A Deeper Look At Build-To-Rent Investing - EP19

build-to-rent market research new build new construction real estate market Jan 04, 2022

"The argument for build to rent, especially on these nicer detached communities, is that it's a better experience for the renter. It takes the stigma out of renting. You live in a nice place, you got a really nice pool, you got great common areas, you got a lot of amenities that a homeowner would sure love to have, and it makes renting more desirable." - Steve Olson

"I mean, think of our projects. I don't think the majority of people realize that those are investor owned properties... I think going through a lot of our projects, you would just say, "Oh, this is just a townhome community", like some of our other builders build. You wouldn't necessarily know this is a full rental community." - Sherida Zenger

Topics Discussed:

  • Is it build-to-rent, build for rent, BTR, B2R, BFR...?
  • What are the pros of building to rent?
  • When does build-to-rent make sense?
  • Why is build-to-rent becoming more popular as an investment strategy?

Whatever you want to call it... build-to-rent, build-for-rent, BTR, B2R, BFR... Let's talk about what it is and why it's here to stay.

How hard is it to create the types of deals you wish you could find on the MLS? It's unfortunate that quality real estate investments are getting harder to find on the open market. But that doesn't mean there are not plenty of opportunities. 

Welcome to the Build-to-Rent Show. Steve Olson here with Chase Leavitt, and Sherida Zenger.

Is it build for rent or build to rent? BTR or B2R or BFR?

We were having a lively debate about which one it should be. We feel it is synonymous.

Sherida Zenger: That's what the internet says.

Steve Olson: If the internet says it, it's gospel. One of my mentors in life is a gentleman named Michael Scott. He is the regional manager of the Scranton branch of a company called Dunder Mifflin. You either get that or you don't.

There was a funny episode where he was talking about negotiation. And he goes to Wikipedia for all of his negotiation tips. And he said that on Wikipedia, anyone can put information on there--so you know you're getting the best information.

Sherida Zenger: Totally Accurate.

Steve Olson: 

Let's define what build-to-rent is:

When we talk about build to rent, it's a concept that has come to light over the last 5-10 years. It's been done forever. If you build an office building, you've built it, to rent it. And that's been going on in industrial and storage. What else is storage other than build to rent, right?

The concept of build-to-rent has really arrived in force in the residential world in the last 5-10 years, especially when it comes to homes. An apartment building has always been build to rent. But when we talk about, would somebody actually build a community of 50 homes and rent the entire thing out.

I think most notably, it's a little different in the fact that before you would build homes, the city would allow you to get 40 different parcels. And Dr. Horton is going to come in there and build homes and sell them to Sally Homeowner, right?

In this case, the city is not allowing you to get 40 different tax IDs. But you're still going to build 40 homes in there. And in fact, many of the cities, we've been recently talking to the city of Tomball, Texas, really liked the idea of detached homes, because cities resist this multifamily component a lot, don't they?

Sherida Zenger: I think the residents resist it. The city is resisting it. And it's pressure from people that live around there. They always say we want that in the city next to us. Not in our city. We need it, but go next door.

Steve Olson: That's exactly right. Yeah, it's not the not in my backyard mentality. The whole idea is, well, could we actually give rentals to the market which they need, but not make the cities and the residents mad?

They don't really know the difference.

So why build-to-rent?

The argument for build to rent, especially on these nicer detached communities, is that it's a better experience for the renter. It takes the stigma out of renting. You live in a nice place, you got a really nice pool, you got great common areas, you got a lot of amenities that a homeowner would sure love to have, and it makes renting more desirable.

There's an article on Forbes that was posted recently. Matthew Avitol at Forbes, and he point he wrote out this article this was toward the beginning of this year, kind of defining what build to rent is.

He said that,

"investors who want to take advantage of these trends driving rapid growth in the BT are built around asset class should make sure to do their due diligence before entering into an investment." Yeah, duh. "Investors should seek properties in low-density suburban markets. With high multifamily occupancy rates. I want to talk about that in a second. "

"Site Location is important proximity to major retail parks and high-quality schools and the visibility of the property from highly traffic roads will also promote location, desirability."

"Amenity quality should also be considered because BTR communities with high-quality amenities will perform well often topping the market in terms of actual rents achieved. Although the relatively high cost of land and building a ground-up BTR project may act as a barrier to entry for some retail investors. Smaller investors can gain exposure through crowdfunding, private syndication, and publicly traded REITs."

Shameless plug, you could call us at the Fourplex Investment Group (FIG) too. That's literally what we do.

But that's not what this show is about. But I mean, it is another option, by the way. So there's a couple of interesting things in that paragraph that make me think about this differently, that I think are conflicting. And I don't think he means to, to make it conflicting than that.

