“SFR and BFR” May Be Emerging Asset Class”

By Al DiNi­co­la

July 10, 2021

We con­tin­ue to mon­i­tor emerg­ing trends in the alter­na­tive real estate invest­ment world. This is accom­plished by par­tic­i­pa­tion in indus­try con­fer­ences and infor­ma­tion exchanges. Over the past few years there has been great inter­est in the Sin­gle-Fam­i­ly Rental (SFR) invest­ment space.   There are pub­lic com­pa­nies as well as pri­vate REITs that are invest­ing in SFR assets in a vari­ety of loca­tions in the US. (We have already con­duct­ed due dili­gence in sev­er­al of these offer­ings). How­ev­er, there is a tremen­dous amount of dol­lars now being direct­ed in this space. SFRs are gen­er­al­ly a col­lec­tion of exist­ing homes, orig­i­nal­ly held by small­er investors, (ref­er­enced as mom and pop) that are being aggre­gat­ed into larg­er port­fo­lios of homes.   Some of these port­fo­lios are com­prised of over 10,000 homes spread over dif­fer­ent geo­graph­i­cal areas and loca­tions. You may also con­sid­er the SFR port­fo­lio hav­ing a diver­si­fi­ca­tion because of the dif­fer­ent loca­tions. The indus­try has grown up in the past 10 years. It may not be too soon to pre­dict that the cur­rent invest­ment into SFRs will tran­si­tion into DST offer­ings in the very near future. As an asset class the SFR is steady and with no cor­re­la­tion to the stock mar­ket. Basic focus for acqui­si­tion of homes will be to fol­low the jobs and rent growth. The Build For Rent (BFR) is an emerg­ing trend where entire neigh­bor­hoods are being pur­pose built as rental com­mu­ni­ties. Recent­ly a few ful­ly leased up and sta­bi­lized com­mu­ni­ties in the south­west were sold to a large invest­ment firm and repack­aged as a DST offer­ing. This repack­ag­ing has enabled small­er investors to take advan­tage of direct cash invest­ment or 1031 tax deferred exchange invest­ment. The pop­u­lar­i­ty of the SFR rental hous­ing stock con­tin­ues to increase. Cur­rent­ly this asset class falls under the Mul­ti­fam­i­ly offer­ings when we report in the Land­scape Overview. Pri­or to stu­dent hous­ing and man­u­fac­tured hous­ing being sep­a­rat­ed into their own asset class­es both were under mul­ti­fam­i­ly report­ing.

Dri­ving Forces:

Dri­ving this SFR/BFR and oth­er hous­ing trends are some basic ele­ments.  Some experts believe there is a short­age of hous­ing units as high as four mil­lion units and expect­ing to grow to six mil­lion units over the next

10 years. This tight inven­to­ry cre­ates a big sup­ply imbal­ance. This may cre­ate a struc­tur­al hous­ing deficit. For the large insti­tu­tion­al investors this cre­ates an oppor­tu­ni­ty. Insti­tu­tion­al mon­ey is enter­ing the space with a large appetite for steady returns cre­at­ed by port­fo­lios that are well man­aged. Insti­tu­tions are risk adverse and con­tin­ue to look for yields and steady income. Mul­ti­fam­i­ly apart­ments con­tin­ue to be a favorite asset class for investors.  The SFR/BFR space may rep­re­sent a “hor­i­zon­tal mul­ti­fam­i­ly” asset class. The SFR/BFR assets oper­ate sim­i­lar to the mul­ti­fam­i­ly in many ways.   There is a prop­er­ty man­ag­er who han­dles the main­te­nance of the prop­er­ties, leas­ing agents, and need­ed repairs are han­dled typ­i­cal­ly by ser­vice tech­ni­cians.   With tech­nol­o­gy today SFR that are spread out over a geo­graph­ic area, main­te­nance and ser­vice calls are rout­ed much like the Ama­zon or UPS deliv­ery ser­vice.  SFR may also ben­e­fit from longer ten­an­cy and less move outs, help­ing with down­time. How­ev­er, with a 2- 3 year move out aver­age this pro­vides for rental bumps as much as 10% ver­sus the aver­age 3–4% annu­al­ly. The BFR which are main­ly pur­pose build and locat­ed in one neigh­bor­hood may have 50 to over 100 homes plus in one loca­tion and many have ameni­ties designed for the rental demo­graph­ic. Some of the new­er com­mu­ni­ties are also gat­ed adding to the pop­u­lar­i­ty and rental demand.

