ADISA Video: Build-for-Rent Investing
In a video interview with Damon Elder, publisher of The DI Wire, and as part of ADISA’s Focus on Alternatives Series, Louis Rogers discussed why build-for-rent homes can be an appealing choice for renters, landlords and investors.
In a decades-long housing crisis, BFR fills a niche alongside denser developments like apartment towers in urban areas, according to Rogers.
“There’s a place for both. They just operate differently. There’s room for regular multifamily A and B and build-for-rent homes,” said Rogers, founder and co-chief executive officer of Capital Square.
BFR homes are communities of single-family homes, typically detached homes or sometimes townhomes or cottages. Popular among 35- to 49-year-olds, the fastest-growing age demographic, BFR homes are generally in the suburbs and provide space, privacy, a yard, amenities, and access to highly ranked schools, according to Rogers.
On the demand side, BFR presents space opportunities, leasing flexibility, and financial freedom during a period characterized by a constrained supply side and high costs.
“We’re roughly 4 million housing units short. And it started in 2008 with the great financial crisis when housing stopped, and then again in 2020 with the pandemic, guess what? Housing stopped. And here we are in 2023 again with interest rates and the economy, housing is going to stop. And so, why can’t people afford to buy a home? Well, there aren’t that many to buy. The purchase price is high,” said Rogers.
With BFR, landlords and investors appreciate the lower turnover and lower maintenance costs among their properties – often with residents including children in school – and investors benefit from the ability to build communities in tranches.
You can build each phase and lease it before building the next phase, “generating cash flow along the way compared to building a multifamily community where you lease at the end,” said Rogers.
“Retail investors are embracing build-for-rent. For the last five years or so, it’s been an institutional asset class. Blackstone and Starwood and Invesco have invested heavily in build-for-rent. … Multifamily has had no losses in 40 years unless you over-leverage. So, it’s very safe, necessity-based, and a very strong economic model,” added Rogers.
Capital Square BFR activities in 2023 included in Texas, Arizona, and Nevada.
Watch the full conversation above.
Video Transcript
Damon Elder 00:09
Welcome to another edition of Focus on Alternatives, brought to you by ADISA, the Alternative and Direct Investment Securities Association. I’m Damon Elder, publisher of TheDIWire.com, and today I’m joined by Louis Rogers, founder, and Co-CEO of Capital Square. Louis Capital Square, for many years has been one of the leaders in the Alts space when it comes to 1031 exchanges, DSTs Opportunity Zones in recent years with a large focus on the multifamily asset class. Today I want to talk a little bit about something that is somewhat related and that’s Build for Rent, which is becoming more popular in recent years. So let’s start with the basics. You know, what exactly is Build for Rent? How is it different from typical multifamily? Should it be, you know, considered part of the multifamily asset class?
Louis Rogers 00:53
Great, thank you Damon. Thank you, ADISA. That’s a great question. What is Build for Rent? What is BFR and BFR is basically a segment of multifamily housing. We’re all familiar with the other segments, Class A multifamily, class B, multifamily manufactured housing. And now we have a new class called Build for Rent. And Build for Rent is essentially communities of contiguous single family homes. And they’re built for the sole purpose of renting. The build for rent industry is about where multifamily real estate was, say 20 years ago. Many people don’t recall that multifamily was not institutional, but starting about 20, 25 years ago, Sam Zell, the REITs came in and all of a sudden multifamily became institutional. And now Build for Rent has become an institutional asset class. It has a long runway. It’s just getting started, but it’s not scattered site, single family homes. It’s communities of single family homes. And it can be any number of things. Typically it’s detached homes, or it could be town homes or it could be cottages.
Damon Elder 02:10
So, after the global financial crisis that started in 2008, as we’re all very familiar with, we did see some institutions come along and start buying up distressed single-family homes, portfolio them together. Some of them even listed. This is not that, right?
Louis Rogers 02:25
This is not that. This is a community of homes, not scattered site homes all over creation.
Damon Elder 02:32
So, these are like master plan developments?
Louis Rogers 02:35
They are. Many of them are gated communities. They look like a, a residential community of homes. They’re just rented homes.
Damon Elder 02:44
So how does the tenant profile differ from traditional apartment tenants? You know, what are these renters looking for? What are the demographics, the economic profile?
Louis Rogers 02:58
You know, it, it’s very similar to the trends in multifamily. We started noticing about five years ago that the three bedroom apartment stayed full. They were very stable. And we started wondering, gee, how come nobody leaves a three bedroom apartment? And that’s because there was a demand. And the demographic of the 35 to 49 year old’s, which is the fastest growing population. Families, they have kids, they have a dog, they’ve outgrown an apartment. And so the build for rent is a solution for them. They want space, they want privacy. We all want a yard. We want amenities, and we demand excellent schools. And the, the build for rent asset satisfies all of those needs. But that’s the demand side. Demand is very strong. Supply side is very, is very constrained, and they can’t afford to buy a home. And you say, well, why can’t they afford to buy a home? Well, there’s a housing shortage. There aren’t that many homes available. We call it the locked in effect, where if you have a two or 3% mortgage, guess what? You think you’re ever leaving that home.