Investors should seek properties in low-density suburban markets with high multifamily occupancy rates.

What do you think about that? It's low density, but we have a high occupancy of multifamily. That's kind of a niche neighborhood.

Sherida Zenger: Yes, do you want to be in there where all your competition is sitting on top of each other?

Steve Olson: I don't know. I mean, there are only a few apartment buildings in there, I guess. And they're all running hot at 98% occupied?

Sherida Zenger: If that's the case, then yeah, you want to be in that neighborhood.

Chase Leavitt: If you can find that neighborhood where it's approved and ready to go, I think that's a home run, isn't it?

Steve Olson: If there's still a need for it, right? Well, that's probably what he's getting into. We're spitballing this, by the way, listeners right now, we haven't talked about this before.

Yeah, if there's a 98% occupancy rate, in what little multifamily is already there, seems like a green light.

Sherida Zenger: But maybe you should go somewhere else. Maybe? I don't know.

Steve Olson: I told you it was a bit of an anomaly. That sentence was.

Sherida Zenger: A double-edged sword.

Steve Olson: He's probably getting after the angle of when we talk about it in the context of a bunch of detached homes. You want to build that community in another community. That's what it is. So if Dr. Horton's next door to you and they built and they sold the Sally Homeowner, to the casual observer, those are two very similar neighborhoods, they would never know. And I think that's maybe what the tenants are after? Nobody knows I'm in a build for rent community.

Sherida Zenger: I mean, think of our projects. I don't think the majority of people realize that those are investor-owned properties. They're just tenants, they're leasing them. They don't know if they own or if they are leased. I think going through a lot of our projects, you would just say, "Oh, this is just a townhome community", like some of our other builders build, you wouldn't necessarily know this is a full rental community.

Chase Leavitt: And I wouldn't say we're low density, we're probably mid-density, right? Anywhere between Yeah, but 8-16 units to the acre. But I see that we're, we're pretty close to a lot of communities that are low density, which is what's considered low density, the eighth of an acre quarter acre. Half acre starts to be really low.

So probably the quarter-acre single-family home. I'm just I don't know, I'm trying to think of different projects. We've done like maybe Eagle Mountain, Utah, Vineyard, Porter's Crossing...

Steve Olson: A lot of I would argue that what he says here fits those places exactly. We're here in not sparsely populated Utah, but the western US population-wise. It's just so much less dense than take New England.

And you got these giant sections of the city that are massive apartment complexes, one after the other. He says this, this is the suburban feel. You want to create a rental experience with multifamily convenience. That makes you feel like you're living in the burbs? Yeah, yeah. So you think about Meridian, Nampa, Idaho. Check, check. We've got one coming up in Ogden, Utah.

All the stuff we've done in Salt Lake County has been west and south that's away from the dense big apartment complexes. A couple has dropped in, thinking about what we got to go in and Phoenix same thing.

Texas definitely the same thing. A couple of Class A apartments have dropped in next to us but we're not in what you would define as an urbanized area. These are all suburban areas.

Chase Leavitt: Once you start getting into high density and especially when we're talking about build to rent. That's just a different ballgame. Because it's the piece of dirt, whether it's one to five acres, whatever that is, you're going to have to go, I'm assuming more vertical with it. So your construction is going to look a lot different.

You're not going to find the medium density, where we're at where there are townhomes, you're going to find it more department condos, not just the three to four levels that we're used to, you're probably going with five to five, five levels, maybe more, maybe, yeah, so that's why with what he said, there, it's interesting, that's pretty much who we are, in a way.

Steve Olson: The renter paradigm is changing, living in the massive apartment complex the high rise, you know, of course, you live in San Francisco, New York, Chicago. Yeah. But you know, in the suburbs people don't want that.

We had a project in Spring, Texas, where we did three-story townhomes and it struggled for quite a while because it was too kind of city-oriented. I remember the feedback from the property manager was people would look at the unit's tenants. And they'd say, yeah, I get it. But why is this here? Right?

In Houston, there's a neighborhood called The Heights. It's the gentrifying place people are putting up a lot of really hip townhouses and high rises and medium-sized projects like that. It felt like something that should have been there, is what they were saying.

So he's talking about that the proximity to major retail parks and high-quality schools and visibility from highly traffic roads will also promote the location.

Sherida Zenger: Again, that goes back to our Chick-fil-A and Costco thing.

Steve Olson: Can I be at a Chick-fil-A within 5-10 minutes? If so, that deal works.

