By Deborah Goonan, Independent American Communities
Have you noticed the new real estate trend? U.S. homebuilders are creating new communities of detached single family homes for rent, not for sale.
The new rental home communities provide an alternative to traditional apartment buildings or HOA-governed townhouse neighborhoods.
Why is this happening?
Well, according to BSB, an architectural design firm with a 50-year history, built-to-rent single family detached homes provide a lucrative revenue source for American home builders.
Newly constructed, built for-rent single-family homes present these buyers with a terrific opportunity to live the American dream – without the additional responsibilities and stress of homeownership. In 2019, home builders who want to stay ahead need to consider the strategic development of built for rent (BFR) single-family products. (Source: What’s Next in Housing: For-Rent Single-Family Homes, Best in American Living (NAHB Magazine))
Let’s examine the pros and cons of this new trend, from a housing consumer’s perspective.
Pros for housing consumers
Detached single family homes create a few obvious advantages for renters.
First, these homes are more likely to have three bedrooms, and overall, more space. And with no shared walls, floors, or ceilings, residents have a lot more privacy.
Big bonus: children and pets gain private outdoor space to run around, which eliminates the common nuisance of noise from upstairs or townhouse neighbors.
The landlord maintains the houses and exterior spaces. This is ideal for busy working people, or retirees who aren’t into DIY projects.
It’s easier to keep a predictable monthly budget. Renters don’t have to scramble to pay hundreds or thousands of dollars to repair a furnace, fix a plumbing leak, or replace the roof.
Career-focused residents are free to move to a new city for a better opportunity. They aren’t tied to a house and a mortgage, and don’t have to try to sell the home on short notice to cash out their equity — if there is any.
And, let’s face it. Tenants take on less financial risk than homeowners, especially owners of homes in HOA-governed communities.
Look, Ma! No HOA!
In many real estate markets in the U.S., HOA-governed homes dominate for sale listings, so they are next to impossible to avoid.
In HOA saturated markets, renting a single family home allows a housing consumer to completely avoid shared ownership in a common interest community. That means no homeowners association with nosy neighbors, dictatorial HOA boards, or neighborhood drama and infighting over petty issues.
No need to worry about surprise special assessments or expensive, protracted HOA lawsuits, for which owners pay, one way or another.
And the landlord of a rental community has the power and the right to evict that occasional neighbor from hell.
Cons for housing consumers
With homeownership becoming less attainable, the need for leased property increases. Rents continue to rise, stretching budgets for many American households.
That means developers can earn higher profit margins by renting vs. selling homes, especially in markets controlled by a few high-volume, corporate developer-landlords.
If home builders can make more money building single family homes for rent, they will be less likely to build homes for sale for the “starter home” or “downsize” market.
The probable result: a relatively small supply of built-to-own homes.
A short supply of homes for sale will likely lead to higher purchase prices and higher rents, making housing less affordable and homeownership even less attainable.
The big picture for housing
As with development of planned communities, which require mandatory HOA governance, build-to-rent communities also reduce the supply of land available for sale.
Put another way, the more land set aside for construction of rental homes, the less land left over for construction of new, non-HOA-governed homes for sale.
And that’s a problem. While some consumers rent by choice, many others rent simply because they cannot afford to own.
Reducing household wealth?
As more U.S. households rent vs. own their own homes, each monthly rent check increases equity for their landlords.
And here’s the rub. A growing percentage of today’s landlords are large, wealthy corporations or real estate investment trusts.
On the positive side, larger rental communities tend to offer modern interior finishes, more flexible lease terms, amenities such as fitness rooms and swimming pools, and 24/7 emergency maintenance service.
But there’s a downside.
All that corporate wealth makes it difficult for small landlords — owners of 4 rental units or less — to compete for tenants on price and value.
So, in many cities and town, a few prominent landlords compete for renters. That, in effect, funnels most renters to communities managed by three or fewer corporate landlords.
In this environment, a tenant is likely to pay high rent, reducing the opportunity to own a home and accumulate equity with each regular mortgage payment.
According to research by the Urban Institute, Homeownership is still financially better than renting. The longer one owns a home, the greater the positive effect on household wealth. The study also finds that homeownership performs better than stocks and bonds.
Therefore, depriving Americans of the opportunity to own a home essentially deprives them of opportunities to accumulate wealth for the future.
Bottom line on build-to-rent single family housing
The single family home build-to-rent trend is a double-edged sword.
It promises to serve the needs of housing consumers who rent by choice. But it also limits supply of housing for purchase, and therefore reduces opportunities for attainable, affordable homeownership.
That’s why policymakers must carefully weigh the pros and cons of the new build-to-rent trend. Local governments must guard against creating an oversupply of houses for rent, in lieu of homes to buy.
The future financial health of America ultimately depends upon household wealth. That, in turn, must rest on a strong foundation of homeownership. ♦
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