Psy­cho­log­i­cal Influ­ence

How­ev­er, what is fuel­ing the psy­cho­log­i­cal demand of the indi­vid­ual renters for the SFR/BFR rentals?  Who are the poten­tial renters? Renters who are seek­ing loca­tions out­side of the urban areas are tired of the threat of crime and are seek­ing the safe­ty SFR loca­tions may pro­vide. COVID also enabled some work­ers to move out­side the urban areas and poten­tial­ly work from home part of the week. This pushed the mar­ket to remote jobs. The orig­i­nal renters were those who must rent by eco­nom­ics. This work­force hous­ing stock should con­tin­ue to do well and cre­ate low­er risk for investors because the asset is backed by rent pay­ing ten­ants. The typ­i­cal home may be a 1,500 square foot three-bed­room two-bath­room home in the Mid­west or south­east built after 1980. Once acquired by the spon­sor or invest­ment com­pa­ny, there is typ­i­cal­ly a cap­i­tal improve­ment bud­get estab­lished to improve the liv­ing space as well as the struc­ture if need­ed.  The cap­i­tal improve­ments also add to the val­ue of the home. The SFR affords a detached home, back yards and afford­abil­i­ty as well as sta­bil­i­ty.  The new­er renters are inter­est­ing and could fall into two main groups.    The BFR are attract­ing elder mil­len­ni­als (late 30’s) who want yards, good schools for their chil­dren they expect to have and to be ‘out of down­town’. A detached home with a small back yard may be one of the advan­tages pro­vid­ing a small area for your chil­dren or pet. The oth­er group may be the old­er retired per­son who does not like liv­ing in an apart­ment and wants some degree of sep­a­ra­tion from a typ­i­cal apart­ment.  The types of BFR neigh­bor­hoods will come in a vari­ety of styles and offer homes as small as one bed­room up to three and four bed­rooms.  Some of the new­er com­mu­ni­ties offer the same ameni­ties as the Class A mul­ti­fam­i­ly apart­ments. There is an addi­tion­al advan­tage rent­ing affords.  Sim­ply put, the renters are not tied down to a spe­cif­ic loca­tion for a long time.  If there is an oppor­tu­ni­ty to move to anoth­er part of the coun­try for oppor­tu­ni­ty the renters can sim­ply exit at the end of the lease peri­od. If an indi­vid­ual home­own­er need­ed to sell their home, there may be a delay in the sale of the home. Although there is a hot real estate mar­ket in many parts of the coun­try that may not always be the case. Rent­ing affords flex­i­bil­i­ty for cer­tain peo­ple.

As always, we will mon­i­tor this and oth­er devel­op­ing oppor­tu­ni­ties.

DSTs are not for all investors.  The acqui­si­tion of a DST is for accred­it­ed investors only.  Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and suit­ed for your invest­ment future. For more infor­ma­tion on how to prop­er­ly set up an IRC 1031 Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098 or email  adinicola@dst.investments.

Any infor­ma­tion pro­vid­ed has been pre­pared from sources deemed to be reli­able but is not guar­an­teed to be a com­plete sum­ma­ry or state­ment of all avail­able data nec­es­sary for mak­ing an invest­ment deci­sion. Past per­for­mance is not a guar­an­tee of future results. Price and yield are sub­ject to dai­ly change and as of the spec­i­fied date. Any infor­ma­tion pro­vid­ed is for infor­ma­tion­al pur­pos­es only and does not con­sti­tute a rec­om­men­da­tion.

DST 1031 con­sult­ing advi­so­ry ser­vices may be offered through: NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC 999 Van­der­bilt Beach Rd,  Suite 200, Naples, FL 34108.

Direct: 239–691-8098

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