Sherida Zenger: And we're usually pretty close to you know, a major freeway of some sort not that it's in your backyard so you're not hearing that traffic, but you know, 10-minute drive max to get you to your next location.

Steve Olson: 

Okay, so "amenity quality should also be considered because build-to-rent communities with high-quality amenities will perform well. Often topping the market in terms of actual rents achieved".

What do you think about that?

Chase Leavitt: I honestly don't think we have super high-quality amenities. I think we have good amenities with FIG. We have the pool the clubhouse. Maybe to some tenants, they think that's high quality.

Sherida Zenger: Dog park.

Steve Olson: Those pickleball courts in American Fork, Utah. Yeah, those are 24/7 And that's a cheap amenity. But people love it.

Chase Leavitt: Yeah. So we have good quality amenities. Oh, no high quality like the big fancy movie theater in the clubhouse. I don't think we've ever done that right.

Steve Olson: No, no, where you got these media rooms and a dog groomer. I mean, you can do all that. That's all great. I just wonder how often tenants I don't think anybody is serving the moderate amenity demographic because when you put those amenities in, you want $2,500 a month in rent. I mean, do you that's what it takes in order to be able to do a project that kind of size. I just wonder how many people can afford that.

Chase Leavitt: I don't disagree with what he's saying. But I don't know if it's the high quality I think it's good amenities that really meet that area the tenant what they're looking for. Some amenities, right. The pool, especially down in Arizona, Texas, where it's hotter up here is nice as well.

The clubhouse. Not a huge clubhouse, but maybe where people can meet and gather have a birthday party, which is really nice or family, whatever the case is, I don't know if you're gonna see the value for that the big fancy movie theater or we have a smaller gym, sometimes in clubhouses but not I've seen some clubhouses or are built to rent a class. Their gym is awesome. Better than a Golds or Vasa right.

Sherida Zenger: Maybe they have a higher HOA, right? That helps offset some of that too.

Steve Olson: You charge for these they become income streams, right for many of these property managers and property owners. We've got this build-to-rent project under contract in Texas right now. And John, our team lead down there, and I have talked about so a couple of projects in Texas one thing is clear, we hate these pools.

They look good. People say they want them.

The debate is open, how often are they actually using this pool? Because the maintenance is out there constantly. It's a pain in the butt. We've read some reviews of other complexes that don't have them. People seem to be minorly irritated. But mostly they're placing the value on how responsive is the property manager... Where can I put my trash... Is there a place? Where can I park and a few other things? So we're toying with not doing a pool.

Sherida Zenger: A splash pad may be a good option, maybe?

Steve Olson: Yeah, because chlorine and all the crap and everything and you know, it's like, are you staffing the project constantly because you know, what happens in pools a lot of times, and you got to deal with that right then and there. But if you don't have somebody on staff, you just got to close the thing. When can you get here? Somebody threw a Snickers in the pool. Right.

We've just toyed with that in Meridian, Idaho, we've got this half-court basketball court, and it's like, always full. And you look at the weather in Meridian. And you compare that, should we do a couple of basketball courts and a pickleball. Court? That can be open? What, like, eight months of the year? All the time.

I mean, if you get a couple of good days in February, you can go shoot hoops, right versus that pool. It's a Memorial Day to Labor day kind of thing. The best-case scenario. Costs a lot of money.

Chase Leavitt: Depends on the market, too. I mean, basketball pickleball Those are awesome. Just depends on the market, the location, so really just research it and understand who your tenants gonna be. I think of Arizona during the summer, and I'm hearing they're not going to want to be out doing pickleball basketball in the heat, right? They're probably going to be by the poolside.

Sherida Zenger: Most likely. Or in the AC.

Chase Leavitt: It just gets so hot down there.

Steve Olson: That's an interesting thing to think about. On these amenities. You know, we even talk about Amazon Lockers, right for package delivery. I've seen a lot of people doing it. I'm not clear how valuable it is or not. James, one of our lead developers at our company, you know, he's always said that, hey, look, cool amenities attract people, garbage and parking keep people.

It's not sexy. But I think over the long term, it makes a huge, huge difference. Yeah, yeah. I mean, we got this one that we did in Vineyard, Utah, that's chock full of college students. There are cars parked everywhere. It looks like a scrap yard practically. Right. And those things turn over regularly because the square footage of the units appeals to the tenants. But it's always a pain in the butt for them to park.

We've even talked about garbage cans, too, because people are just crazy with these dumpsters. Can you go to garbage cans, it opens up a new set of problems.

Chase Leavitt: Sometimes you have to.

