BUILT TO RENT
Rising house prices push investors who once flipped homes into new business models.
In Houston, Katy, Humble and the surrounding suburbs, you can see them going up: entire subdivisions, some with upward of 400 homes, built not for homeowners but for renters. Major builders and investors are hopping on the trend, drawn by the promise of good, dependable returns.
But build-to-rent is also unfolding on a smaller scale throughout the region, as rapidly rising home prices push investors who traditionally flipped individual homes into new business models.
“As inventory accessibility thinned out, you had less opportunity to buy. You had less inventory to buy. And the market has gotten tighter and tighter,” said Jon Shipley, Texas managing director of Renovo Financial, which loans money to real estate investors to rehab and build homes and hold them as rentals. “So (experienced individual investors have) evolved their business to … picking up lots and creating their own inventory and renting it out.”
Not only is stiff competition for existing homes pushing investors into the build-to-rent business, but financing for the model has become more widely available. Take Chicago-based Renovo, which I spoke with when it recently expanded with new offices in Houston and San Antonio.
At the end of 2019, it rolled out a 30-year loan specifically for investors looking to hold onto homes for rent. The loans are underwritten largely based on the market rent of the property. According to Shipley, most lenders making such loans are looking for the market rent that could be fetched by a building backing a loan to be 1.1 to 1.3 times the monthly payment on the loan — meaning an investor could take out a loan with a $1,000 monthly payment if the rent is equal to $1,100 to $1,300. Interest rates on the loans, which are not backed by the federal government, can be as much as a percentage point higher than they would be for a conventional mortgage, depending on a range of factors.
For investors, the option offers a way to keep a home after building or renovating. The short-term loan used for construction or renovations can be refinanced into a longer-term loan.
The product has since taken off. Renovo originated more 30-year loans for investors in the first quarter than it had in all of 2020.
“There was always a need for an investor-friendly 30-year product,” Shipley said. “But sometimes capital markets have to catch up to the demand a little bit.”