SVN | SFR Capital Management, a private commercial real estate investment firm that focuses on the single-family build-for-rent housing sector, and RP Homes, a Southeast regional builder, have entered into a joint venture to acquire and lease homes across the Southeast.
The Guild, a 92-townhome build-for-rent community currently under construction in Chattanooga, is the inaugural asset of the joint venture. The partners plan to eventually stockpile 250 to 1,000 homes annually, targeting Tennessee, South Carolina, North Carolina and Georgia.
The partnership with RP Homes is SVN | SFR’s first direct U.S. homebuilder joint venture.
Currently under development, with several townhomes occupied, The Guild in Chattanooga features open concept floor plans with attached garages and interior upgrades and an average monthly rent range of $1,800 to $2,300.
Here, Michael Finch, executive vice president at SVN | SFR Capital Management in Phoenix discusses the benefits of build-for-rent communities for both occupants and investors. He also reveals the company’s best practices for its build-for-rent assets.
SVN | SFR Capital Management doesn’t appear to be interested in selling one house or one community at a time.
“We sell in bulk. We might have a disposition package three or four years from today of 8,000 or 10,000 homes, but it will be an amalgamation of three four or five joint ventures. One JV might have built 800 homes, another 2,000, another 2,500 and so on.
“All the JVs get to take advantage of the larger disposition package because we’ll be looking to sell to pension funds or anyone who’s looking to deploy significant capital and have immediate scale in the build-for-rent space.’’
How did you identify Chattanooga as a site for your inaugural joint venture with RP Homes?
“Our relationship with RP grew as we were working with them through our brokerage and discussing the options our capital management platform provides. As a joint venture partner, we go where our developers and builders are located.
“Of course, Chattanooga has a lot going for it. It has the best fiber optic in the country and there are good jobs and population growth thanks to the Volkswagen plant and other businesses.’’
Why invest in build-for-rent instead of build-to-sell?
“It’s about having options. The country is becoming less adverse to renting, and build-for-rent communities offer something besides ownership.
“Many people today are choosing to rent because they prefer it for myriad reasons. They like the lock-and-leave lifestyle, they don’t care for the cost of ownership, or they might not know where their job will take them in three to five years, so they’re choosing not to own a home.’’
It’s also no secret that many millennials have significant student debt and home prices have risen.
“Affordable housing doesn’t really exist today in almost any city in the country. I believe the median home price in the U.S. in 2020 was $340,000, and that’s only gone up. Even with low interest rates, that’s not an affordable option for many people.
“So, it’s still cheaper to rent. That would not have been the case two or three years ago because home prices weren’t where they are today, but renting is an option for those who can’t afford to buy because they don’t have the down payment or they don’t want to rent.’’
Describe the atmosphere of your build-for-rent communities. Are they closer to apartment living or living in a neighborhood where people own their homes?
“Renters want the feel of a pride-of-ownership property – and they get it. Many families live in our communities for a long time because we aren’t leasing to the typical apartment tenant. These are three- and four-bedroom homes, and the families that are living there are a part of the community. Their kids go to the local schools and play in the neighborhood together.
“Or they’re baby boomers who are leasing because their kids are gone and they don’t need a 2,500 square foot five-bedroom home anymore. They can move into a smaller three-bedroom home and not have to worry about cleaning the gutters and mowing the lawn and dealing with the hot water heater when it goes out.’’
What benefits do build-for-rent projects offer builders and developers?
“Build-for-rent gives homebuilders the opportunity to diversify their production. Historically, homebuilders have built only for sale and were missing a huge chunk of the market, which is people who have to rent or choose to rent. That’s 40% of the country.
“Build-for-rent gives them an opportunity to increase production and look at sites they might not have considered before because they were focused on a for-sale community.’’
What are the best practices for a build-for-rent community?
“When we’re working with a developer or builder, we feel it benefits the end product for us to be involved as soon as possible – while they’re working through entitlements and thinking about lot sizes.
“The key amenity to a build-for-rent community isn’t a grandiose pool or gym or clubhouse but the home itself. These are families with busy lives, so having a two-car garage and a backyard is the amenity.’’
How do these best practices ensure a better financial return?
“Scaling back amenities that create higher operating expenses increases the net operating income. It’s important to think through that from the beginning and make sure we’re maximizing density.
“You don’t need 60-foot lots in a build-for-rent community because you’re not going to get enough homes within the given acreage, and that’s almost always a more expensive lot, which in turn would be a more expensive home to build.’’
At what point do you factor in the demographics of a particular area?
“Dallas is different than Denver, which is different than Chattanooga, so we look at the demographics early on and then consider what that market needs. We then create what that particular site in that particular town needs.
“We then work through the mix of floor plans. Does this site need more four-bedroom units than three-bedroom units? Should it have more threes than fours? If we see more new families in their upper twenties and lower thirties, we probably won’t need a lot of fours. A good 1,500 to 1,600 square foot three-bedroom will do really well.’’
Did you employ these best practices with The Guild?
“RP Homes was well underway with The Guild prior to our relationship, so we weren’t able to do a lot of prep work, but it’s a phenomenal community that’s leasing now. They have around 40 of the 92 homes finished.’’