Steve Olson: He continues to say that you know, the barrier for entry might be high, you can get involved through crowdfunding syndication and publicly traded REITs. And he didn't put fig at the end, but he should have as we established. Right. So the main point is there is it is so difficult to get inventory right now.

Those of you that have been in the real estate business since the Great Recession of 2008 realize the tsunami of foreclosure inventory in many markets that came and the market feasted on that inventory for a good five years, in my opinion, right? Those foreclosures made their way through the system, you could get at first heavily discounted properties, and eventually, it just kind of dissipated.

Well, now what's the solution? Get past that barrier to entry. And I think that's why people are raving about build to rent is because well, if I go out on the MLS, if I go costar, I can't find anything.

Figure out how to build to rent a property because that barrier to entry is something that most people won't put up with. If you're a syndicator. And you can develop a fund with built for rent properties, you can get a lot of those small retail investors that couldn't participate otherwise.

Or if you're a builder, you really ought to consider it because your exit can be a lot more smooth than dealing with 50 Different homeowners. Any thoughts on that?

Chase Leavitt: Want to go through and talk about the pros and cons of build to rent or should we save that for another day?

Steve Olson: I think Preston's writing that down right now for another episode. That's a great idea.

Chase Leavitt: Pros and cons. Let's just chat through that. That'd be fun.

Last paragraph. This isn't me saying this, this is the guy on this article that we've been talking about,

"I truly believe that this asset class is still in its infancy stage. There's still plenty of time to take advantage of this great opportunity before it explodes."

What do you guys think of that? Is that true? Has it already exploded? Have investors missed the turn on that?

I don't I personally don't think so. No, I mean, it. Does the deal. Make sense?

We go back to that episode we did about what's a good deal. Well, what are you going to do with your capital? I kept thinking that when I was at that conference a couple of weeks ago, a lot of Wall Street types at this build for rent conference in Scottsdale. Compared to what? I mean, you going to put it into stocks, you're going to put it in, I don't know...

Sherida Zenger: Crypto, a CD...

Steve Olson: Where are you going? It's clearly an asset that's very, very needed. So is that deal a good place for your capital to go? Stop worrying about "well, am I in at the right time?"

Is it a good deal for you? Is your capital going to be happy there and earn you a return?

Chase Leavitt: So are you saying buy real estate and wait... don't wait to buy real estate.

Steve Olson: I had one of my associates point out to me like, when I talked to an investor on the phone, that guy that's been in the market for 30 years and I say, Well, you know, how are you so successful? Why is real estate been so good to you? He never says, Well, you know, I'd locked that interest rate back in 1982. And got a point lower, and I wouldn't be where I am today... said nobody ever.

Sherida Zenger: No, he keeps buying. Even though prices keep continuing to rise, he keeps investing it back into the real estate market.

Steve Olson: And he keeps a thick skin for when prices don't rise because they don't always go like this. At some point, these are going to dip 10-15%. Guess what, even worse, maybe. We've all lived through that. But the point is, you look at those troughs. The next trough is always higher than the last trough.

Sherida Zenger: It always comes back up. So just hold on. Build-to-rent isn't a get-rich-quick thing.

Steve Olson: Unless there's some complete decimation of the population or some disruptive technology that allows us to live on Mars. Right? It's hard to imagine a scenario where it's this stuff is needed. And, and we just got to keep investing. So I think you keep doing it, especially to because so much of the national housing stock is old and the term is obsolescent, right?

How many houses were built in the 40s 50s and 60s that are just It's time, right? It's time to scrape those things. And especially with this green energy movement to write what's up to code green energy. I think that you're looking at a construction situation that's going to keep going. It sounds self-serving. We have the build-to-rent podcast.

Sherida Zenger: I pulled up an article and it said, "only 5% of the inventory out there is built to rent". So it's such a new market for people for the most part. I think it's the way to go.

Steve Olson: People are less committed. We've talked about it before the mobile worker. We were talking to our attorney this morning, Markdown in Phoenix. How's it going? Mark? Are you managing through COVID? Okay, and he was joking. I love having my office all to myself, you know, there's me and a couple of people, I got all this room to spread out. We've sent our nonessential staff to work at home. We don't require them to come in.

At what point do I mean, especially in Phoenix, that paralegal says it's August, I don't have to be in Phoenix. I'm going to go to Spokane for the whole summer. And I'm going to work from there.

Renter and mobility are now more common.

Sherida Zenger: Yeah, I love it. I can work on the go and nobody needs to know that I'm away. Yeah, that's how most people are right? I'm still productive. I can still do things but then I can take time out to be with my family when I need to.

Steve Olson: Being a renter goes without mobility, but somebody has to own these properties that people want to rent. I'd rather be that guy.

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