June 1, 2022- DST.EDU (Series B- Part 6) Single Family Rental & Build for Rent

Editor’s note- this is part six of a ten-part series on the var­i­ous asset types of DST offer­ings.

SFR / BFR Asset Classification Discussion

By Al DiNi­co­la, AIF®
June 1, 2022
DST 1031 Spe­cial­ist
NAMCOA® – Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC

SFR, BTR, BFR all offer a new alter­na­tive

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. 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 own­er­ship) that are being aggre­gat­ed into larg­er port­fo­lios of homes.  Some of these port­fo­lios are com­prised of over 10,000 to 15,000 homes spread over dif­fer­ent geo­graph­i­cal areas and loca­tions. You may also con­sid­er the SFR port­fo­lio hav­ing 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 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 pop­u­lar­i­ty of the SFR rental hous­ing stock con­tin­ues to increase. Cur­rent­ly this asset class falls under the Mul­ti­fam­i­ly offer­ings when report­ing invest­ment into REITs, LLCs and oth­er offer­ings.  As a side note stu­dent hous­ing and man­u­fac­tured hous­ing being sep­a­rat­ed into their own asset class­es both were under mul­ti­fam­i­ly report­ing.

Emerg­ing Trend 

The Build for Rent (BFR) or Built to Rent (BTR) is an emerg­ing trend where entire neigh­bor­hoods (over100homes+) are being pur­pose built as rental com­mu­ni­ties. These com­mu­ni­ties when offered as Delaware Statu­to­ry Trust (DSTs) are sep­a­rat­ed from the mul­ti­fam­i­ly asset clas­si­fi­ca­tion. 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. The offer­ing was ful­ly sub­scribed quick­ly. The same due dili­gence mate­ri­als and Pri­vate Place­ment Mem­o­ran­dums (PPM) are need­ed. This repack­ag­ing has enabled small­er investors to take advan­tage of direct cash invest­ment or 1031 tax deferred exchange invest­ing. BFR may be typ­i­cal sin­gle-fam­i­ly homes 1,200- 1,900 square feet or may be much small indi­vid­ual homes. The small­er homes in the BFR space may com­pared in some way to a “hor­i­zon­tal mul­ti­fam­i­ly” asset class.   The actu­al prop­er­ty iden­ti­fi­ca­tion may be one prop­er­ty ID and con­tain 100+ indi­vid­ual detached units.  Alter­na­tive­ly, the 100+ units may each have indi­vid­ual prop­er­ty iden­ti­fi­ca­tion num­ber. Under the DST sce­nario there would be a mas­ter lease and a prop­er­ty man­ag­er who over­see the main­te­nance on the prop­er­ties, leas­ing of the units, and need­ed repairs are han­dled typ­i­cal­ly by ser­vice tech­ni­cians.  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.

Lack of Hous­ing

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 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. Indi­vid­ual investors may also seek invest­ment into this asset class.

Tech­nol­o­gy Rules

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 down time. With a 2- 3 year move out aver­age this pro­vides for rental bumps as much as 10% ver­sus the aver­age 3–4% annu­al­ly. The longer lease time may also min­i­mize the turnover cost.

Psy­cho­log­i­cal Demands
What is fuel­ing the psy­cho­log­i­cal demand of the indi­vid­ual renters for the SFR 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 to investor 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.

Demand Dri­vers
The SFR affords for 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 want 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 the flex­i­bil­i­ty for cer­tain peo­ple.

Effects of Inter­est Rate Increase
Over the past few months inter­est rates have begun to inch up which will move the pur­chase of a new home move out­side the each of some buy­ers. There is a con­cern by some ana­lyst that the rise in inter­est rates may slow down the tor­rid pace of new sin­gle-fam­i­ly home either cur­rent­ly under con­struc­tion or about to break ground. While the first-time home buy­er may not be finan­cial able to pur­chase (mort­gage wise) these same poten­tial buy­ers still need a place to live.  Large equi­ty groups and DST spon­sor have cap­i­tal to acquire these prop­er­ties and pack­age the real estate into DST offer­ings.

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 1031Tax 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@namcoa.com.

This is not an offer to pur­chase or solic­i­ta­tion to pur­chase any secu­ri­ty, as such be made only through an offer­ing mem­o­ran­dum or prospec­tus. Invest­ing in secu­ri­ties, real estate, or any invest­ment, whether pub­lic or pri­vate, involves risk, includ­ing but not lim­it­ed to the poten­tial of los­ing some or all of your invest­ment dol­lars when you invest in secu­ri­ties. You should review any planned finan­cial trans­ac­tions that may have tax or legal impli­ca­tions with your per­son­al tax or legal advi­sor. NAMCOA, LLC is a Reg­is­tered Invest­ment Advi­sor, reg­u­lat­ed by SEC (Secu­ri­ties and Exchange Com­mis­sion). Our cor­po­rate office is locat­ed at 999 Van­der­bilt Beach Road, Suite 200, Naples Flori­da 34108. Secu­ri­ties Offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC. 410 Peachtree Park­way Suite 4245, Cum­ming, GA 30041. MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.

Thank you.

NAMCOA® – Naples Asset Man­age­ment Com­pa­ny®, LLC

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