How does a Single Family Rental development deal pencil?
I work in MF development in the southeast and hear about these deals for a few years now but have not seen one yet. The demand story checks, but I can't figure out the execution. As I see it, unless you have a waiting list of tenants, you can get crushed in lease-up waiting on these 3BR renters. Plus the value of the house today is worth more to a homeowner than an investor, so you are better off just building and selling than building to rent then sell.
Anyone in this space having success yet? Whats the exit CAP? Long term financing options? Lease-up assumptions?
Most of the models I have seen are not necessarily traditional single family, they are typically 2 bed 2 bath units on tiny lots, and fill the gap in-between a full fledged single family home, and a townhouse/ apartment. It's basically just less dense single story garden style apartments where the units do not share common walls.
I’ve even see one bed units proposed before.
Yes they do have those too
The units typically get leased very quickly and you're developing in ~10 unit tranches that can be sped up or slowed down depending on absorption. Financing rates close to multi-family. Cap rates have been 4.5-5.5.
Somewhat agree on the better off selling to a homeowner vs an investor, real money is made in long term rent growth which is essentially a guess. In theory you build as many homes as you can sell, when you run out homebuyers you build homes to rent. obvi in todays market there is no shortage in home buyers but BFR is still being built.
My big gripe with SFR is how the hell does it make sense given that the for-sale market is so tight right now / prices are so high? I think the only explanation is the old Sam Zell line that supply is only loosely connected to demand in real estate. It's all about how much capital there is to invest.
You get your C/O individually in these developments. So lease up isn't as clear cut. You will do tranches of units that get their C/O at once. So month 18 leasing starts, and you get 10 units online via approved C/O. Those lease. Than the next month you get 5 units, etc. There is huge demand, especially during c-19 as people just want more space. And from a capital markets perspective, people need somewhere to place money, so it is flowing. The large institutions can't really invest in retail right now, so out of the 4 main food groups (office, multifamily, retail, industrial), there are now 3 remaining. But wait...you can't get office done right now either (for the most part). So now there are two. Which means, institutions need to find another avenue to invest. Ala: SFR, life science, data centers, etc. This is part of the demand from the capital perspective.
We have capitalized four of these deals so far. They pencil just like a multifamily deal, with some non-traditional premiums like lawns, corner lots, etc. The typical structure is a phased delivery and closing of homes in timed tranches as they roll off the workflow/production line. So, similar to multifamily in that you have the concept of "first unit turns" prior to final CO, the only primary difference is the timing of the closing disbursements which are lumpier. A lot of availability of institutional debt in the space already, operates under the same premise of phased acquisition financing that dovetails with the tranche deliveries.
isn't the only downside the inability to scale within this SFH asset class? 15 roofs versus 1 (multifamily) and generally just maintenance in general. Why pay the same cap rate as multifamily?
Some of these BFR portfolio's are next door to each other reducing maintenance costs. Single family home renters also turnover less frequently than apartment renters
So, this is what is still to be seen in these developments and this strategy. SFR is going through its first set of renovations, etc. now and over the next 5 years. Technically speaking, the capex should be built in your proforma. Just like if you buy a 30 building garden apartment complex, you will project when to replace each roof, you'll do the same here. Sure, it'll be may 10 times as many roofs (assuming 300 units), but if you are putting it into your cashflow, it is valued the same. Maybe the SFR sector should trade like multfamily, maybe it shouldn't, but we will play that out over time.
Dont think of these as always 5 doors in TX, 10 doors in FL, 7 doors in NV, mom & pop guys do that, institutional capital like TCR and Goldman build SFR homes in one community, think of single family tract homes for sale but except these are for rent. And not every home is a SFR, there will be attached townhomes thrown in there as well. It then becomes pretty much multifamily. You dont even need to provide amenities like pool because the amenities and the attraction for the tenants are the attatched garage, driveway, backyard, more space etc.
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