How ‘build to rent’ movement could boost the mortgage market

Feb 17, 2018

The ranks of renters have swollen since the financial crisis, but there are few foreclosed homes left to pick up on the cheap and rent out. So some of the biggest landlords are buying, or building, new single-family homes to pad their portfolios.

While the initial yields for new construction tend to be lower, these firms have access to cheaper capital than they did when they started out a few years ago; some have raised equity or obtained financing from government-sponsored enterprises. Consolidation has also created experienced property managers with huge economies of scale, another factor making new build more economical.

Though it will be awhile before these new homes show up as collateral for asset-backed issuances, their low maintenance costs and the higher-quality tenants that they attract should tend to reduce the overall risk in the pools.

Strategies vary among institutional landlords. Those hunting yield have kept their focus on older homes with, on average, lower-income tenants. But others have targeted relatively new homes. These include Progress Residential, Tricon American Homes, Invitation Homes and American Homes 4 Rent. And more recently, players have been moving into new build, with American Homes 4 Rent the most vocal about this shift.

“You’re starting to see build-to-rent because they’re able to do it at a price that makes sense to rent it out, which had not been the case before,” said Beth O’Brien, the CEO of Corevest Finance, a shop that provides mortgages to small but professional landlords who generally manage 50 to a few hundred homes. Institutional investors “tend not to be building it themselves but buying from people selling small pools and aggregating them,” O’Brien said.

Bruce McNeilage is one of those people. He’s the CEO of Kinloch Partners, a Southeast-focused real estate firm that buys single-family homes and has a building unit as well.

“Of the top 10 [institutional investors], we’ve sold to a number of them,” McNeilage said. The company is most active in the metropolitan areas of Nashville and Atlanta but also has been ramping up its business in the corridor in South Carolina from Greenville to Spartanburg.

High-caliber product
While declining to give names, McNeilage said growing appetite from the large players in the market will help double Kinloch’s revenue this year. “Not only are we selling more; these investors are saying, ‘Hey, when you have the next 50 houses, call us.’ We, in essence, have outstanding orders from three or four of the large companies. Literally, as many houses that we can get them, they’ll buy.”

Dennis Cisterna, CEO of Investability Solutions, a business unit of Altisource Portfolio Solutions – which provides a variety of services to the single-family rental sector – said the firm in late 2017 closed on its first purchase of a portfolio of new builds. Besides AH4R, Tricon and Streetlane are also moving in the direction of new builds, Cisterna added. Progress Residential is also reportedly active in this space.

Neither Tricon nor Progress – both of which regularly tap the securitization market for funding – responded to requests for comment.

While sourcing newer properties from third parties is the most common approach, American Homes 4 Rent has actually started to build its own homes. It appears to be taking it slow, having built 13 homes in the third quarter, according to a transcription of a third-quarter conference call published by Seeking Alpha. Still, this was a fraction of the 111 newly built homes that AH4R acquired through its National Builder program.

On the call, AH4R management projected spending $393 million in the build-to-rent space in 2018, with $261 million going to the National Builder program. The company’s total investment in build-to-rent for the third quarter amounted to $27 million.

“Evidencing the tremendous demand for newly constructed rental homes, many of our third-quarter … development deliveries have been leased and are now cash flowing at estimated yield premiums of 100 basis points over traditional channel acquisitions in comparable markets,” AH4R Chief Executive David Singelyn said on the call.

The company did not respond to a request for comment.

Certain geographies naturally lend themselves to new construction because foreclosures are exceedingly low, but there’s still heady demand for housing and plenty of space to build it.

“In Arizona, Texas, Georgia and Florida, there are tens of thousands of undeveloped lots that don’t make sense being developed as owner-occupied developments,” Cisterna said. “A lot of this is due to their location in secondary or tertiary markets of larger metro combined with tight credit markets for mortgages.”

Cisterna explained that these “further-out” locations must be more affordable to justify the longer work commutes. The lower home prices attract those who don’t have the income or credit to obtain better-situated places.

The internal rate of return necessary for development is too low for firms looking to sell the homes. “[But] as rental communities, the time to lease up … is much faster – usually three to four times faster – than selling the homes to potential homeowners, so the builder can move through the projects much faster,” he added.

