Building communities for hire are thriving in Houston, but at what cost?

For more than four decades, Dr. Horton has built homes for homeowners, but this past winter he tried something new. In a pine-tree neighborhood north of The Woodlands, she has built 124 homes not for homeowners, but for renters. She rented it out and put it on the market as a package deal for a different type of buyer: an investor.

The winning bid, $31.8 million, was 79 percent more than the $17.8 million the local community incurred to build, market and sell. For comparison, the average home a builder sold to a homeowner in that quarter only went for it 34 percent More than costs. On the earnings call, analysts marveled at the trade.

The rental business model has flourished as investors – faced with low or uncertain returns in traditional investments – pour money into new projects. Single-family rents allow investors to collect monthly rent payments as well as drive up home prices, which have skyrocketed to double digits during the pandemic. (The median price of a home sold in Houston in March was 16 percent higher than the average price the previous year, according to the Houston Association of Realtors.) And now, an investor buys one in four Houston-area homes sold, according to the Houston Association of Realtors. To John Burns Real Estate Consulting, which tracks residential investment.

More than 7,500 rental homes have been developed in the Houston area, according to RCLCO, a real estate advisory firm — good news for renters who, for one reason or another, are turning away from the home-buying frenzy due to the pandemic but still want the perks of living in a home with a backyard and the amenities of a home. The neighborhood is a good educational area.

But some argue that this also means potential homeowners face a tighter market.

“It comes down to the issue of affordability,” said Jim Gaines, an economist at Texas A&M’s Texas Real Estate Research Center. “If ownership is transferred from potential ownership to the rental market, that is less stock,” he said. “This makes prices… go up.”

Yet the momentum is undeniable. Houses rise so quickly in Clearwater in Balmoral’s One Bridge – part of a modest master-planned community that surrounds a crystal lake – that walking down the street feels like it’s traveling through an interval. In one of the buildings, the wooden frames of the buildings were still visible; Across the street, roofed and insulated homes await brick siding; And along the way, newly completed homes are ready to move in for rents starting at $1,995 a month. Someone had already welcomed its first passengers. Within a period of a recent Thursday morning, two other potential tenants had filled out the paperwork needed to move in.

Roots in the Great Recession

After poorly underwritten mortgages caused the Great Recession in 2007, millions of Americans lost their homes — and investors with bags of cash showed up at mortgage auctions to snap up real estate at bargain prices.

They were buying homes for rent—the beginning of the shift in single-family home rentals from a mom-and-pop endeavor to an asset class that attracts attention from very large funds, known as foundations. Now, investors can buy and sell large portfolios of single-family rental homes without ever appearing on the website, rental homes can be publicly traded in REITs, or REITs, and rental listings can be compiled in stock. Your pension fund may collect rent from suburban homes.

But as home prices recover from the Great Recession, investors are beginning to face the same price pressures that are putting pressure on potential first-time homeowners. Houston-based developer Ting Qiao, who began buying scattered homes to rehabilitate and rent out in 2013, quickly found it very difficult to find homes at prices low enough to make a good return.

Then, in 2015, an idea came to him: His company, One Bridge, compared the cost of buying and renovating an old home with the cost of building a new one.

“Our conclusion is that the cost is the same,” he said. “So why not build the entire community out of one development?”

At first, he faced the stigma attached to the old neighborhoods where many homes were for rent, as well as confusion from lenders and investors. When he built his first rental community outside of Dallas, he raised money from individuals abroad who were looking for an easy way to invest in American real estate. With the model proven, Qiao said, banks were willing to fund building communities for rent, and family offices and institutional players wanted to invest in homes.

There is no alternative

Wan Bridge is now one of at least six companies building single-family homes for rent in the Houston area. It has seen such success that it is currently aiming to increase its staff by 25, or more than 50 percent.

Among the reasons for the sudden rush to building for rent is the global economic landscape. Giant funds are under pressure to find high returns on their money, but the government’s response to the pandemic-induced recession and economic uncertainty has pushed bond yields to historic lows. At the same time, it’s hard to find undervalued companies when stocks are at record highs, and commercial real estate investments were previously seen as reliable revenue streams – office towers, hotels, retail centers, apartments – I was hit by social distancing.

“Returns are insane, very low at the moment,” explained Rick Palacios Jr., Director of John Burns Real Estate Consulting. “So you have investors all over the world who have to find investments that meet their yield requirements, groups that have been able to do that in safe things like Treasuries. They can’t do that anymore.”

But occupancy, rent collections and even rent increases for single-family homes have remained in good shape throughout the pandemic, providing a dependable return on which investors will jump.

“It is attracting unprecedented capital,” Palacios said.

Impact on homeowners?

He said the influx of investors’ money chasing building on rent is taking some supply out of the sales system and helping drive up housing prices. “Since you now have … another pool of capital competing for land, you bid for land, and the derivative of that is housing prices.”

Others have opposed the idea that build-to-rent affects potential home buyers.

“These are homes that could not have been built for sale,” said Lawrence Dean, Houston regional director for housing research firm Zonda. “It would never have been built apart from this institutional capital.”

Tim Dosch, a principal at Houston Dosh Marshall Real Estate, a land brokerage, has seen players build-to-hire bid big.

He said, “Building for rent pays about three times what construction men would pay to sell for the land.” But with 40 such deals currently in the works, he hasn’t seen both types of developers bid on the same lots.

But at least one Houston-area homebuilder said it would increase a portion of its land used for single-family rentals rather than units for sale. Woodlands-based home builder Lennar announced that institutional investors are aiming for $4 billion worth of single-family homes and townhouses for rent.

“This exciting new project has the opportunity to expand at a pace we don’t think is possible for competitors in the single-family rental space, given direct access to Lennar’s pipeline of more than 300,000 owned and controlled home locations,” Lennar co-chairman and CEO Rick Pickuitt said in a statement. .

A blessing for renters

Either way, the trend unfolds quickly. Tenants are flocking to newly built rentals in dozens of neighborhoods across the city.

On a recent weekend in Kingwood, Erica Lockwood was moving to Regent Square Brownstones, another Wan Bridge development project.

A longtime homeowner, this was her first step in the rental business, and she was nervous about making monthly payments for a home she didn’t own. But it was within walking distance of her office, which she has moved across the country to work at, and assigned a good high school for her 16-year-old son. What’s more, it was new and beautiful, and she knew the yard would be taken care of and maintained.

“I have to tell you,” she said, “I am a single, professional woman.” “I work a lot. I have hard work and the temptation to not take responsibility for garden maintenance – no need to worry about changing bulbs! – that’s great. The trade-offs (of not having) are worth it to me.”

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