build-For Rent community? Johnston likens it to “horizontal multifamily.” Typically, BFR could be defined as a master-planned community of single-family detached or attached rental homes with a minimum of 25 units up to 500 or even 1,000 homes laid out in one symbiotic community. Product types include:

1. Cottage homes: small 1BR/1BA detached homes, the most affordable BFR
2. Duplex, triplex, fourplexes, and townhomes: homes with shared walls in buildings of two to four units?
3. Traditional single-family homes: 3 BR/2BA

Approximately 40% of BFR communities in the US are in that third, single-family detached category. The BFR community may involve the developer/operator owning one large platted lot upon which rental homes are constructed, or the community may consist of individual platted lots. (Close-outs of leftover homes in a developer’s build-for-sale community are not within the BFR definition.) The rental homes are built to work cohesively together as one thriving community, much like a multifamily complex— but with luxuries including privacy, garages, and yards.?

A BFR community usually offers common amenities, whether in the form of a clubhouse, pool, fitness center, walking trails, or dog park, and it may be serviced much like an apartment complex. Have a major plumbing problem? Call the BFR landlord. If the AC goes out . . . call the BFR landlord. Chances are the community’s homes were built with similar designs and infrastructure, permitting easy landlord access to systems, along with efficiencies and scale in solving work orders from tenants. In addition, they are typically built to be resilient, i.e. built with materials selected to withstand the wear and tear of tenants to minimize turnover costs. The landlord, in the case of BFR, is typically the developer/operator, an institutional investor, or a combination of the two.?

The Market for Investing in BFR

Multifamily developers have segued into the BFR development market, an extension of the core business of many, and some traditional single-family builders, such as D. R. Horton, have also expanded into BFR. So too have institutional investors homed in on the BFR market, given a staggering 700,000 single-family rentals estimated to be built nationwide over the next decade. All roads, it seems, are leading to BFR being one of the most important community models for the future.

Sun Belt Leads in Popularity

And where exactly are these opportunities? The Sun Belt leads, by far. The National Rental Home Council and Yardi Matrix data show that currently, the most prolific states for BFR under construction are: Texas, Arizona, Florida, North Carolina, and Georgia. California and Ohio have had their shares of completed BFR communities as well. These areas of BFR focus are attributed in part due to the availability of large parcels of flat land in or near metropolitan areas in these states, together with population growth, among other factors.?

Yet still, according to real estate data intelligence firm Zonda, of the top 10 rental housing markets tracked, BFR communities account for 3% or less of total rental housing stock. With more than 3.4 million millennials preferring to rent rather than own a home, it will take some heavy lifting for the development community to fill the need for BFR communities.?

Community-Centric: “Neighbors, not Tenants”

Says Jim Boyce, DLP Capital’s president of Development and Construction, “Not only are there tremendous investment opportunities in the Build-For-Rent sector, but we’re also creating a new model of thriving communities. We’re creating a ‘community-centric’ model of development, rather than one-off single-family homes. Our Build-For-Rent communities will have neighbors, rather than tenants, and they will be new, affordable, and safe homes where residents can stay for years and raise families—or have the flexibility to move into alternative rentals as jobs and families demand. It’s the best of all worlds. Build-For-Rent is here to stay.”?

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Sources:

1. ?Zonda, Jan. 8, 2024
2. ?Urban Institute, June 2023