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Single-Family Rental Neighborhoods Are Hot in the Twin Cities Right Now

Oct 23, 2020 by Laura Agadoni
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Neighborhoods of single-family homes that don't allow renters are nothing new. But do you know what is? Neighborhoods of single-family homes that only allow renters -- that's what. In a table-turning sort of way, Minneapolis' Twin Cities are seeing a new trend: single-family rental neighborhoods, otherwise known as "built-for-rent" or "built-to-rent" housing. Is there something to this?

What the neighborhoods look like

Single-family rental neighborhoods, like those currently being built in the Twin Cities' suburban areas, are upscale homes that rent for between $2,000 and $4,000 a month (or more). The homes range from 1,500 square feet to over 3,000 square feet and come with all the latest accouterments, such as keyless entry, front-door cameras, and smart-home features.

The neighborhoods offer plenty of amenities as well, such as walking trails, clubhouses, swimming pools, and dog parks. But the main attraction for many residents is a maintenance-free lifestyle. Rent includes lawn care, snow plowing, and appliance repair, all of which is generally handled by a property management company.

The trend is spreading

The Twin Cities area, as of October 2020, has one single-family rental community of 66 homes already built, and this neighborhood was completely rented out in a matter of months. Plans from the developer, Watermark Equity Group, are to complete a 37-home community that already has 18 homes leased, start leasing an 81-home development this spring, and to build a 121-unit community in Inver Grove Heights in 2021.

“The No. 1 comment we hear from people coming to tour is ‘I didn’t even know this existed,’ says Chris Crooks, Director of Asset Management, Watermark Equity Group. “Once people realize they don’t have to compromise on flexibility, convenience, and comfort, they’re immediately interested.”

The built-to-rent concept might be new for the Twin Cities, but the Phoenix area has seen these types of developments since 2014. Phoenix now has 11 single-family rental neighborhoods, all by developer NexMetro. This builder features rental home communities with one-, two-, three-, and sometimes four-bedroom homes, some attached and some detached, but all with upscale features such as cathedral ceilings, private yards, quartz countertops, and hardwood floors. Plans are to expand this single-family rental model to other areas of the country.

The market for single-family rental neighborhoods

Most people who are interested in the built-to-rent community would probably be candidates for a luxury apartment building that features all the latest amenities. The problem many people have with apartment living, however, is the shared wall aspect. Single-family rental neighborhoods provide residents with a detached home and with all the convenience features of apartment living.

A breakdown of the potential market

  1. Young professionals who relocate frequently for work. In the Twin Cities area, for example, a cluster of Fortune 500 companies fuels the trend for single-family rental neighborhoods.
  2. Empty nesters. This group typically can afford to buy but chooses to rent, preferring a lifestyle that doesn't involve home maintenance.
  3. Single people or people who recently divorced. Renting provides the freedom to easily relocate if need be.
  4. Newly married young couples. Not sure how they want to settle down just yet, this group wants to test the lifestyle of living in a single-family home in the suburbs before committing to it.

Advantages for investors

The experiment with single-family rental neighborhoods is proving to be a success, as the model is a win for both residents and owners. What's been happening with these developments is builders/developers build the single-family rental neighborhoods, get a property manager to manage them, and then -- after all the homes are rented -- the builder typically sells the entire community to a real estate investment trust (REIT) or a huge rental operator like Invitation Homes.

Benefits for investors

Renewals are more likely. Renters tend to view these homes as long-term commitments more than renters of typical rental units usually do, partly because the homes in build-to-rent communities are built and designed the same way as typical subdivisions are, giving them a more permanent feel.

Higher rent growth. Rent raises tend to outperform those of typical rental units. NexMetro's Avilla neighborhoods in Phoenix have experienced rent increases between 6% and 11%, compared with between 1.6% and 5.4% for apartment rentals nationwide.

Pride in home and community. Because people tend to view single-family rental homes as long-term commitments, they tend to care more about the home and the neighborhood than renters in typical rental units generally do. This isn't to say that renters as a whole don't care about their rental units or the neighborhood, but people who plan to live in an area for a longer term tend to act more like homeowners who have a greater stake in their homes and community.

The Millionacres bottom line

Expect to see more built-to-rent neighborhoods in the future. Home builders Lennar (Lennar Corporation (NYSE: LEN)), JMC Homes, Camillo Properties, and AHV Communities are all planning to build single-family rental neighborhoods across the nation.

But let's hope these communities are managed better than what happened post-2008 recession. The huge conglomerates that bought foreclosed homes earned a poor reputation based on neglectful maintenance practices, high rent hikes, and excessive late fees. If you like to follow trends, this is one to watch.

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LauraAgadoni has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.