Damon Elder 04:06
Right, you’re not going to sell in this environment.
Louis Rogers 04:08
30 or 2% mortgage, you’re not going anywhere. So that, that cuts down on the supply. We’re roughly 4 million, 4 million housing units short. And it started in 2008 with the great financial crisis when housing stopped, and then again in 2020 with the pandemic, guess what? Housing stopped. And here we are in 2023 again with interest rates and the economy, housing is going to stop. And so, you know, why can’t people afford to buy a home? Well, there aren’t that many to buy. The purchase price is high. And many of the resident’s potential homeowners have spent their covid savings. They bought a Peloton and did all the things they wanted to do, and they don’t have the down payment. What the segment of resident population is looking for is flexibility in two ways. They’re looking for leasing flexibility. It’s a one year lease, just like an apartment. So if they, if they have a job change, they can leave. If they want to move to another part of the country, they can leave. But they tend to stay longer than regular apartment residents. So they have the freedom to move. And they also have financial freedom because they don’t have to worry about the, the air conditioner, the roof leaking the chores.
Damon Elder 05:26
They get all the benefits of home ownership without the headaches, right?
Louis Rogers 05:28
No maintenance, no repairs, and a fixed rent. So, it satisfies the demand for people that need, want, need a home but can’t afford one.
Damon Elder 05:39
Gotcha. So, turning to the other side of the equation then, from a landlord…
Louis Rogers 05:43
Yes.
Damon Elder 05:44
An investor perspective.
Louis Rogers 05:45
Yes.
Damon Elder 05:46
What’s the attraction to BFR communities?
Louis Rogers 05:48
It’s a great question. It’s a little different for each of those groups. Landlords, residents and investors. But from the landlord standpoint, residents stay longer. If you have kids in school and lots of furniture, you don’t move so fast. Lower turnover means, guess what? Lower maintenance cost. Lower maintenance cost means, guess what? Higher yield and higher leverage. And so from the, from the landlord standpoint, the residents are stickier. And then from the resident standpoint, they have a home at a reasonable cost. It’s in a great school district. It satisfies their demands, leasing flexibility, financial flexibility. And it’s important to note the cost to own is roughly $1,500 a month more expensive than to lease. So there’s a big financial incentive or disincentive to own right now. From the investor standpoint, it’s the same story as multifamily. We’ve been talking about the migration from the gateway cities. It was accelerated during the pandemic when people started moving out of the big cities into the suburbs. They were following less dense areas to live. And jobs followed strong job growth throughout the Sunbelt that led to stable occupancy and rent growth. From an investor standpoint that has been a very positive development. Apartments and build for rent, communities are full, the rent is strong, they’re stable. And it’s, it’s interesting to note that only 4% of housing is institutionally owned. That means mom and pop is maintaining the property. And you get what you get compared to an institutional owner with a first class property manager would create a much higher level of amenities. Much higher lifestyle, much higher quality. And then one, a subtle point from the investor standpoint is Build for Rent. Communities can be built in tranches. So you can build phase one and lease it. You can build phase two and lease it. You can build phase three and lease it. You’re generating cash flow along the way compared to building a multi-family community where you lease at the end.
Damon Elder 08:06
So, Louis, you know, the time-honored adage in real estate is that location, location, location means everything, right? And the <crosstalk>. So, and how does that relate to BFR? Is geography important? Where are the best places to be developing these? Right now?
Louis Rogers 08:20
It’s critically important. We like to look at the U-Haul one way statistic from say, California, from your town in California.
Damon Elder 08:29
A lot of people shipping out.
Louis Rogers 08:30
To anywhere in Texas. The U-Haul are going one way, they’re not coming back. Geography is critically important. We’re talking the same as multifamily. It’s the same story. We’re talking about high growth sunbelt markets. Typically the suburbs built for rent requires a large parcel. So we’re typically 30 miles from the city in the suburbs. Atlanta suburbs are very popular. Raleigh, Dallas-Fort Worth, we’ve all heard about the growth in Texas. How many headquarters have moved to, to DFW and Phoenix, a very large city with a big population and growth, job growth, low cost of living, high quality of life. These Sunbelt communities are full of governments that are friendly.
Damon Elder 09:18
Speaking in, in terms of working with municipalities and residents oftentimes when a developer comes in to build something, there’s neighborhood groups that are posing new development of any type. Some cities are friendlier than others. Generally speaking, are the cities, the municipalities, the residents of those areas, are they friendlier to this sort of BFR development than they are other types?
Louis Rogers 09:40
The suburban local governments tend to be friendlier. They’ve seen the job growth, they need housing. We’re 4 million housing units short. And if they don’t produce housing, they’re not going to bring in the employers. Employer says, where are my people going to live? And so there’s a balance.
Damon Elder 09:57
So, Louis, as you alluded to earlier, you know, the US has been in a housing crisis for really decades now. Massive million plus what, 4 million shortage of housing…
Louis Rogers 10:06
4 million housing units short and roughly half of the rental housing stock is old, obsolete, and decrepit from 1980 or earlier.
