By Meera Pal

Dec 27, 2022

Many renters crave the extra bedrooms, laundry facility, and backyard big enough for a pair of swings and a slide that single-family houses provide. But they’re facing a for-sale market with still-high housing prices and surging mortgage interest rates, pricing many out of homeownership, at least for now.

But what if you could have that large house without having to come up with a big down payment and get approved for a mortgage?

Many builders are rushing to put up whole communities of single-family homes for rent. And renters seeking more space and privacy—but can’t afford to purchase a home—are turning to this rapidly growing build-to-rent market. While the sector isn’t new, interest ramped up during the COVID-19 pandemic when renters began searching for larger homes, and a greater part of the workforce began working remotely from home.

Sometimes described as “horizontal apartments,” build-to-rent communities are designed and developed with the sole intent of renting out the homes. Over the past few decades, 3% of single-family starts were developed as rentals. By third quarter 2022, that number has jumped to 12%, according to the National Association of Home Builders. 

While investment and planning for new build-to-rent communities had been brewing in the year leading up to COVID-19, the pandemic coupled with rising inflation has contributed to the growing interest as many would-be homeowners are grappling with higher costs, says Robert Dietz, chief economist of the builders association.

“We know that as a result of COVID, a lot of people wanted a single-family structure. They wanted more space,” he says. “We estimate that probably about a third of the workforce is working at home, at least a few days a week. All those factors drive demand for the single-family structure. But of course, not everyone can afford those costs.”

How is a build-to-rent community different?

Unlike an apartment rental, single-family rentals in a build-to-rent community offer the lifestyle of homeownership without the added expenses of maintenance or what some call the hassle of owning a home. The homes generally rent for more than a typical apartment.

“We had this idea that if you build new-build homes in a community setting and you put a management, maintenance, and amenity package, much like an apartment, you probably have something pretty attractive,” says Mark Wolf, CEO and founder of AHV Communities. The company is one of the first developers, builders, and operators of luxury, single-family, and attached home rentals.

Since starting in 2013, AHV manages nine communities in Colorado, Texas, and Washington, with six more under construction in Texas, Alabama, and California.

The communities feature brand-new houses with high-quality finishes as well as a garage and a yard. Residents also have access to a fitness center, clubhouse, and on-site management and maintenance in the community.

It’s the low-touch features of a build-to-rent community that draw largely millennial renters and empty nesters looking for a single-family home without the burden of homeownership.

Who is living in these build-to-rent communities?

Roughly 95% of millennials surveyed by Zonda, a real estate consultancy, want to own a home. The national homeownership rate, however, sits at 66% as of November.

“When we asked [millennials] why they rent, four of the five top reasons have to do with affordability,” says Ali Wolf, chief economist at Zonda.

In today’s market, demand remains high for build-to-rent due to rising mortgage rates, says Devyn Bachman, senior vice president of research at John Burns Real Estate Consulting.

Rates averaged around 6.3% for 30-year fixed-rate loans, a sharp rise from the mid-3% range at the start of the year, according to Freddie Mac data.

“It’s more expensive than ever to own a home, ” says Bachman.

For instance, in San Antonio, TX, the cost to own a three-bedroom, two-bath house listed at $289,700 with a 5% down payment on a 30-year fixed-rate mortgage (including principal, interest, taxes, and insurance), along with mortgage insurance and a maintenance assumption, is about $2,800.

In comparison, AHV Communities’ Farm Haus build-to-rent community in San Antonio is renting out three-bedroom, 2.5-bathroom duplex homes from $2,200 (1,365 square feet) to $2,400 (1,415 square feet) a month.

Wolf adds that rental prices for each AHV-owned community are determined by the number of amenities, the layout, and the local rental market.

Is the dream of homeownership dead?

Is the American dream of homeownership vanishing? It depends on whom you ask.

Homeownership has long been a way that people have been able to build wealth over time that can be passed on to future generations. But the nation is in a dire housing shortage resulting in high prices and not enough properties to go around.

Those high prices and shifting attitudes have made it more acceptable to rent for longer—if not forever.

Still, the state of the current housing market does not mean that homeownership will be unattainable forever.

Dietz, of the homebuilders association, notes that the U.S. Federal Reserve won’t keep raising interest rates forever and at some point mortgage rates will fall below 6% again. When that happens, demand for homes to own is likely to increase again.

“We want to focus on getting households into homeownership. It makes for better citizens and wealth accumulation,” Dietz says.

But what build-to-rent communities do offer is an alternative housing solution, says Bachman of John Burns.

“A lot of people would rather live in this style of [housing] over an [apartment or condo building] where they have to have someone next to them or on top of them,” she says.

Source- https://www.realtor.com/news/trends/those-who-cant-afford-a-single-family-house-are-turning-to-build-to-rent-communities/