The author argues that "building single-family rental home neighborhoods seems like a great idea, until you run the math."
Almost 12% of all households in the country now rent a single-family home. Certainly, a portion of these renters will pay a rental premium for a new home. However, there is a snag. While the rental demand remains strong, our home building and rental clients who have run the analysis have concluded that build for-sale homes usually create the most profits. Thus, most new home neighborhoods will continue to be for sale rather than for rent.
There are exceptions, however, particularly when generating cash quickly is the priority. These include:
- Weak for-sale demand. For-rent communities make sense in areas where for-sale demand is weak. When a for-sale community might take years to sell out, a for-rent community can return cash sooner.
- Helping retail feasibility. A master developer may need to attract more residents quickly to help its new retail center thrive. Rental homes generally lease up very quickly and can bring needed customers to an area to help support a retail development.
- Additional segmentation. The developer might also choose to increase cash flow by selling a for-rent parcel to someone who won’t build homes that compete with the for-sale homes in the community. This strategy generates cash and brings future homebuyers to the community.
- Significant relocation area. Often, relocating households prefer to rent for a while before buying. They want to learn more about the area, and might even want to wait for more certainty in their job situation.
In summary, build for rent can make sense in some instances, but build for sale will continue to dominate the single-family home construction landscape.
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