|
With 2025 upon us, we are excited about bringing new opportunities to our investor community that provide solid, risk-adjusted returns. It’s been an interesting market the last few years and we’re hopeful with the new administration, we’ll see some stability. It doesn’t sound like interest rates will drop much; so we continue to adjust accordingly and underwrite with this in mind. One of the asset classes we have been exploring is build-to-rent housing (BTR). We spent time in West Virginia a few months ago taking a look at the community seen in the picture above and discussing the benefits to purchasing this type of asset. If you’re not familiar, BTR “operates similarly to apartment buildings under property management companies while offering a single-family living experience. Unlike dispersed individual rentals, build-to-rent homes create communities with diverse housing types, including townhomes, cottages, and detached houses. These homes take many characteristics of single-family rentals and enhance the experience by developing homes inside a professionally managed community. Some of these communities also feature leasing offices, pools, and fitness centers… Many U.S. families consider homeownership a part of the American dream, but the price of real estate is unaffordable for many. This is causing residents to turn to single-family rentals or something similar, like a build-to-rent option.” -Realtor.com –See article here with quote and more information on BTR housing at Realtor.com. Our partner (that we purchased the Gables of Cornerstone with) has a relationship with a large homebuilder, D.R. Horton. They have previously purchased other BTR Communities and they’re looking to expand. I’ve included information they shared recently on why BTR is a great place to invest! It’s a little lengthy, but take a look if you’re considering new opportunities this year and want to look at BTR. Stay tuned for more information to come! “The Case for Forward Purchase of new Built-for-Rent Properties Over the last few years we have learned that there are many different types of operators in the multifamily space. Assuming all else is equal from an operator standpoint, one of the main ways to create alpha, or excess return, without taking on more risk is to have a unique acquisitions strategy, such as being early to a new idea within the space. In a competitive market such as Multifamily, once a deal is fully marketed, with a broker involved, it is difficult to truly get a “deal”. This is the reason why almost every deal we have purchased to date has been off market. Given our relatively small size, we have the luxury of being able to underwrite hundreds of deals on and off market, waiting for the perfect off market opportunity that we can purchase at what we believe to be a discount to market, with above average risk adjusted returns. This month we wanted to highlight a few of the reasons we have been pursuing off-market, direct to builder, forward purchases of brand new Built-for-Rent properties in our mission to generate alpha for our investors. Home Builders are Incentivized to Sell Quickly One of the things we’ve learned as we’ve worked more with Home Builders over the last year is that they often look at return differently than a traditional developer. DR Horton for example has explained to us that instead of ROI being a traditional “Return on Investment” metric, they look at ROI as “Return on Inventory”. This effectively means that for them, they are judged internally by how quickly they are turning a dollar, rather than just looking at the actual return on an investment. Their goal is to keep their balance sheet light and to move product as quickly as possible. This strategy emerged following the challenges they faced during the financial crisis where they had too much inventory on their books that they couldn’t get rid of. Since then, they have pivoted to trying to move their inventory quicker, even if that means selling at a lower price, or as we’ll discuss below, selling under a more beneficial structure to groups like us. Given these incentives have shifted for homebuilders, we have gotten into circumstances and have seen transactions in the market where homebuilders will sell at an extreme discount due to a time constraint such as a quarter end or year end deadline they need to hit. We have recently been in situations where local division heads have asked us to step in on deals and close at a significant discount if we can close by a certain date. On the forward sale side, if we can provide surety of closing at a later date, this can also result in a discounted price as it removes the need for the homebuilder to go through a full marketing process which could result in choosing a group that re-trades them on price, terms or importantly, closing timeline. Relationships and Track Record to Generate Excess Returns As we have underwritten, offered on and closed deals with these homebuilders such as DR Horton, we have built relationships and a small track record of doing what we say we will do, when we say we will do it. Meadows at Berkeley Ridge for example, which we closed earlier this year in 2024, was originally under contract for roughly 20% more than we ended up closing on it for. While on a hunting trip with DR Horton, the deal fell out of contract due to the prior buyer not being able to figure out the financing, and given the timing issues discussed above, we stepped in and committed to close by quarter end which was an important date for them, and in exchange, we received a heavily discounted price. Meadows is now paying out over 7% to our investors and has been one of the cleanest properties to operate given it is brand new, with high quality residents making over $150,000 on average and having an amazing onsite team. This is a perfect example of the way that strong relationships and a track record can generate above market returns for our investors on brand new built-for-rent properties. Ability to Structure Deals while Purchasing at a Significant Discount As we’ve learned more about the homebuilding model, while also better understanding how to operate Built-for-Rent Properties more effectively, we have thought more creatively about how we can structure deals as a win-win for the homebuilder and for us and our investors. We have come to realize there are four different structures that can work for us, each having a different risk/return profile, but all working well for us when accounting for that risk when determining our price and terms. Structure #1: Finished Lot Strategy: While not full development, this is as close to development as we will get at this point in our business. This strategy is the highest risk, but results in the