An important advantage of newer rentals over older ones is much lower maintenance costs.

“You’re getting a high-caliber product,” Cisterna said.

And while the tenants for new homes may not have credit as pristine as that of homebuyers, they tend to be higher caliber than those renting older homes.
Investors have found “that the newest tenant is easier to manage,” said Gregory Rand, CEO of OwnAmerica, a platform for trading portfolios of single-family rentals.

Homeownership edging back up
Of course, the strength of build-to-rent in the single-family rental sector will be shaped by the strength of the rental market in general. And that, in part, hinges on whether people can or want to buy. The homeownership rate took a beating in the aftermath of the financial crisis, falling to 62.9% in the second quarter of 2016 from a peak of 69.2% in the fourth quarter of 2004.

The number of renters soared over this period thanks to an overhang of student loans and much tighter credit.

But more recently, homeownership appears to be edging back up. The figure for the fourth quarter of 2017 was 64.2%.

Rand, for one, believes that homebuyers will soon be competing with investors for new construction homes “in a big way,” even as the investors continue forging relationships with homebuilding companies.

This view is based on the fact that millennials, who have been taking longer than previous generations to get married and settle down, are starting to buy homes in larger numbers. Rand also expects that more confidence around employment should nudge up the homeownership rate.

The new tax law might also strengthen the hand of first-time homeowners, according to Fannie Mae Chief Economist Doug Duncan. By increasing the standard deduction, the law “could allow renters to save more and pay down their debts and potentially become owners sooner,” he said in a v https://asreport.americanbanker.com/video/why-single-family-rental-securitization-may-have-peaked ideo interview< https://asreport. americanbanker.com/video/why- single-family-rental- securitization-may-have-peaked >.

On the flip side, there’s a compelling argument to be made that institutional investors have plenty of room to increase market share in single-family rentals. In total, they owned about 200,000 single-family rentals at the end of 2016, about 2% of an estimated nationwide total of 15 million, according to a report issued by Amherst Capital Management in August 2017.

In the multifamily sector, by comparison, institutional investors own over 50% of rentals, suggesting that there is room for the big landlords to grow in the single-family segment.

The overall investment of large investors in single-family rentals as of August of 2017 amounted to $33 billion, dwarfed by the estimated value of $26 trillion for the overall single-family rental market.

“Versus the mom-and-pop landlords, the lower cost of capital has gotten more pronounced,” said Sandeep Bordia, head of research and analytics at Amherst. He added that the big institutional investors have other advantages as well stemming from their economies of scale, such as securing bulk discounts on appliances.

Bordia said that there is evidence that in the wake of Hurricane Harvey, the large investor landlords generally repaired homes faster than small landlords because they tended to have insurance even for places outside the traditional flood zone.

Collateral for future securitizations
To date, few newly constructed homes have been used as collateral for asset-backeds. The rare examples have loans backed by multiple new homes that were included in multiborrower transactions. Six loans originated by CoreVest for Camillo Properties, a homebuilder in Texas, served as collateral for three securitizations issued in 2015 and 2016, at which time the homes were three years old, according to Kroll Bond Rating analyst Akshay Maheshwari.

The Camillo loans initially represented between 13.1% and 15.7% of the total issuance balance for each deal they collateralize. The remainder of loans in each deal are secured by properties that generally have relatively older build-dates. “Most of the Camillo properties were leased at the time each loan was originated,” said Daniel Tegen, another Kroll analyst.

Tegen said the large size of the loans and the nature of the underlying properties made then a “unique case” for a multiborrower securitization. Camillo “owns large plots of undeveloped land, so the majority of the homes in a neighborhood may have been constructed by and are owned by” the company, he said.

It’s considered unlikely that bridge loans used to build new homes will ever be securitized. “The properties that are in the securitization are stabilized properties,” said Kevin Dwyer, an analyst at Morningstar Credit Ratings. To be bundled into a deal they need to be ready to be leased, he said.
“We do offer bridge products and construction products and sometimes we offer them to build-to-rents,” said O’Brien. “But the stuff we’re securitizing is only stabilized assets.”

