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.
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.
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.
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.
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 email@example.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.
NAMCOA® – Naples Asset Management Company®, LLC