highest return and the lowest purchase price per unit. Under this strategy, we would purchase finished lots either from a Home Builder, or from a Lot Developer, and then we would hire DR Horton to build the Built-for-Rent product for us at a fixed price. Under this model, given DR Horton’s ability to build at significantly lower rates than most builders, we would be getting a brand-new asset at a significant discount to what it would be worth after stabilizing and leasing up the property. This of course comes with additional building risk on the front end, risk from working with DR Horton on the construction and of course the lease-up operational risk. Thus, this requires the highest return threshold for us to execute on this strategy. Structure #2: Purchasing at Certificate of Occupancy Strategy: This strategy is a step down in risk from Structure #1. In this structure, we would be purchasing the finished product after it has been completely built, so we would be taking on no construction risk, and would only be taking on the lease up operational risk. This structure would require slightly lower returns than Structure #1, and result in a slightly higher price than if we were to buy finished lots, however, this structure still results in a significant discount to purchasing the asset after it has been stabilized, and certainly lower than if we were to buy a fully marketed deal. Structure #3: NRI Minimum Strategy: This structure is still a structure by which we are executing on a deal directly to the homebuilder, completely off market, however we are pre-negotiating the price based on the builder hitting a minimum Net Rental Income (NRI) threshold before we will close on the asset. This structure removes the lease up risk we would be taking on in structure 1 and 2, has no construction risk and allows us to place long term fixed rate financing at acquisition as the property is fully occupied before closing. This strategy still results in a lower purchase price given it is a true forward sale negotiated deal, off market, direct to the builder, however the risk is also significantly lower, resulting in a great risk/return trade off especially compared to a fully marketed deal. Structure #4: Fully Marketed Deal: This final structure is a traditional acquisition where we would be competing against many different buyers on both price and terms. This structure of course results in the lowest potential return and likely the highest price per unit given you are paying a market price and competing against others on price and terms. While relationships can certainly still help win a marketed deal even if we are not the highest price, this is the lowest value-add strategy that likely results in the most average returns out of the various structures we’ve discussed. Regardless if we are utilizing structure 1, 2, 3 or 4, the benefit of looking at these forward sale opportunities direct to the home builders is that in each case, we are getting a brand new property, with above average floor plans, in a great location in one of our target markets and we own a property that is typically in extremely high demand for both residents, and on the back end, for capital markets players looking to build a portfolio of these high quality built-for-rent properties. We’ve noticed in our short time in this asset class that these built-for-rent properties have much lower resident turnover, much lower Repairs & Maintenance costs given their brand new nature, are in higher demand with fewer competing properties and attract a higher quality resident who has pride in ownership and typically strong credit resulting in operational efficiency and relative ease of operations relative to other assets we own. Additionally, these properties attract great property management and maintenance professionals who are eager to work at the higher end of the market with these property types. Maintain Downside Protection We are always looking at how we can mitigate risk and protect our downside on any deal we do, which we have discussed many times in past newsletters. The built-for-rent asset class, especially when utilizing forward sale structures that result in significantly discounted pricing relative to market, enables us to protect our downside in a few ways. First, given all of these units are typically individually parceled, we have the ability to sell units one off if needed in the future for whatever reason. We also have the ability to sell the individual units one off if the market is paying a significant premium for selling these homes to retail home buyers as compared to keeping them together as a single built-for-rent property. While this is never our business plan to break off these deals into one off retail home sales, we do take comfort knowing we have this flexibility if needed. Additionally, given the forward sale nature of these deals, we can buy well below retail price resulting in a significant premium if we were to go that route. The other major downside protection we have on these deals is the ability to hold these assets for the long term, with fixed rate financing in place and in a market that is growing, most often with demand greatly outpacing supply. In Martinsburg, WV for example, there is projected population growth over the next five years of roughly three times the national average, despite this, there is very limited new supply planned in the market over that same time period. This should result in the ability for us to continue to push rents at an above average rate while also maintaining strong occupancy, resulting in our ability to continue to drive cashflow and returns for our investors over the hold period. Conclusion By the end of 2024, we will have underwritten over 400 multifamily deals of all types and in many different markets. For the reasons outlined above, we have found the forward sale direct to builder built-for-rent strategy continuing to pencil better than most other strategies while also protecting our downside and offering a very favorable risk/return trade off. As we head into 2025, we will continue to build our relationships with different home builders as we seek to provide great opportunities to our investors in our target markets with the goal of generating alpha on a deal-by-deal basis. We are excited to capitalize on all we have learned this year in this space and will continue to remain diligent in sourcing only the best opportunities as we continue to grow our portfolio and serve our residents and our investors.” |
|
If you haven’t taken the leap yet, is 2025 the year you’ll invest in real estate? |
|
Let’s chat about your goals and see if Taylored Investments can help! Schedule a time here. |
Build-to-Rent Opportunities on the Horizon