In the meantime, the cost of funding for institutional landlords continues to decline. O’Brien noted that yield spreads on Corevest’s securitizations – issued under the Colony American Finance name before the company’s acquisition by Fortress Investment Group in mid-2017 – have tightened since the first deal in October 2015.

Colony American Finance 2015-1 featured a AAA-rated, $168.2 million tranche that pays 170 basis points over swaps. The comparable tranche of a deal completed two years later pays just 90 basis points over swaps. The spread narrowing was even more pronounced for the riskier tranches of the two transactions, which moved in to swaps plus 125 basis points.

And the institutional players in the sector now enjoy a variety of funding options, as underscored by Blackstone Group’s January 2017 IPO of its Invitation Homes unit, which raised $1.54 billion.

The potential for continued involvement of the GSEs in the securitization space – Fannie Mae guaranteed a deal backed by a $1 billion loan from Wells Fargo to Invitation Homes in April 2017, and Freddie Mac did the same for a transaction by Corevest – bodes well for reducing the cost of capital for

By Bruce McNeilage 14 Dec, 2023
In my interview with Seana Smith & Brad Smith from Yahoo Finance today we discussed single-familiy rental rates and my thoughts on mortgage rates going into 2024.
By Bruce McNeilage 14 Dec, 2023
Owner's equivalent rental prices rose 0.5% in November , a pervasive factor in US inflation as limited housing inventory continues to squeeze homebuyers out of tightened real estate markets. Kinloch Partners CEO Bruce McNeilage joins Yahoo Finance Live to weigh in on the outlook for renters and home purchases in 2024. Home prices are "not going to go down, that's for sure. And mortgage rates might go down, but if the cost of a house goes up $10-20,000, it's a wash," McNeilage states. For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live. 
By Bruce McNeilage 08 Nov, 2023
Original Story can be found here: https://www.tennessean.com/story/money/real-estate/2023/11/08/renters-seek-new-options-in-nashvilles-tight-housing-market/70652968007/ Charlene and Timothy Stratton traded in their 4-acre Illinois ranch for a rental home in the Nashville suburb of Spring Hill and, so far, they love the new low-maintenance lifestyle. Like a growing contingent of Americans, they chose to rent a single-family house rather than buy a home or rent in multifamily apartment buildings. "We lived in the country all of our lives with horses and cows," said Timothy Stratton, a retired airline mechanic. "But we wanted to rent because we’re looking at our age. We did a lot of research and decided this will work out for the time being." Families like the Strattons increasingly want the mobility and limited commitment of a rental, with the privacy and space of a single-family home. Meanwhile, many families are also being pushed out of the tight housing market. Housing affordability plummeted to historic lows this year, with only 23% of U.S. listings in April considered affordable to households earning $75,000 or less, according to the National Association of Realtors. In response, real estate investors are betting heavily on new rental properties and, increasingly, on standalone units — especially in the South. More than 61,000 fully and semi-detached single-family rental units are under construction in Southern states as of September. In comparison, 28,000 units are in production in the Western U.S., the next-busiest region, according to RealPage Market Analytics. Those units include single-family homes, townhomes, rowhomes, quadruplexes and duplexes. Single-family rental communities are increasingly concentrated in subdivisions with on-site maintenance, rather than in homes nestled in for-sale housing neighborhoods. The Nashville market has the ninth-highest number of in-construction, build-to-rent homes with 2,745 units in the pipeline. Phoenix tops the list with 21,676 units underway, a RealPage analysis in August found. "Construction isn't going fast enough in Nashville. If they built four or five new build-to-rent communities, they would fill them up immediately," said Doug Ressler, the business intelligence director of Yardi Matrix, a real estate data firm. "We really expect Nashville to continue to see growth here." Rent vs. own: 'More house for your money' Charlene Stratton filled the three-bedroom house with festive seasonal crafts and artwork she creates in her home studio. Renting isn't perfect, but there are real perks — like, when the air conditioner stalled on a Saturday afternoon in the middle of summer, the landlord offered to put