Damon Elder 10:17
So that I think begs the question, isn’t denser developments like apartment towers and in large suburban areas or large urban areas, wouldn’t that be a wiser choice? Generally speaking from an investor’s perspective than these more diffused BFR kind of communities?
Louis Rogers 10:33
There’s a place for both. They just operate differently. And, uh, you know, there, there’s room for both regular multifamily A and B and build for rent of homes.
Damon Elder 10:45
So then on the flip side, obviously home ownership has become increasingly difficult. Again, you spoke briefly about this in the, in the introduction. So especially for middle-and lower-income Americans, and now with, you know, interest rates getting to the highest point in more than 10 years, it’s even more difficult. So, you know, I think I read recently a Fannie Mae study that demonstrated the majority of metro area in the US suffer from chronic lack of affordable, not necessarily subsidized, but affordable single-family housing for both renters and homeowners. Is BFR going to help solve this issue? Can it solve the issue?
Louis Rogers 11:22
Yes, the BFR is adding to the housing stock? We’re providing supply and taking away some of that shortage, absolutely.
Damon Elder 11:31
And I think as we talked about earlier, you mentioned that it’s, it’s actually more efficient and quicker to build these communities.
Louis Rogers 11:37
It is.
Damon Elder 11:38
Okay.
Louis Rogers 11:39
It is. We can build them in tranches and get them online quicker. And because they’re fewer build for rent communities, the demand is actually stronger than just regular old multifamily.
Damon Elder 11:49
So BFR, build for rent, build to rent, whatever you want to refer to it as. We’ve started to hear about this asset class from an investments perspective in recent years, but not a lot. Capital Square last year made a concerted effort to enter this space. Are there others? What’s the bandwidth? What’s the marketplace look like? Are we going to see retail investors starting to embrace build for rent?
Louis Rogers 12:12
Retail investors are embracing build for rent. For the first, for the last five years or so, it’s been an institutional asset class. Blackstone and Starwood and Invesco have invested heavily in build for rent. They’re very sophisticated. It’s now become a retail asset class. And it’s the same story we talked about. It’s the same story that Dr. Peter lineman talks about when he says, we’re in the golden age of multifamily investing. Why is that? Well, we have residents who stay longer in the, in the build for rent space. We have less turnover cost. We have necessity, it’s an asset you need, you want, you need to have a roof over your head. And so, it’s in inflation resistant. And even through the pandemic multifamily, all the segments of multifamily were basically full. And so retail investors seek the same things that the institutions wanted and a hedge against inflation. We have one year leases typically. And so every year you can reset and you can raise the rent. And typically multifamily of all segments has more than covered inflation. And then, and then the last, but not least from Dr. Lindeman, multifamily has had no losses in 40 years unless you over-leverage. So it’s very safe, necessity based and a very strong economic model.
Damon Elder 13:36
Yeah, we, we have a very significant cohort of young people in this, in this country who are starting to form families and probably would be very attracted to the single-family housing option. But again, they just can’t afford to afford it right now.
Louis Rogers 13:50
They can’t afford it. Maybe a couple of years ago they could have afforded it, but with the shortage of supply, with the lack of a down payment with the housing that’s available, being so expensive, they want to live in a home, but they can’t afford it. The BFR is a great option.
Damon Elder 14:06
So last question for you. I want to stick a little bit more in the weeds on the investment side of things. From a retail investment perspective, as a product sponsor, how does BFR work best? Do you put it into a DST structure? LLCs, REITs, what, how should we be packaged?
Louis Rogers 14:23
They fit in various places. They fit very well in DSTs. They fit well in development funds. Uh, they fit well in REITs. Each one’s a little bit different and it depends on which segment, uh, which strategy we’re talking about. Uh, with, with the build for rent, you have ground up development where you’re taking a piece of land, you’re building a building ground up, that’s the highest risk. It’s also the highest return that doesn’t qualify for 1031, but does qualify for a development LLC, high risk, high return. And then there’s sort of a middle ground which is the, what we call the forward sales, where we buy from the developer on C of O, when the certificate of occupancy is issued phase by phase we buy, which reduces the risk of development. And that is sort of a middle ground and that works great as a DST or as a regular plain old cash investment. And then finally buying stabilized, built and rented communities. That’s just like any other A or B multifamily, very stable.
Damon Elder 15:28
Just like building an apartment building except collection of single-family homes.
Louis Rogers 15:32
It’s built, it’s there, it’s safe. So, different strategies for different structures.
Damon Elder 15:38
So, Louis, thanks for sharing your insights today. Like I said, I know I find Build for Rent to be a very interesting emerging asset class in the retail space. I’m sure our viewers do as well. Appreciate your insights and you sharing your information with us. And thank you so much for joining us for another edition of Focus on Alternatives hosted by ADISA. Again, I’m Damon Elder, publisher of TheDIWire.com. For more educational information on alternatives of all sorts, visit adisa.org. And of course, for your Daily News on the alternative space, visit TheDIWire.com. Thanks so much.
Louis Rogers 16:08
Thank You.
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