Kendrick Brinson for The New York Times
Ramika Archibald owns a home near Atlanta. She is the president of the homeowners’ association in her subdivision.
By SHAILA DEWAN
Published: December 4, 2013
ATLANTA — Homeownership was out of reach for Tishri Hyman, a single mother of two with a good job but less than stellar credit. But three years ago, she found the next best thing: a brand new house, complete with a fireplace, that she could rent.
The New York Times
“It was just absolutely magnificent to be able to live in a new home,” she said. “It gave me a sense of independence. It provided something for me that was probably missing.”
Ms. Hyman and her daughters moved into what had been a model home in one of the many boom-time subdivisions around Atlanta that were originally intended for first-time buyers. But now thousands of similar single-family homes are being built for tenants, rather than owners.
Around Atlanta, new five-bedroom, three-bath homes that once might have sold for a little less than $200,000 are now on offer for monthly rents of $1,300 — granite countertops and walk-in pantries included.
Building homes to lease, rather than sell, has begun to make sense to home builders and investors because the pool of qualified first-time home buyers has shrunk even as the price of buying existing homes has risen enough to make new construction worthwhile again.
According to census figures, the percentage of homes built specifically as rentals is still relatively small, at 6.2 percent in 2012. But that represents a record high.
These houses are going up in the same neighborhoods that catered to first-time home buyers before the housing market crashed five years ago. But such buyers are scarcer because of lower wages and higher unemployment, particularly among young adults, who often are forced to live with their parents or share an apartment with roommates. By one estimate, there are 2.4 million fewer new households now than there would have been under more normal conditions.
At the same time, tougher standards for home mortgages have kept other potential buyers out of the market, making rentals of single-family houses look like a better alternative.
Despite the obstacles for some buyers, sales of new homes climbed 25.4 percent in October, to a seasonally adjusted annual rate of 444,000, the Commerce Department reported Wednesday. But people turn to rental homes for a variety of reasons.
In Jacksonville, Fla., Viviana Bowens, a nurse, lived in a spacious custom-built home, every light fixture and paint color carefully selected, until her husband left her and she could no longer cover the payments. Because the home was worth little more than half what the couple paid, she could not sell it and it went into foreclosure. When she looked for a new place for herself and her three children, she was surprised to find a brand new, four-bedroom house built by JWB Real Estate Capital, a local real estate investment firm.
“To have to uproot them I was like, oh my God,” she said. “So to get to live in a new place was a relief.” Ms. Bowens said she would eventually like to buy again, when her credit history is repaired.
“If I can afford an $1,100 rent, I can definitely afford a home,” she said. “So it’s just the fact that, who’s going to give me a loan with that history?”
JWB is emblematic of the small companies that are at the forefront of the build-to-rent trend.
“We buy a lot of houses, and I had people coming to me with these lots that they were trying to sell for five grand,” said Alex Sifakis, the president of JWB, who has since given talks on the subject at industry conferences. “I would keep turning them away, and one day I was like, hey, I wonder what it costs to buy a whole new house?”
His company has since built about 100 homes and plans 125 more.
Bruce McNeilage, the managing partner of Kinloch Partners, a Nashville-based real estate investment company that is active in the Atlanta area, said he initially scooped up model homes like the one he leased to Ms. Hyman.
“A year or two ago, I could buy a brand-new home, never been lived in, and I could buy it for half of what it cost me to build,” he said. “The problem is now all those houses are gone.”
But new homes still command a premium with renters, especially in places like Atlanta, where long commutes make it preferable for workers to rent so they can move when they change jobs.
“There’s no repairs, lower maintenance, it looks great to the tenants, you can get maximum rents, and people are going to stay in them for a while because they’re brand-new,” Mr. McNeilage said. He now plans to build 20 to 30 houses a year.
Lately, much bigger players like US Invest, which helps foreigners buy and manage American real estate, have joined in. US Invest has built 10 homes and has options on 1,000 lots in Sun Belt cities, said Ryan McFarland, a managing partner. Colony Capital, a hedge fund in California, is also building homes to rent.
Kendrick Brinson for The New York Times
Elizabeth Francis said she was worried her home’s value would drop as more renters moved in.
About 1,000 of Colony’s 15,000 homes are new, and the fund is in the process of finishing large chunks of several Atlanta subdivisions that were left incomplete when the market crashed. While the smaller operators have built mostly on scattered sites, Colony is transforming large blocks of houses in Atlanta into rentals.
A year ago the Ewing Farm subdivision, northeast of Atlanta, had only about two dozen homes on a forklike arrangement of cul-de-sacs that was originally laid out for 80. Late last year, residents were told that the remaining 56 lots had been sold and that new homes would finally be going up. Initially, several residents said, they were told that the homes would be for sale. Many said they were dismayed to learn otherwise last month, when the new houses neared completion and “for rent” signs went up.
Elizabeth Francis, a Ewing Farm resident, responded to the news by putting her house on the market. “I can see three or four or five rentals in this neighborhood, but the whole community?” she said. “I’m worried about my property value.”
While there is little evidence that the new rentals will worsen property values that had already fallen sharply as the market collapsed, Ms. Francis said she consulted a lawyer who told her that there was little residents could do to block the rentals because Colony now owns the majority of the subdivision’s lots.
Justin Chang, chief of the Colony American Homes unit of Colony Capital, declined to comment.
In a nearby subdivision, Oak Field, Colony plans to build at least 39 houses, and in Rosebud Park, also northeast of Atlanta, the company has 22 new homes for rent. In still another subdivision, only one homeowner is left; 56 new rental homes are coming.
Ramika Archibald, the president of the homeowners’ association in Rosebud Park, said she was mainly concerned that the new landlords screen their tenants carefully and tell them the rules. If she sees so much as a garbage can out of place, she said, “They will get a letter.”
Landsmith, a San Francisco-based firm that acquires and manages real estate for investors and has built about 1,000 homes in places like Indianapolis, Houston and the Kansas City area, tries to avoid such heavy concentrations of rental housing.
“We never do more than 20 or 25 percent of a subdivision — we like to spread it out as much as possible,” said James Breitenstein, the chief executive. “We don’t want them to become rental communities.”
Of course, today’s rentals could be sold to homeowners tomorrow, or whenever the conditions are right. Analysts say it is still an open question whether the thousands of rental homes that some investors are amassing should be viewed more as income-generating investments or assets held until they appreciate.
In some places, the economic sweet spot for build-to-rent has already come and gone. This summer, John Badura, the owner of Invest Arizona, a company that buys and rehabs houses and sells them to investors, was planning to build about 160 new homes in the Phoenix area, with an eye toward renting. But now, prices have gone up and investors have gone elsewhere.
“Because of price appreciation and the market, it’ll make more sense to sell these just to home buyers,” Mr. Badura said
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