Statistics show we're turning into a nation of renters. Although millennials (the cohort most likely to purchase entry-level housing) are buying homes, their ownership rates don't match past generations.
The 2021 Millennial Homeownership Report from Apartment List found that by age 30, 42% of millennials owned homes. That sounds like a pretty healthy number, but it isn't really when you consider that 48% of Gen Xers and 51% of boomers were homeowners by 30. One of the most common reasons young people aren't buying homes is that they are overburdened with student-loan debt at a time when home prices have skyrocketed.
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A nation of renters
About 62% of people under age 35 are renters, according to the U.S. Census Bureau. But not all are renting apartments. Single-family homes are becoming popular: CrowdStreet, a real estate investing platform, found that single-family rentals have made up more than 50% of the growth in the rental housing stock from 2005 to 2015.
Built-for-rent combines the best of two worlds
This trend of renting single-family homes hasn't gone unnoticed by institutional investors, such as Invitation Homes, Blackstone, Starwood Capital, and DigitalBridge (formerly Colony Capital), all firms that have accumulated a portfolio of single-family rentals (SFRs).
The next investing trend along these lines is buying entire communities of SFRs, otherwise known as "built-for-rent" or "build-to-rent" homes. These are brand-new communities of single-family homes, all built as rental properties. Homebuilders such as Toll Brothers and Lennar have investments in this market.
These communities have many of the amenities apartment buildings offer: gated communities, dog parks, on-site gyms, swimming pools, and tennis courts. But they also offer a different experience from apartment living, namely a house with more space and a greater sense of community.
Built-for-rent showing good returns
Built-for-rent neighborhoods have been around for a few years. CrowdStreet reports cap rates -- a key measure of real estate valuation -- at between 4.75% and 5.5%, are comparable to traditional multifamily rental properties. And the built-for-rent model is one of the fastest-growing sectors of the housing market, according to Builder. The WSJ reports that in 2021, investors have put about $30 billion in debt and equity into this sector.
The trend
There's no denying that there's money to be made in the rental business. Traditionally, many people got into this business as I did, by buying properties and becoming a mom-and-pop-type of landlord.
But, in the same way that many small businesses have struggled during and after the pandemic, it's becoming more difficult for the "little guy" to buy investment property in this housing climate of low supply and high demand -- a climate that favors institutional investors that have large sums of money at their disposal. So, investing in a built-for-rent housing market might be the way to go in the future.
