Single Family Homes Being Built to Rent

The Wall Street Journal ran a front page story on something we’re starting to see here in the Piedmont Triad: ┬ásingle family homes being built with renters in mind:

Last year 5.8% of the 535,000 single-family homes started were being built as rentals, up from 4.8% in 2011 and the highest share since at least 1974, according to an analysis of census data by the National Association of Homebuilders. From 1974 to the home-price peak in 2006, only about 2% of single-family homes were built for rentals…

For investors, the interest in new homes reflects their belief that the rental market will continue to see strong demand and rising rents…Overall, about 15 million of the nation’s single-family homes were rentals last year, up from 10.8 million in 2005, according to Zelman & Associates, a research firm…

Building new rental homes undercuts part of the thesis of investing in single-family rental homes. Investors were attracted to this market largely because they could buy houses for less than the “replacement cost” or how much it would cost to build a new home.

But investors say they can still make profits. They point out that new homes typically come with builder warranties and cost less to maintain, at least in the initial years of ownership…

“So you could buy a house from 1990 and get a 12% return. Now you can buy a brand-new house and get a 10% net return, so the spread isn’t that dramatic given the uptick in quality you’re getting,” says Chang Kim, a vice president at Landsmith. “We’re in a unique period where brand-new houses can be built for a low enough cost that single family rentals can work.”