Investors are lining up to get their hands on the thousands of government-held foreclosed homes, either to fix up the houses for resale or to hold the properties as rentals. But in a sort of if-you-can't-beat-them-join-them scenario, some builders are putting up brand-new houses as rentals.
At a time when buyers are scarce but tenants are plentiful, builders say it's an idea whose time has come again.
“It's a very dynamic business opportunity,” says architect-developer Robert Koch, who is building an 80-unit rental subdivision in the Knoxville, Tenn., area.
Houses as rentals are nothing new. Depending on whom you ask, anywhere from one-third to one-half of the country's rental units are houses. Purpose-built single-family, detached rentals are not new, either. Backed by tax credits and other subsidies, dozens of subdivisions are built every year to house low-income families, the elderly and even college kids.
But now, bowing to the realities of today's for-sale housing market, a growing cadre of market-rate builders are warming to the concept of houses as an alternative rental product.
“This is a fantastic strategy,” says Dallas-based apartment builder Joe Petersen, who has three such projects under way, including one in Arkansas in which the houses will be up to 1,700 square feet, with two-car garages and all the other trappings typically associated with homeownership.
Several factors are driving developers to consider building houses for rent instead of sale.
One is that builders can hold land for only so long before they must do something with it. Another is that banks are reluctant right now to finance construction of houses that may prove difficult to sell.
But perhaps most important, the market is currently flush with renters. With housing prices still tumbling and the economy in disarray, many people who otherwise would buy houses are reluctant to pull the trigger. In normal times, they would be first-time owners. But for the moment, they are happy as tenants.
At the same time, these renters tend to want more out of their living arrangements than what most multifamily properties have to offer. “They're tired of apartments, but their intuition says now is not the time to buy,” says Koch, a principal in the Fugleberg Koch architectural firm in Winter Park, Fla. “So renting a house is the next best thing.”
“This is not waiting for the single-family for-sale market to come back,” adds Petersen, whose firm, Insight Real Estate Strategies, has built thousands of apartments over the years. “This is how I can build what my single-family target market wants.” And what people want are the safety, privacy, storage and amenities they can't find in most apartment projects.
Then there are the millions of families who have lost their homes as a result of the housing meltdown. Generally, when people move out of homes they owned, they look for houses to rent rather than apartments. Rental houses are a step down for these folks, but an apartment is a slide all the way to the bottom of the ladder.
At Silverado Ranch in Bakersfield, Calif., most of the families who occupy the 53 three- and four-bedroom, 1,200- to 1,600-square-foot houses built as rentals are ex-owners. Their credit is scarred by a foreclosure or some other failure. But as long as their records are otherwise in good shape, that one unfortunate mark tends to be overlooked. Monthly rents at Silverado Ranch range from $1,200 to $1,350, which includes pest control, fenced rear yards and lawn care.
Generally, rental houses are owned by mom-and-pop landlords who have been unable to sell their places or by investors who tend to do as little as possible to maximize their returns.
“What you tend to get is a slumlord-type landlord who won't be as responsive as he should be, if he is responsive at all,” says Peter Bell, president of the National Housing & Rehabilitation Association, the trade group of for-profit developers of affordable housing.
Even for the kind of well-heeled investors that Uncle Sam expects to take over its stack of foreclosures, it is going to be difficult to achieve the economies of scale necessary to operate scattered-site properties effectively, Bell says.
Petersen believes he “can control my community much better.” The Dallas developer plans to hire property managers who will live in on-site houses and be on call 24/7. He intends to screen tenants in much the same way he does applicants for his firm's apartments.
As this longtime apartment developer sees it, living in one of his rental-house projects may be a better alternative than buying somewhere else.
“A rental community of single-family homes can be a far better living experience than that offered in a typical single-family community, where homeowner associations are mostly ineffective,” Petersen says. “There won't be any rusty Winnebagos parked on the street or foil on your neighbor's windows, and convicted felons won't be living next door.”
And as Koch points out, owning often can be more costly than renting. “There's not just your monthly house payment,” the architect-developer says, “but the rest of the cost of owning over time. Among other things, you also have to mow the grass, change the furnace filters and pay for pest control.”
Petersen, who was a homebuilder before switching to the multifamily side in the 1990s, likes the idea that it's “easier” to rezone a property that's already approved for apartments, even when the houses will be rented rather than sold. Most places “would rather have topless bars than apartments,” he says.
Lenders “love the idea,” too, he says. “They see it as a better investment strategy.”
Finally, he points out that building single-family rentals on deeded lots offers two exit strategies for the price of one. When he's ready to bail, he can either sell the entire property in the same manner as he would an apartment project, or he can sell each house individually.
© 2012, United Feature Syndicate Inc.