them in a hotel until maintenance could fix it that Monday. "When something goes wrong, we just call them," Charlene Stratton said. "It's great." The Strattons live at DerryBerry Estates, one of the first of its kind, built in 2019 by Kinloch Parners. The 34-home community sits on former pastures with views of Spring Hill's rolling green landscape and rose bushes in the front yard. Local development companies like Kinloch Partners of Nashville and Franklin-based Chartwell Residential and Barlow Builders have made stakes in the industry. "In 2008, I had no competition. Now there are six or seven players in the market," said Kinloch Partners Co-founder Bruce McNeilage, who sold much of his inventory to American Homes 4 Rent and expanded to South Carolina. "We're 99% leased out." McNeilage said he prioritizes creating a calm, supportive community with competitive prices. Rents at DerryBerry Estates ranged from $2,300 to $2,600 for homes with three to five bedrooms in September. "People are starting families later in life and COVID-19 has allowed people to work out of their houses so people are moving farther out," McNeilage added. "Housing prices are going up and interest prices just doubled. You can get more house for your money if you get farther out." Housing in Nashville area: 'Can't build them fast enough' Chartwell Residential, a local real estate firm specializing in multifamily apartments, is now building out its first single-family rental home community. https://www.tennessean.com/story/money/real-estate/2023/11/08/renters-seek-new-options-in-nashvilles-tight-housing-market/70652968007/ https://www.tennessean.com/story/money/real-estate/2023/11/08/renters-seek-new-options-in-nashvilles-tight-housing-market/70652968007/ https://www.tennessean.com/story/money/real-estate/2023/11/08/renters-seek-new-options-in-nashvilles-tight-housing-market/70652968007/ https://www.tennessean.com/story/money/real-estate/2023/11/08/renters-seek-new-options-in-nashvilles-tight-housing-market/70652968007/ https://www.tennessean.com/story/money/real-estate/2023/11/08/renters-seek-new-options-in-nashvilles-tight-housing-market/70652968007/ https://www.tennessean.com/story/money/real-estate/2023/11/08/renters-seek-new-options-in-nashvilles-tight-housing-market/70652968007/
By Bruce McNeilage 15 Jul, 2023
NASHVILLE, Tenn. (WKRN) — High prices and high-interest rates have kept many from buying a single-family home in a quiet suburban neighborhood. But what if you could rent one? Developers say they are seeing a big demand for build-to-rent communities. Upon first glance at the DerryBerry Estates subdivision, you might assume the single-family homes are for sale, but they are not—each one is a rental. “People are very happy with what we are providing,” said Bruce McNeilage, CEO/co-founder, Kinloch Partners. Bruce McNeilage built DerryBerry Estates in Spring Hill a few years ago. He saw some families struggling to afford a single-family home in the suburbs, but still craving that lifestyle. “Their kids are getting older, they want to be in good schools, you want to ride a bike around, and you just can’t do that in an apartment complex.” No sharing walls at DerryBerry Estates, or Fairview Station, the other rental home community Kinloch Partners built in western Williamson County. DerryBerry Estates subdivision has 41 single-family homes with 3 and 4 bedrooms and rents in the $2,300 to $2,500 range; and all the trappings of the suburban lifestyle. “They have front porches, they have covered back porches, two-car garage. They have all the amenities and appointments on the interior that one would want in a house for sale, but these are available for rent.” Who would be interested in an all-rental community? McNeilage said his tenants are often folks new to town testing out the neighborhood, young families who can’t afford just yet to buy, those looking for a low-maintenance lifestyle, and senior citizens, which make up 10% of his tenants. “They don’t want to live in an apartment and share walls with someone. They want to live in a single-family home in the suburbs to probably be real close to their grandchildren.” McNeilage has a couple of rental communities in Middle Tennessee, as well as out of state. And with housing prices staying high, he sees the popularity of rental communities sticking around “I could build 100 houses. I could build another 100 houses. I really have a demand that I can’t keep up with.” McNeilage said that his tenant turnover is lower than an apartment complex. People will stay in his homes 3-4 years on average, but for apartment complexes, it’s 1.5 years. 
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